THRUSTMASTER INC
10-Q, 1998-05-08
COMPUTER PERIPHERAL EQUIPMENT, NEC
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<PAGE>

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

                         SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON, D.C. 20549

                                     FORM 10-Q
                                   _____________

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

                   For the quarterly period ended March 31, 1998

                          Commission File Number   0-25520
                                   _____________

                                 THRUSTMASTER, INC.
               (Exact name of registrant as specified in its charter)

               OREGON                                         93-1040330
    (State or jurisdiction of                                (IRS Employer
   incorporation or organization)                          Identification No.)

                          7175 N.W. EVERGREEN PARKWAY #400
                           HILLSBORO, OREGON, 97124-5839
                      (Address of principal executive offices)
                                     (Zip Code)

                                   (503) 615-3200
                          (Registrant's telephone number)
                                   _____________

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes  X     No 
                                       -------    -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.

            Common stock, no par value                 4,371,449 shares
                     (Class)                    (Outstanding at April 30, 1998)

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

<PAGE>

                              THRUSTMASTER, INC.

                              Index to Form 10-Q
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION                                       PAGE NO.
                                                                      --------
<S>                                                                   <C>
Item 1. Financial Statements

     Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . .     2

     Consolidated Statements of Operations . . . . . . . . . . . . . .     3

     Consolidated Statements of Cash Flows . . . . . . . . . . . . . .     4

     Consolidated Statements of Changes in Shareholders' Equity. . . .     5

     Notes to Consolidated Financial Statements. . . . . . . . . . . .     6

Item 2. Management's Discussion and Analysis of 
        Financial Condition and Results of Operations. . . . . . . . .     7


PART II -- OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . .     10


SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     11

</TABLE>

<PAGE>

                              THRUSTMASTERS, INC.
                         CONSOLIDATED BALANCE SHEETS
                                (In thousands)

<TABLE>
<CAPTION>

                                                  March 31,      December 31,
                                                    1998            1997   
                                                 ----------      -----------
                                                (unaudited)
<S>                                             <C>              <C>
                                ASSETS
                                                                           
Current assets:
  Cash and cash equivalents                       $  2,586          $   449
  Accounts receivable, net                           7,578           16,604
  Inventories                                        5,988            6,974
  Prepaid expenses and other                           461              294
  Prepaid income taxes                                 892                -
  Deferred income taxes                                516              409
                                                   -------          -------
    Total current assets                            18,021           24,730

Plant and equipment, net                             2,180            2,119
Other                                                   27               28
                                                   -------          -------
    Total assets                                   $20,228          $26,877
                                                   -------          -------
                                                   -------          -------

                     LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Note payable                                    $      -          $ 1,110
  Accounts payable                                     986            2,919
  Accrued liabilities                                  753            3,504
                                                   -------          -------
    Total current liabilities                        1,739            7,533
Deferred income taxes                                   83               64
                                                   -------          -------
   Total liabilities                                 1,822            7,597
                                                   -------          -------
Shareholders' equity:
  Preferred stock                                        -                -
  Common stock                                      13,853           13,486
  Retained earnings                                  4,553            5,794
                                                   -------          -------
    Total shareholders' equity                      18,406           19,280
                                                   -------          -------
    Total liabilities and shareholders' equity     $20,228          $26,877
                                                   -------          -------
                                                   -------          -------

</TABLE>

                                      2

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

<PAGE>


                               THRUSTMASTER, INC.
                    CONSOLIDATED  STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                  Three Months Ended
                                                       March 31,
                                                 ---------------------
                                                   1998         1997
                                                 ---------    --------
<S>                                              <C>          <C>
Revenues                                           $ 6,282      $6,272
Cost of goods sold                                   4,792       3,786
                                                  --------     -------
Gross profit                                         1,490       2,486
                                                  --------     -------
Operating expenses:
   Research and engineering                            722         673
   Selling, general and administrative               2,708       1,435
                                                  --------     -------
Total operating expenses                             3,430       2,108
                                                  --------     -------
Income (loss) from operations                       (1,940)        378
Interest income                                         30          80
                                                  --------     -------
Income (loss) before income taxes                   (1,910)        458
Income tax provision (benefit)                        (669)        169
                                                  --------     -------
Net income (loss)                                  $(1,241)     $  289
                                                  --------     -------
                                                  --------     -------
Net income (loss) per share
   Basic                                           $ (0.29)     $ 0.07
                                                  --------     -------
                                                  --------     -------
   Diluted                                         $ (0.29)     $ 0.06
                                                  --------     -------
                                                  --------     -------
  Weighted average shares outstanding
   Basic                                             4,303       4,245
                                                  --------     -------
                                                  --------     -------
   Diluted                                           4,303       4,555
                                                  --------     -------
                                                  --------     -------

</TABLE>

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

                                       3

<PAGE>

                                 THRUSTMASTER, INC. 
                       CONSOLIDATED STATEMENTS OF CASH FLOWS 
                                   (In thousands) 
                                     (Unaudited) 

<TABLE>
<CAPTION>

                                                                     Three Months Ended
                                                                         March 31,
                                                                 -------------------------
                                                                   1998             1997
                                                                 --------         --------
<S>                                                              <C>              <C>
 Cash flows from operating activities: 
   Net income (loss)                                             $(1,241)         $   289
   Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities: 
       Depreciation                                                  230              124
       Deferred income taxes                                         (88)              (5)
       Changes in assets and liabilities: 
         Accounts receivable                                       9,026            5,248
         Inventories                                                 986             (833)
         Prepaid expenses and other assets                        (1,058)            (202)
         Payables and accrued liabilities                         (4,358)          (3,388)
                                                                 -------          -------
           Net cash provided by operating activities               3,497            1,233

 Cash flows from investing activities: 
   Purchase of plant and equipment                                  (291)            (282)
                                                                 -------          -------
 Cash flows from financing activities: 
   Payments on note payable                                       (1,110)               -
   Payment on long-term debt                                           -               (3)
   Proceeds from issuance of common stock                             41                5
                                                                 -------          -------
       Net cash provided by (used in) financing activities        (1,069)               2
                                                                 -------          -------
       Net increase in cash and cash equivalents                   2,137              953
 Cash and cash equivalents, beginning of period                      449            6,420
                                                                 -------          -------
 Cash and cash equivalents, end of period                        $ 2,586           $7,373
                                                                 -------          -------
                                                                 -------          -------
</TABLE>

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

                                       4

<PAGE>

                               THRUSTMASTER, INC.
          CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 
                                 (In thousands)
                                  (Unaudited)

<TABLE>
<CAPTION>

                                               Common Stock    
                                            -------------------    Retained
                                             Shares     Amount     Earnings
                                            --------   --------   ----------
<S>                                         <C>        <C>        <C>
 Balance, January 1, 1998                    4,294     $13,486     $ 5,794

 Stock options exercised                        77          41           -

 Tax benefits from stock options exercised       -         326           -

 Net loss                                        -           -      (1,241)
                                            ------     -------      ------
 Balance, March 31, 1998                     4,371     $13,853     $ 4,553
                                            ------     -------      ------
                                            ------     -------      ------

</TABLE>

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

                                        5

<PAGE>

                                 THRUSTMASTER, INC.
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       (In thousands, except per share data)

NOTE 1  --  Basis of Presentation

     The accompanying consolidated financial statements include the accounts 
of ThrustMaster, Inc., and its wholly-owned subsidiaries, and have been 
prepared by the Company without audit and in conformity with generally 
accepted accounting principles for interim financial information.  
Accordingly, certain financial information and footnotes have been omitted or 
condensed.  In the opinion of management, the unaudited condensed 
consolidated financial statements include all necessary adjustments (which 
are of a normal and recurring nature) for the fair presentation of the 
results of the interim periods presented.  These financial statements should 
be read in conjunction with the Company's audited consolidated financial 
statements for the year ended December 31, 1997.  The results of operations 
for the periods presented are not necessarily indicative of the results that 
may be expected for the entire fiscal year.

NOTE 2  --  Inventories

     Inventories are stated at the lower of cost (first-in, first-out) or
market.  Inventories are as follows (in thousands):

<TABLE>
<CAPTION>

                                      March 31,      December 31,
                                        1998            1997
                                      ---------      ----------
               <S>                    <C>            <C>
               Raw materials              $881           $1,062
               Work in progress             48               49
               Finished goods            5,059            5,863
                                        ------           ------
                                        $5,988           $6,974
                                        ------           ------
                                        ------           ------

</TABLE>

NOTE 3  --  Impact of Recently Issued Accounting Standards

     During 1997, the Financial Accounting Standards Board issued SFAS No. 
130 and SFAS No. 131, "Disclosures About Segments of an Enterprise and 
Related Information."  These standards will become effective for the 
Company's 1998 fiscal year. SFAS No. 130 establishes standards for reporting 
and display of comprehensive income and its components in a full set of 
general-purpose financial statements.  SFAS No. 131 changes current practice 
by establishing a new framework on which to base segment reporting (referred 
to as the "management" approach) and also requires interim reporting of 
segment information.  Management has studied the implications of the 
implementation of these standards, and based upon the initial evaluation, 
expects the adoption to have no impact on the Company's financial condition 
or results of operations, but will require revised disclosures when adopted.

                                       6

<PAGE>

ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS
     The following table sets forth, for the periods indicated, the percentage
of revenues represented by certain items included in the Company's Consolidated
Statements of Operations:

<TABLE>
<CAPTION>

                                                   Three Months Ended
                                                       March 31,
                                                 -----------------------
                                                   1998           1997
                                                 --------       --------
     <S>                                         <C>            <C>
     Revenues                                     100.0%         100.0%
     Cost of goods sold                            76.3           60.4
                                                  -----          -----
     Gross profit                                  23.7           39.6
                                                  -----          -----
     Operating expenses:
         Research and engineering                  11.5           10.7
         Selling, general and administrative       43.1           22.9
                                                  -----          -----
     Total operating expenses                      54.6           33.6
                                                  -----          -----
     Income (loss) from operations                (30.9)           6.0
     Interest income                                0.5            1.3
                                                  -----          -----
     Income (loss) before income taxes            (30.4)           7.3
     Income tax provision (benefit)               (10.6)           2.7
                                                  -----          -----
     Net income (loss)                            (19.8)%          4.6%
                                                  -----          -----
                                                  -----          -----

</TABLE>

COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 TO THE THREE MONTHS ENDED
MARCH 31, 1997

     Revenues for the three months ended March 31, 1998 were $6,282,000,
essentially the same as the  $6,272,000 for the three months ended March 31,
1997. 

     Gross profit for the three months ended March 31, 1998 was $1,490,000, a 
decrease of $996,000, or 40.1%, compared to $2,486,000 for the three months 
ended March 31, 1997.  As a percentage of revenues, the gross profit margin 
percentage was 23.7% for the three months ended March 31, 1998 and 39.6% for 
the three months ended March 31, 1997.  Gross profit declined primarily due 
to the increases in product returns during the quarter from: (1) retail 
channels developed during 1997 whose customers return products at higher 
rates than historically experienced, (2) higher than average rates of return 
on a new joystick product introduced during the fourth quarter of 1997, and 
(3) design and manufacturing problems encountered in a racing wheel product 
in Europe introduced during the fourth quarter and, which the company 
believes has been corrected.

                                       7

<PAGE>

     Research and engineering expenses were $722,000 for the quarter ended 
March 31, 1998, compared to $673,000 for the quarter ended March 31, 1997.  
The increase resulted primarily from additional expenses incurred in 
development of the Company's new products. 

     Selling, general and administrative expenses were $2,708,000 for the 
three months ended March 31, 1998, compared to $1,435,000 for the quarter 
ended March 31, 1997.  The increase was primarily due to higher selling 
expenses associated with increased merchandising and marketing activities, 
and the funding of the Company's continued expansion into Europe. 

     The income tax benefit for the three-month period ended March 31, 1998 
reflects an effective tax rate of 35.0%, compared to a provision at an 
effective tax rate of 36.9% for the three-month period ended March 31, 1997. 
         
LIQUIDITY AND CAPITAL RESOURCES

     The Company has financed its activities to date with a combination of 
cash flow from operations, borrowed funds, and proceeds from the sale of 
equity securities.

     The Company has a line of credit pursuant to which it may borrow up to 
the lesser of $1.0 million or 75% of eligible receivables.  The line of 
credit is scheduled for review in July 1998 and is collateralized by 
substantially all the Company's assets.  The line of credit requires the 
Company to maintain certain working capital and debt-to-equity ratios.  At 
March 31, 1998 there were no borrowings outstanding under the facility and 
the Company was in compliance with all loan covenants.  The Company is 
discussing with its bank an increase in the amount available but has no firm 
commitment.

     Net cash provided by operating activities was $3,497,000 for the three 
months ended March 31, 1998, resulting primarily from a reduction in accounts 
receivable of $9,026,000, a decrease in inventories of $986,000, offset by 
increases in prepaid expenses and other assets of $1,058,000, and by 
decreases in payables and accrued liabilities of $4,358,000.

     At March 31, 1998, the Company had cash and cash equivalents of 
$2,586,000 and working capital of $16,282,000.

     Capital expenditures for the three month period ended March 31, 1998 
were $291,000, compared to $282,000 for the same period in the prior year.  
These expenditures were primarily for new product tooling and manufacturing 
and computer equipment.

     The Company does not intend to pay cash dividends to the holders of 
Common Stock and intends to retain future earnings to finance the expansion 
and development of its business.

                                       8

<PAGE>

     The Company, from time to time, considers and may in the future enter 
into joint ventures or make acquisitions in connection with the development 
and marketing of its products, and may require additional funds in connection 
therewith, depending upon the circumstances.

     The Company believes that available funds, expected increased 
availability under its credit facility, and expected cash flow to be 
generated from operations will be adequate to meet the Company's anticipated 
cash needs for its present operations through 1998. 

     This report on Form 10-Q may include forward-looking statements.  
Investors are cautioned that  forward-looking statements involve risks and 
uncertainties and various factors could cause actual results to differ 
materially from those in the forward-looking statements.  Forward-looking 
statements relate to anticipated revenues, gross margins, earnings, product 
return rates, availability of products manufactured for the Company and new 
product introductions.  The following factors, among others, could cause 
actual results to differ from those indicated in the forward-looking 
statements:  uncertainties associated with market acceptance of and demand 
for the Company's products, impact of competitive products and pricing, 
dependence on third party suppliers, uncertainties associated with the 
development of products and manufacturing and differing characteristics of 
different distribution channels.  Investors are directed to the Company's 
filings with the Securities and Exchange Commission, including the Company's 
1997 Form 10-K, which are available from the Company without charge, for a 
further description of the risks and uncertainties relating to 
forward-looking statements made by the Company as well as to other aspects of 
the Company's business.

                                       9

<PAGE>


PART II  --  OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS

<TABLE>
<CAPTION>

     NUMBER    DESCRIPTION
     ------    ------------
     <C>       <S>
       *3.1    Articles of Incorporation, dated July 23, 1990; Articles of
               Amendment, dated December 15, 1990; Articles of Amendment, dated
               July 7, 1992; Articles of Amendment, dated July 7, 1993; Articles
               of Amendment , dated December 14, 1994

      **3.2    Amended and Restated Bylaws

       *4.1    Description of Capital Stock contained in the Articles of
               Incorporation and Amendments thereto (See Exhibit 3.1)

      **4.2    Description of Rights of Security Holders contained in the
               Amended and Restated Bylaws (See Exhibit 3.2)

       *4.3    Form of Certificate for Shares of Common Stock

       *4.4    Form of Representatives' Warrant Agreement among the Company,
               Cruttenden Roth and Black & Company, Inc.

      *10.1    Consulting Agreement, dated December 1, 1993, between the Company
               and BOCAR, Inc.

     **10.3    Directors' Nonqualified Stock Option Plan, dated July 19, 1994

     **10.4    1994 Stock Option Plan, dated July 19, 1994

     **10.5    Letter agreement, dated May 16, 1996 from United States National
               Bank of Oregon to the Company regarding a revolving line of
               credit

      *10.6    Voicecom Development Agreement, dated November 4, 1994, between
               the Company and Advanced Protocol Systems, Inc.

       10.7    1990 Stock Option Plan (incorporated by reference to Exhibit 4.3
               to the Registration Statement on Form S-8 filed on September 5,
               1995 (File No. 33-93082))

    ***10.8    Leases, dated March 13, 1996, between Pacific Realty Associates,
               L.P. and the Company, as amended

     **10.9     Summary of 1997 Bonus Program (Bonus Program Extended for 1998)

      10.10     Lease dated January 7, 1998, between Stargas Nominees Limited,
                and the Company

</TABLE>
                                       10

<PAGE>

<TABLE>
      <C>       <S>
      11.1      Statement re Computation of Per Share Earnings

        27      Financial Data Schedule

</TABLE>

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

*Incorporated by reference to the same exhibit number from the Registration 
Statement on Form SB-2 filed on January 5, 1995, as amended on February 7, 
1995, and February 24, 1995 (File No. 33-88252-LA).

**Incorporated by reference to the same exhibit number to the Company's 
Annual Report on Form 10-K for the year ended December 31, 1997.

***Incorporated by reference to the same exhibit number to the Company's 
Annual Report on Form 10-K for the year ended December 31, 1996.

(b)  Reports on Form 8-K

     No reports on Form 8-K have been filed during the period for which this
     report is filed.



SIGNATURES


          Pursuant to the requirements of the Securities Exchange Act of 1934,
     the registrant has duly caused this report to be signed on its behalf by
     the undersigned thereunto duly authorized.


                                        THRUSTMASTER, INC.

Date:  May 8, 1998                      By  /s/ Kent E. Koski
Kent E. Koski                             ------------------------------

                                        Vice President of Finance and 
                                        Administration, Chief Financial 
                                        Officer

                                       11

<PAGE>


                    DATED                   7th January, 1998
                    -----------------------------------------




                   (1)   STARGAS NOMINEES LIMITED

                   (2)   THRUSTMASTER INC








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

                                   Counterpart/
                                    UNDERLEASE


                        of Numbers 8 & 9, Admiralty Way,
                                Camberley, Surrey


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








                                      ROWE & MAW
                                20 Black Friars Lane
                                   London EC4V 6HD


                                 Tel: 0171-248 4282
                                 Fax: 0171-248 2009

                                Ref:  296/21681.00671




<PAGE>


                                    INDEX TO CLAUSES




PARTICULARS OF UNDERLEASE                                               PAGE

1.       INTERPRETATION

1.1      Definitions

1.2      Index and Headings

1.3      Interpretation

2.       DEMISE

3.       TENANT'S COVENANTS

4.       LANDLORD'S COVENANTS

5.       GUARANTOR'S COVENANTS

6.       TENANT'S OPTION TO DETERMINE

7.       PROVISOS

8.       CERTIFICATES

Schedule 1    DEMISED PREMISES AND RIGHTS

Schedule 2    EXCEPTIONS AND RESERVATIONS

Schedule 3    TENANT'S COVENANTS

              1.   Payment of rent

              2.   Payment of Interest

              3.   Payment of outgoings

              4.   Payment for services

              5.   Alterations

              6.   Repair

              7.   Exterior decoration

              8.   Interior decoration

              9.   Entry by Landlord and others

              10.  Breach of repairing covenant

              11.  Acts of Parliament

              12.  Use of Demised Premises

              13.  Alienation

              14.  Insurance

              15.  Easements etc.

              16.  Regulations

              17.  Information

              18.  Display of signs







<PAGE>

               19.  Yielding up

               20.  Removal of fixtures etc.

               21.  Indemnity

               22.  Costs

               23.  Value Added Tax

SCHEDULE 4     LANDLORD'S COVENANTS

               1.   Quiet enjoyment

               2.   Insurance

               3.   Services

               4.   Failure of services

               5.   Headlease

SCHEDULE 5     GUARANTOR'S COVENANTS

               1.   Guarantee

               2.   Continuing Guarantee

               3.   Forebearance and delay

               4.   Primary obligations

               5.   Indemnity

               6.   Set off and counterclaim

               7.   Rights against Tenant

               8.   Enforcement of Guarantee

               9.   To accept a New Lease

               10.  Unconditional Guarantee

               11.  No assignment of benefit necessary

               12.  Duration of Guarantee

               13.  Authorised Guarantee Agreement

               14.  General

SCHEDULE 6     PROVISOS

               1.   Re-entry

               2.   Avoidance of waiver

               3.   Compensation

               4.   Cesser of rent

               5.   Rent from third party

               6.   Effect on other property

               7.   Additional rights


<PAGE>


               8.   Interruption of services

               9.   Notices

               10.  Landlord's licence or consent

               11.  Arbitration

SCHEDULE 7     REVIEW OF BASIC RENT

               1.   Definitions

               2.   Review

               3.   Ascertainment

               4.   Payment of increase

               5.   Statutory restrictions

               6.   Record of review

               7.   Review frequency on renewal

SCHEDULE 8     SERVICE CONTRIBUTION

               1.   Ascertainment of Estate Costs

               2.   Notification of Estate Costs

               3.   Service Contribution account

               4.   Balancing charge

               5.   Inspection

                              PARTICULARS OF UNDERLEASE

H M LAND REGISTRY                                 LAND REGISTRATION ACTS 1925-71

                                        UNDERLEASE


COUNTIES                                          -    Surrey
                                                       Hampshire

DISTRICTS                                         -    Surrey Heath
                                                       Rushmoor

FREEHOLD TITLE NUMBERS                            -    SY487805
                                                       SY490338

HEADLEASEHOLD TITLE NUMBER                        -    SY494942

PROPERTY                                          -    Numbers 8 and 9
                                                       Admiralty Way
                                                       Camberley Surrey

<PAGE>

DATE                                   -  7th January 1998

LANDLORD                               -  STARGAS NOMINEES LIMITED whose
                                          registered office is at 100 Thames
                                          Valley Park Drive, Reading, 
                                          Berkshire

TENANT                                 -  THRUSTMASTER INC a company 
                                          incorporated in the State of Oregon 
                                          United States of America whose
                                          registered office is at 7175 NW
                                          Evergreen Parkway #400, Hillsboro,
                                          OR 97124 USA (company registration
                                          no. FC020132) whose address in 
                                          England for service is at Unit 8
                                          Station Road Industrial Estate
                                          Oxford Road Wokingham Berks

GUARANTOR                              -  None

DEMISED PREMISES                       -  Numbers 8 and 9, Admiralty Way,
                                          Camberley, Surrey more particularly
                                          described in the First Schedule 
                                          together with the rights more
                                          particularly described in the First
                                          Schedule

PLAN                                   -  Drawing number BG/N103/10/08/06/3A 
                                          on scale 1:1250 and drawing number
                                          BG/N103/10/08/06/4A on scale 1:500

DESIGNATED PARKING AREA                -  Parking Area 4 and 5 and Service
                                          Area 2

INITIAL NUMBER OF PARKING SPACES       -  Thirty (30)

DESIGNATED SERVICE AREA                -  Service Area 2

TERM                                   -  Ten years commencing the 29th day 
                                          of August 1997, subject to Clause 6

INITIAL RENT                           -  (a)  during the first year of the 
                                               Term the rent of Eighty-one
                                               thousand two hundred and fifty
                                               pounds (L81,250) per annum; and

                                       2
<PAGE>

                                          (b)  thereafter the rent of One
                                               hundred and five thousand 
                                               pounds (L105,000) per annum

MARKET RENT                            -  

RENT COMMENCEMENT DATE                 -  1st March 1998

RENT PAYMENT DATES                     -  usual quarter days

SERVICE CONTRIBUTION                   -  6.66 per cent of the Estate Costs

ACCOUNTING PERIOD                      -  1st January to 31st December or as
                                          otherwise specified by the Landlord 
                                          from time to time

ADVANCE PAYMENT DATES                  -  usual quarter days

ETERNAL DECORATION PERIODS             -  From March to October in the years 
                                          2000, 2003 and 2006

INTERNAL DECORATION PERIODS            -  During the year 2002

PERMITTED USER                         -  either as a light industrial 
                                          building within Class B2 or as a 
                                          warehouse or repository within 
                                          Class B8 of the Town & Country 
                                          Planning (Use Classes) Order 1987

                                       3


<PAGE>

THIS UNDERLEASE is made on the date stated in the Particulars

BETWEEN

(1) The Landlord

(2) The Tenant and

(3) The Guarantor (if any)

WITNESSES:

1.  INTERPRETATION AND DEFINITIONS

1.1 DEFINITIONS

    Unless the context otherwise requires the following terms and definitions 
    shall apply in the interpretation of this Underlease

    "ACCESS ROAD" means Admiralty Way;

    "ACCOUNTING PERIOD" means a period of twelve consecutive months commencing 
    and terminating as specified in the Particulars;

    "ACT OF PARLIAMENT" means any public or private acts and whether referred 
    to generically or specified by name includes any modification or 
    re-enactment of them from time to time in force and any order regulation 
    by-law direction or licence made or issued under or pursuant to any of 
    them and any provision or requirement of any of them or deriving validity 
    from any of them;

    "ADDITIONAL RENT" means those sums payable by the Tenant in respect of 
    insurance and services;

    "ADVANCE PAYMENTS" means fair and reasonable payments specified from time 
    to time by the Landlord to be made by the Tenant in advance on account of 
    the Service Contribution;

    "ADVANCE PAYMENT DATES" means the dates specified in the Particulars on 
    which the Advance Payments are to be made;

    "BALANCING CHARGE PAYMENT DATE" means the date fourteen days after 
    submission by the Landlord of the account of the Service Contribution;


                                      4

<PAGE>

    "BASIC RENT" means the Initial Rent and the Market Rent but excludes the 
    Additional Rent;

    "DEMISED PREMISES" means the property or any part of it and all additions 
    alterations and improvements to it and Landlord's fixtures and fittings 
    from time to time in or about the property short details of which are 
    specified in the Particulars and which is more particularly described in 
    Schedule 1;

    "DESIGNATED PARKING AREA" means the parking area specified in the 
    Particulars and designated numerically on the Plan;

    "DESIGNATED SERVICE AREA" means the service area specified in the 
    Particulars and designated numerically on the Plan;

    "DEVELOPMENT" bears the same meaning as defined in the Planning Acts;

    "ENVIRONMENT" means air, controlled waters (as defined in the Water 
    Resources Act 1991) or land;

    "ESTATE COSTS" means the expenditure incurred for the purposes of the 
    Landlord's Estate in any Accounting Period;

    "EXCEPTIONS AND RESERVATIONS" means those matters excepted from or 
    reserved out of the demise granted by this Underlease more particularly 
    described in Schedule 2;

    "EXTERNAL DECORATION PERIODS" means those periods specified in the 
    Particulars during which the Tenant is to effect decoration of the 
    exterior of the Demised Premises;

    "FULL REINSTATEMENT VALUE" means the cost anticipated by the Landlord 
    from time to time of reinstating the Demised Premises in accordance with 
    the provisions of this Underlease including:

    (a)  costs of demolition and site clearance;

    (b)  incidental costs consequent upon rebuilding or reinstatement;

    (c)  architects' surveyors' and other professional fees; and

    (d)  Value Added Tax;


                                       5


<PAGE>

    "GUARANTOR" means the person (if any) so specified in the Particulars and 
    includes any successor in title or permitted assign and, in the case of 
    an individual, his personal representatives;

    "HAZARDOUS SUBSTANCES" means any dangerous, hazardous, toxic or flammable 
    substances, materials or pollutants, effluents, contaminants, oils, 
    petroleum and petroleum products which have resulted in or may result in 
    the pollution or contamination of the Environment or harm to the health 
    of any human or other living organism;

    "HEAD LANDLORD" means BG plc whose registered office is situate at 
    100 Thames Valley Park Drive, Reading, Berkshire and includes the person 
    persons or corporation entitled to the reversion immediately expectant on 
    the determination of the term granted by the Headlease;

    "HEADLEASE" means the Lease dated the 9th day of October 1980 made 
    between British Gas Corporation (1) and Midland Bank Trust Company 
    Limited (2) the reversion immediately expectant upon the determination of 
    which is now vested in the Head Landlord and the term of which is now 
    vested in the Landlord and by virtue of which the Landlord holds the 
    Demised Premises and the remainder of the Landlord's Estate;

    "INITIAL RENT" means the rent payable by the Tenant from the Rent 
    Commencement Date to the day before the first Review Date the amount of 
    which is specified in the Particulars;

    "INSURANCE CONTRIBUTION" means a sum equivalent to the costs incurred 
    from time to time by the Landlord in effecting and maintaining insurance 
    in accordance with the Landlord's covenant attributable to the Demised 
    Premises being the aggregate of:

    (a)  the due proportion certified as such by the Landlord from time to time 
         attributable to the Demised Premises of the costs incurred from time 
         to time by the Landlord in effecting and maintaining insurance of the 
         Landlord's Estate; and

    (b)  any additional cost payable by the Landlord in respect of insurance 
         consequent on any particular requirement of the Tenant in connection 
         with the Demised Premises or the Permitted User;

    (c)  any tax on insurance premiums; and


                                      6
<PAGE>

    (d)  any sum incurred by the Landlord in connection with valuation of the 
         Demised Premises for insurance or otherwise in connection with the 
         insurance of the Demised Premises;

    "INSURED RISKS" means the risks included in any policy of insurance 
    effected in connection with this Underlease being those in respect of 
    loss or damage by:

    (a)  fire or explosion;

    (b)  non-enemy aircraft or other aerial devices or articles dropped from 
         them;

    (c)  earthquake;

    (d)  riot, civil commotion or malicious persons;

    (e)  lightning or storm;

    (f)  flood, bursting or overflowing of water tanks apparatus or pipes;

    (g)  impact by vehicles;

    (h)  two years' loss of Basic Rent and Additional Rent in an amount to 
         take into account potential increases in Basic Rent resulting from a 
         rent review or such higher amount as the Tenant shall require by 
         written notice to the Landlord; and 

    (i)  such other risks (including terrorism) as may be deemed necessary or 
         appropriate from time to time by the Landlord;

    "INSURER" means the insurance office or underwriter with which the 
    Landlord effects insurance cover against the Insured Risks;

    "INTEREST" means interest payable;

    (a)  at a rate of four pounds per centum above the base lending rate from 
         time to time of the Midland Bank Public Limited Company; or

    (b)  at a rate of four pounds per centum per annum above any rate 
         replacing or superseding the same; or

    (c)  in the event that any such rate as aforesaid shall be abolished 
         without replacement or substitution at a rate of four pounds per 
         centum per annum


                                       7

<PAGE>


          above the rate specified from time to time by the Regulations made 
          pursuant to section 32 of the Land Compensation Act 1961;

     calculated on a day to day basis and compounded at intervals of three 
     months after the date on which it became payable;

     "INTERNAL DECORATION PERIODS" means those periods specified in the 
     Particulars during which the Tenant is to effect decoration of the 
     interior of the Demised Premises;

     "LANDLORD" means the person so specified in the Particulars and 
     includes the person for the time being entitled to the reversion 
     immediately expectant upon the determination of the Term and where any 
     right is reserved or granted to the Landlord or any obligation of the 
     Landlord is to be preformed shall be deemed to include any servant, 
     agent, contractor or other person employed or engaged by or on behalf 
     of the Landlord;

     "LANDLORD'S ESTATE" means the property demised to the Landlord by the 
     Headlease shown on the Plan by a stippled verge line;

     "MARKET RENT" means the rent payable by the Tenant during the periods 
     between the Review Date and the determination of the Term which is more 
     particularly defined in and is to be ascertained in accordance with the 
     provisions of Schedule 7;

     "PARTICULARS" means the Particulars forming part of this Underlease;

     "PERMITTED USER" means the use to be made by the Tenant of the Demised 
     Premises which is specified in the Particulars;

     "PLAN" means the drawings specified in the Particulars or any one or any 
     combination of them;

     "PLANNING ACTS" means the Town and Country Planning Act 1990, the 
     Planning (Hazardous Substances) Act 1990, the Planning (Listed Buildings 
     and Conservation Areas) and the Planning and Compensation Act 1991 or 
     any statutory modification or re-enactment of any of them for the time 
     being in force and any regulations or orders made or having effect under 
     them;

     "PLANNING PERMISSION" means any permission, consent or approval (whether 
     conditional or otherwise) granted or deemed to be granted under the 
     Planning Acts;


                                       8
<PAGE>


     "REGULATIONS" means any rules which may be made from time to time by the 
     Landlord in accordance with the principles of good estate management in 
     relation to the Landlord's Estate and notified in writing to the Tenant;

     "RENT COMMENCEMENT DATE" means the date so specified in the Particulars 
     on which the Basic Rent first becomes payable;

     "RENT PAYMENT DATES" means the dates specified in the Particulars on which 
     the Basic Rent is to be paid;

     "REVIEW DATE" means 29th August 2002

     or such other dates as are days upon which the rent reserved by this 
     Underlease is subject to review in accordance with the provisions of 
     Schedule 7;

     "SERVICE CONTRIBUTION" means the due proportion attributable to the 
     Demised Premises of the Estate Costs payable to the Landlord by the 
     Tenant in accordance with the provisions of clause 2(d) and Schedule 8
     and expressed in the Particulars as a percentage;

     "SERVICE MEDIA" means watercourses, gutters, downspouts, sewers, drains, 
     pipes, wires, cables, conduits, ducts, flues, vents, sprinklers and any 
     other media for the provision of services of whatever description and 
     includes any apparatus connected to them other than Tenant's fixtures 
     and fittings now or in the future to be constructed or installed;

     "TENANT" means the underlessee of this Underlease specified in the 
     Particulars and shall include any successors in title and permitted 
     assigns and, in the case of an individual, his personal 
     representatives;

     "TERM" means, subject to Clause 6, the term of years granted by this 
     Underlease commencing and terminating (if by effluxion of time) on the 
     dates specified in the Particulars and includes any statutory 
     continuation of it and any period after the specified date of 
     determination during which the Tenant holds over;

     "THIS UNDERLEASE" means this Underlease and any documents supplemental 
     to it or entered into pursuant to its terms;

     "UNDERLEASE PROVISIONS" means the Tenant's covenants and the conditions 
     and provisions agreements and declarations contained in this Underlease;


                                       9



<PAGE>

     "UTILITIES" means surface water, soil, gas, electricity, water supply,
     telephone, telex and other electrical impulses, light impulses, heating,
     ventilation, air conditioning, smoke, fumes and any other facility of 
     whatever description;

     "VAT ACT" the Value Added Taxes Act 1994;

     "VAT ELECTION" means an election to waive exemption from Value Added Tax in
     respect of the Demised Premises;

     "VAT SUPPLY" the meaning which "supply" has for the purpose of the VAT Act;

     "WASTE" means any Hazardous Substances or matter containing a Hazardous
     Substance which constitutes scrap material or an effluent or other unwanted
     surplus substance arising from the application of any process and any
     substance or article containing Hazardous Substances which requires to be
     disposed of as being broken, worn out, contaminated or otherwise spoiled.

1.2  INDEX AND HEADINGS

     The index and headings are included for ease of reference only and do not
     affect the interpretation or construction of this Underlease.

1.3  INTERPRETATION

     In this Underlease, unless the context requires otherwise, any reference
     to:

     (a)  a "party" or "the parties" is to a party or the parties, as the case
          may be, to this Underlease;

     (b)  a Clause or a Schedule is to a clause of or a schedule to this
          Underlease, as the case may be and a paragraph is to a paragraph of
          the Schedule in which that reference appears;

     (c)  "this Underlease" includes the Schedules, which form part of the
          Underlease for all purposes;

     (d)  a statute or statutory provision includes any consolidation,
          re-enactment, modification or replacement of the same, any statute or
          statutory provision of which it is a consolidation, re-enactment or
          replacement and any subordinate legislation in force under any of the
          same from time to time;

     (e)  the masculine, feminine or neuter gender respectively includes the
          other genders, references to the singular include the plural, and vice
          versa, and

                                          10
<PAGE>

          references to persons include firms, corporations and unincorporated
          associations and bodies;

     (f)  consent includes any other form of licence, permission, approval or
          authorisation;

     (g)  the Demised Premises includes any part of the Demised Premises;

     (h)  neighbouring premises includes any premises adjoining, adjacent to or
          in the vicinity of the Demised Premises;

     (i)  value added tax includes any substituted or similar tax;

     (j)  any covenants or obligation by or of the Tenant not to do or omit to
          be done any act matter or thing shall be deemed to include an
          obligation not to permit or suffer such act, matter or thing to be
          done or not to permit or suffer the omission of such act, matter or
          thing as the case may be;

     (k)  periods of time expressed by reference to:

          (i)  a number of days are to be computed on the basis of consecutive
               not working days

          (ii) a number of months are to be computed on the basis of calendar
               months;

     (l)  any agreement, covenant, representation, warranty, acknowledgement or
          undertaking in this Underlease on the part of two or more person is
          made or given by such persons jointly and severally.

2.   DEMISE

     In consideration of the rents reserved by this Underlease and of the
     covenants by the Tenant and by the Guarantor (if any) contained in this
     Underlease the Landlord HEREBY DEMISES to the Tenant the Demised Premises
     excepting and reserving the Exceptions and Reservations.

     TO HOLD unto the Tenant for the Term subject to Clause 6.

     YIELDING AND PAYING to the Landlord (whether or not demanded) yearly during
     the Term and proportionately for any part of a year without deduction and
     subject to the provisions for the payment of Interest contained in this
     Underlease:

                                          11

<PAGE>


     (a)  on and from the Rent Commencement Date until the day preceding the 
          first Review Date the Initial Rent;

     (b)  on and from each Review Date until the day preceding the Review 
          Date next following the greater of:

          (i)  the Market Rent assessed in relation to the Review Date 
               in question; or

          (ii) the Basic Rent (disregarding any cesser or abatement of 
               rent) payable for the period immediately preceding the
               Review Date in question

          such Basic Rents shall be paid by equal quarterly payments in 
          advance on the Rent Payment Dates.

     AND ALSO PAYING by way of Additional Rent:

     (c)  the Insurance Contribution to be paid within fourteen days of 
          demand;

     (d)  the Service Contribution to be paid on the Advance Payment Dates 
          and the Balancing Charge Payment Date.

     The first proportion of any Basic Rent from the Rent Commencement Date to 
     the respective payment dates next following shall be paid on or before 
     the Rent Commencement Date.

     The proportion of Additional Rent from the commencement of the Term to 
     the payment date next following the date of this Underlease shall be 
     paid on demand.

3.   TENANT'S COVENANTS

     The Tenant HEREBY COVENANTS with the Landlord as set out in Schedule 3.

4.   LANDLORD'S COVENANTS

     The Landlord HEREBY COVENANTS with the Tenant as set out in Schedule 4.

5.   GUARANTOR'S COVENANTS

     In consideration of this Underlease having been granted at its request the 
     Guarantor (if any) HEREBY COVENANTS with the Landlord as set out in 
     Schedule 5.


                                       12
<PAGE>

6.   TENANT'S OPTION TO DETERMINE

     If the Tenant wishes to determine this Underlease upon the 29th August 
     2002 and provided that:

     (a)  the Tenant gives to the Landlord not less than six months' prior 
          notice in writing of its wish so to do; and

     (b)  upon the 29th August 2002 gives vacant possession to the Landlord 
          free from any sub-tenancies;

     then upon the 29th August 2002 this Underlease and everything contained 
     within it shall cease and be void but without prejudice to the rights 
     and remedies of either party against the other in respect of any 
     antecedent claim or breach of covenant.

     Time shall be of the essence for the performance of all the requirements of
     this paragraphs (a) and (b) of this Clause 6.

7.   PROVISOS

     Provided always and it is hereby agreed and declared between the parties 
     as set out in Schedule 6.

8.   CERTIFICATES

8.1  This Underlease is not made in pursuance of an agreement for lease.

8.2  This Underlease is a new tenancy within Section 1 of the Landlord and 
     Tenant (Covenants) Act 1995.

9.   JURISDICTION

9.1  DOMESTIC JURISDICTION

     This deed shall be construed in accordance with English law and the 
     parties irrevocably submit to the exclusive jurisdiction of the English 
     courts to settle any disputes which may arise in connection with this 
     deed.

9.2  SERVICE OF PROCEEDINGS

(1)  Proceedings and Notices may be served upon the Tenant at the Demised 
     Premises or the Address in England Stated in the Particulars.


                                       13

<PAGE>


(2) If for any reason the Tenant ceases to maintain an address for service in 
    England and Wales the Tenant shall promptly appoint an agent for service 
    of process in England and notify the Landlord of the appointment and the 
    new agent's name and address. If the Tenant does not make such an 
    appointment within seven days of such cessation, then the Landlord may do 
    so on its behalf and shall notify the Tenant if it does so.

IN WITNESS whereof the parties hereto have executed this Underlease which is 
delivered on the date stated in the Particulars.

                                SCHEDULE 1

                       (DEMISED PREMISES AND RIGHTS)

All that land together with the building on it or on some part of it and all 
additions or improvements made to it or replacement of it and the 
Landlord's fixtures and fittings on or about it now or at any time during the 
Term forming part of the Landlord's Estate and known by the address specified 
in the Particulars and shown edged red on the Plan.  The walls or structures 
separating one unit from the next shall be party walls or structures severed 
medially.

TOGETHER WITH the following rights in common with all others having the like 
right:

1.  To pass and repass on foot only over and along the footways on the 
    Landlord's Estate leading to and from the Demised Premises.

2.  To pass and repass on foot or with vehicles over and along the Designated 
    Service Area for the purposes of access to and egress from the Demised 
    Premises.

3.  To the passage and running through the Service Media on or under the 
    remainder of the Landlord's Estate of utilities and any other facility for 
    which provision may be made in respect of the Demised Premises from time to 
    time.

4.  To use no more than the number of parking spaces in the Designated Parking
    Area specified in the Particulars for the purpose of parking cycles, cars 
    and vans not exceeding 15 cwt unladen weight in connection with the 
    Permitted User and enjoyment of the Demised Premises PROVIDED THAT 
    subject to the number of parking spaces remaining constant the location 
    and any marking of individual parking spaces may be varied from time to 
    time by the Landlord for the better management of the Landlord's Estate by 
    Regulations or otherwise.

5.  To use that part of the Designated Service Area contiguous to the Demised 
    Premises for the purposes of loading and unloading goods to and from the 
    Demised Premises.

                                      14


<PAGE>


                                                                Schedule 2

                                     SCHEDULE 2

                             (EXCEPTIONS AND RESERVATIONS)


The following rights are excepted and reserved from the Demised Premises for 
the benefit of the Landlord, the Head Landlord, the Landlord's Estate, the 
tenants of the Landlord on the Landlord's Estate and their respective 
successors in title, permitted assigns and permitted subtenants:

1.  To the passage and running through the Service Media in on or under the 
    Demised Premises to and from the remainder of the Landlord's Estate and 
    any adjoining or neighbouring property of the Utilities and for any person 
    affected by such Service Media or Utilities after at least five days' 
    written notice to the Tenant (but in case of emergency at any time 
    without notice) to enter the Demised Premises for the purpose of 
    constructing, repairing and renewing the same the person exercising such 
    right forthwith making good all damage caused by such entry except insofar 
    as such entry may be necessitated by any act or default of the Tenant.

2.  To rebuild or alter any of the adjoining or neighbouring buildings or to 
    erect any new buildings (whether or not such buildings may be on the 
    Landlord's Estate) notwithstanding any interference thereby occasioned to 
    the access of light or air to the Demised Premises.

3.  To make such alterations to the Access Road, footpaths and parking and 
    service areas as may be required in connection with any repositioning of 
    them or in order to link the same to any new access road or in connection 
    with any replanning of the public highways.

4.  At all reasonable times after at least five days' written notice to the 
    Tenant (but in case of emergency at any time without notice) to enter and 
    remain upon the Demised Premises for the purposes of constructing, 
    repairing, maintaining, altering, cleansing examining or testing any 
    adjoining premises and its Service Media or to cleanse empty and repair any
    such Service Media the person exercising such right forthwith making good
    all damage thereby caused to the Demised Premises and causing as little 
    disturbance as possible to the Tenant.

5.  All rights, easements, quasi-easements and privileges to which the Demised 
    Premises are or may be subject.


                                     SCHEDULE 3


                                        15








<PAGE>

                                                                      Schedule 3

                              (TENANT'S COVENANTS)

1.       PAYMENT OF RENT

         To pay the Basic Rent and Additional Rent on the Rent Payment Dates, 
         Advance Payment Dates and Balancing Charge Payment Date without any 
         deduction, abatement, counterclaim or set-off whatsoever except for 
         such as the Tenant may be required to make in compliance with any 
         Act of Parliament.

2.       PAYMENT OF INTEREST

         To pay Interest upon any Basic Rent or Additional Rent unpaid on the 
         relevant payment date on and from the relevant Rent Payment Date, 
         Advance Payment Date or Balancing Charge Payment Date up to and 
         including the actual date of payment. Interest shall be payable 
         notwithstanding that the Landlord refuses to accept Basic Rent or 
         Additional Rent to prevent the waiver of any breach of covenant by 
         the Tenant.

3.       PAYMENT OF OUTGOINGS

         To pay and discharge all general and water rates, taxes, duties, 
         charges, assessments, impositions and outgoings whether 
         parliamentary, parochial, local or of any other description which 
         are now or at any time may be taxed, charged or imposed upon or 
         payable in respect of the Demised Premises or on the owner or 
         occupier in respect of them and to pay or indemnify the Landlord 
         against the payment of a fair or due proportion of any such 
         outgoings payable in respect of the Demised Premises in conjunction 
         with any other part of the Landlord's Estate or with any adjoining 
         or neighbouring property or upon the Tenant in conjunction with the 
         respective owners tenants or occupiers thereof PROVIDED ALWAYS that 
         this paragraph 3 shall not oblige the Tenant to pay any tax or duty 
         which the Landlord or Head Landlord are personally liable to pay as 
         a result of this demise or of any dealing by the Landlord or the 
         Head Landlord in their respective reversionary interests or of the 
         receipt by the Landlord of any rent or other monies under this 
         Underlease.

4.       PAYMENT FOR UTILITIES

         To pay for all gas, water, electricity, telephone, telex and other 
         services of whatever description used, consumed or employed in or on 
         the Demised Premises during the Term.

                                      16
<PAGE>

                                                                      Schedule 3

5.       ALTERATIONS

5.1.1    Not to:

         (a)  cut, maim, alter or remove any or any part of the principal 
              structure, beams, columns, roofs, walls or other structural parts 
              of the Demised Premises; or

         (b)  affect, alter or modify the layout, elevation or external 
              appearance of the Demised Premises; or

         (c)  make any structural erection, addition or alterations to the 
              Demised Premises either externally or internally; or

         (d)  carry out any Development on or to the Demised Premises.

5.1.2    Not without the previous licence under seal of the Landlord nor 
         except in accordance with plans, drawings, specifications, schedules 
         and quantities previously submitted in sextuplicate to and approved 
         by the Landlord to carry out any non-structural alterations to the 
         Demised Premises.

5.1.3    If the Landlord shall consent to any such additions or alterations 
         then unless waived by the Landlord in writing, at the expiration or 
         sooner determination of the Term the Tenant shall at its own expense 
         reinstate the Demised Premises to the Landlord's satisfaction.

5.1.4    The Tenant may install, alter or remove demountable partitioning in 
         the Demised Premises without the consent of the Landlord.

5.2      To obtain all other licences, approvals, permissions and consents 
         required for the commencement and execution of any such works 
         permitted by the Landlord and to produce the same together with all 
         other related documents for the approval of the Landlord together 
         with two copies of every such licence, approval, permission or 
         consent for the Landlord's retention PROVIDED THAT:

         (a)  the Landlord shall be deemed to have given such approval if it 
              has not notified the Tenant to the contrary by the twenty-eighth 
              day after receipt of such licence, approval, permission or 
              consent;

         (b)  the Landlord may refuse to give its approval to any such 
              licence, approval, permission or consent on any of the following 
              grounds;

                                      17

<PAGE>

                                                                     Schedule 3


              (i)   any condition contained in it or omitted from it or the
                    period of it would be or be likely to be prejudicial to its
                    interest in the Demised Premises or other adjoining or
                    adjacent property of the Landlord whether during the Term or
                    following the determination or expiration of the Term;

              (ii)  it may result in the imposition on the Landlord of a tax 
                    charge or other payment;

              (iii) the approval of the Head Landlord has been refused.

5.3      To carry out any such works at the expense in all respects of the 
         Tenant and fully in compliance with all licences, approvals, 
         permissions and consents in a good and workmanlike manner to the 
         reasonable satisfaction of the Landlord.

5.4      To permit the Landlord to enter upon the Demised Premises at all 
         reasonable times to view the state and condition of any such works 
         and to comply forthwith with any requirement of the Landlord 
         consequent thereon.

5.5      If in breach of the covenants contained in this Underlease the 
         Tenant shall erect or allow to be erected any other building or any 
         structure or apparatus on the Demised Premises or make or allow to 
         be made any alterations or additions to the Demised Premises or 
         server or remove the Landlord's fixtures and fittings or cut into or 
         damage or allow to be damaged the Demised Premises then immediately 
         upon notice in writing from the Landlord requiring it so to do to 
         remove all such new buildings structures apparatus alterations or 
         additions and/or replace any such Landlord's fixtures and fittings 
         and make good and restore the Demised Premises to their state and 
         condition existing before the breach of such covenant by the Tenant 
         and if the Tenant shall neglect so to do within fourteen days after 
         such notice then the Landlord shall be entitled to enter upon the 
         Demised Premises to remove such new buildings, structure, apparatus, 
         alteration or addition and replace any such Landlord's fixtures and 
         fittings and make good and restore the Demised Premises to the state 
         and condition existing before the breach of covenant by the Tenant.

5.6      Not without the prior written consent of the Landlord and in 
         compliance in all respects with any relevant Act of Parliament and 
         the regulations, terms and conditions of any body or institution 
         (whether statutory or non-statutory) competent in that behalf to 
         install in or upon the Demised Premises any fuel burning apparatus 
         or make any addition or alteration to any of the Service Media 
         serving the Demised Premises or the Landlord's Estate.

                                       18
<PAGE>

                                                                     Schedule 3

5.7      Not to suspend from the ceilings, roof or main structure of the 
         Demised Premises any excessive weight nor load or use the floor or 
         structure of the Demised Premises in any manner which will in any 
         way impose a weight or strain in excess of that which such 
         components are constructed to bear with due margin for safety or 
         which will any way strain or interfere with the main structure.

6.       REPAIR

         Save in respect of any damage or loss arising from the occurrence of 
         any of the Insured Risks (except to the extent that the insurance 
         shall have been vitiated by the act or default of the Tenant) to 
         repair, cleanse, maintain amend and keep the Demised Premises and 
         the portions of all party walls and structures attributable to the 
         Demised Premises in good and substantial repair and maintained, 
         cleansed and amended in every respect notwithstanding that any want 
         of repair may be due to wear and tear or deterioration or otherwise 
         and at the direction of the Landlord to join with the tenant or 
         occupier of the premises to which another portion of such party wall 
         or structure is attributable in carrying out and completing any 
         requisite rebuilding, repairing or cleansing. As often as any 
         Landlord's fixtures belonging to the Demised Premises shall so 
         require to renew the same with other fixtures of a similar 
         description quality and value to the reasonable satisfaction of the 
         Landlord PROVIDED ALWAYS that if the Tenant shall desire to replace 
         the same with fixtures of a different description quality or value 
         the Tenant shall produce to the Landlord for approval full 
         particulars of such fixtures and shall not install such fixtures 
         without the prior written consent of the Landlord.

7.       EXTERIOR DECORATION

         During the External Decoration Periods and also in the last year of 
         the Term should this Underlease determine otherwise than by 
         effluxion of time to paint or otherwise treat as the case may be in 
         a good and workmanlike manner with materials of good quality and of 
         types previously approved in writing by the Landlord and with no 
         changes in colours all external parts of the Demised Premises 
         previously or usually requiring to be painted or otherwise treated. 
         Also as often as in the opinion of the Landlord shall be reasonably 
         necessary (but not more often than once in every five years) to 
         clean, wash down or otherwise treat as may be appropriate according 
         to the materials used all exterior stone, concrete and fiberglass or 
         other finishes to the exterior of the Demised Premises to the 
         reasonable satisfaction of the Landlord. As often as the Landlord 
         may require (but not more often than once in every month) to clean 
         the glass of the Demised Premises.

                                       19

<PAGE>

                                                                      Schedule 3

8.        INTERIOR DECORATION

          During the Internal Decoration Periods and also in the last year of
          the Term should this Underlease determine otherwise than by effluxion
          of time to paint with at least two coats, redecorate, paper, repaper
          or otherwise treat as the case may be in a good and workmanlike manner
          with materials of good quality all internal parts of the Demised
          Premises previously or usually so treated or which require painting or
          other treatment for their proper maintenance, preservation or
          appearance and to wash down any tiles, glazed bricks and similar
          washable surfaces PROVIDED THAT the Tenant will obtain the written
          consent of the Landlord to the type of materials and colours to be
          used during the final Internal Decoration Period or during the last
          year of the Term as the case may be.

9.        ENTRY BY LANDLORD AND OTHERS

9.1       To permit the Landlord at all reasonable hours during the daytime on
          reasonable prior notice (but in case of emergency at any time without
          notice) to enter the Demised Premises to:

          (a)  ensure that nothing has been done upon the Demised Premises that
               constitutes a breach of any of the Tenant's covenants;

          (b)  view and examine the state and condition of the Demised Premises;

          (c)  take inventories of the fixtures and fitting in the Demised
               Premises;

          (d)  execute any improvement it may undertake to execute;

          (e)  make any inspection which may be required for the purpose of the
               Landlord and Tenant Acts 1927 and 1954 or any other Act of
               Parliament for the time being affecting the Demised Premises;

          (f)  execute repairs to the Demised Premises for which the Landlord is
               responsible or repairs or alterations to any adjoining premises
               if such repairs or alterations cannot be executed conveniently
               without entering the Demised Premises; or

          (g)  empty, cleanse, renew or repair any of the Service Media 
               belonging to the Demised Premises or any such adjoining premises 
               as often as occasion shall require the Landlord making good as 
               soon as practicable in a reasonable manner any damage thereby 
               occasioned and causing no unnecessary damage or disturbance.


                                          20
<PAGE>

                                                                      Schedule 3

9.2       To permit the Landlord or any tenant or occupier of any adjoining or
          adjacent property authorised in writing by the Landlord and their
          servants, agents and workmen at all reasonable times on reasonable
          prior written notice (but in the case of emergency at any time without
          notice) to enter upon the Demised Premises to:

          (a)  execute repairs, alterations, painting, redecoration or other
               works to any adjoining property; or

          (b)  construct, lay down, connect, alter, repair, cleanse or maintain
               any of the Service Media in or under the Demised Premises for the
               accommodation of any adjoining or adjacent property;

          the person or persons exercising such right making good all damage
          thereby occasioned to the Demised Premises and causing as little
          disturbance as possible to the Tenant and in case of dispute or
          controversy with such tenant or occupier relating to any Service Media
          or to any easements or privileges whatsoever affecting or relating to
          the Demised Premises or any adjoining or adjacent property to allow
          the same to be settled by and abide by the determination of the
          Landlord's Surveyor in such manner as he shall direct in writing.

10.       BREACH OF REPAIRING COVENANT

10.1      To repair and make good all breaches of the Tenant's covenants,
          defects and wants of reparation for which the Tenant may be liable of
          which notice shall have been given by the Landlord to the Tenant
          within the time stipulated in such notice and if the Tenant shall fail
          to perform any of its covenants relating to the repair, decoration,
          cleansing or condition of the Demised Premises the Landlord shall be
          entitled (but without prejudice to the right of re-entry contained in
          this Underlease) to enter upon the Demised Premises and at the expense
          of the Tenant to carry out such repairs, cleansing or decoration in
          accordance with such covenants.

10.2      If and when called upon so to do to produce to the Landlord all
          documents and other evidence which the Landlord may reasonably require
          in order to satisfy the Landlord that the Tenant has performed and
          observed its covenants in this Underlease.

11.       ACTS OF PARLIAMENT

11.1.1    Subject to the provisions of paragraph 11.1.2, at all times during the
          Term to observe and comply in all respects with every Act of
          Parliament and in particular but without prejudice to the generality
          of the foregoing the:


                                          21
<PAGE>


                                                                    Schedule 3

          1.1  Clean Air Act 1993;

          1.2  Control of Pollution Act 1974;

          1.3  Factories Act 1961;

          1.4  Fire Precautions Act 1971;

          1.5  Health and Safety at Work etc. Act 1974;

          1.6  Landlord and Tenants Acts 1927 and 1954;

          1.7  Offices Shops and Railway Premises Act 1963;

          1.8  Public Health Acts 1936 and 1961;

          1.9  The Planning Acts;

          1.10 The Environmental Protection Act 1990, Water Resources Act 
               1991 and Environment Act 1995;

          or the requirements of any competent person, body or authority so 
          far as they relate to or affect the Demised Premises, the Permitted 
          User or the use or employment the Demised Premises in of any 
          person, fixture or fitting, plant, machinery or chattel and to 
          execute all works and provide and maintain all arrangements which 
          may be directed or required in respect of such matters whether by 
          the Landlord or the Tenant, and to indemnify the Landlord at all 
          times against all costs, charges and expenses of or incidental to 
          the execution of any such works or the provision or maintenance of 
          any such arrangement and not at any time to do or omit or suffer 
          to be done or omitted any act or thing by reason of which under any 
          Act of Parliament the Landlord may incur or have imposed upon it or 
          become liable to pay any penalty, damages, compensation, costs, 
          levy, charges or expenses PROVIDED ALWAYS that compliance with all 
          Acts of Parliament shall not relieve the Tenant from procuring all 
          necessary licences, consents, permissions or approvals required by 
          this Underlease.

11.1.2    The Tenant shall not be required to take any action or to carry out 
          any works to prevent, remedy or clean up any pollution or 
          contamination of the Environment with hazardous Substances and/or 
          Waste where such Hazardous Substances and/or Waste were in 
          existence upon the Demised Premises prior to the date of this 
          Lease. The Tenant shall not be relieved from liability where in 
          order to prevent, remedy or clean up Hazardous Substances and/or 
          Waste in existence upon the Demised Premises after the date of this 
          Lease the Tenant shall also of necessity be obliged to prevent, 
          remedy


                                       22
<PAGE>


          or clean-up Hazardous Substances and/or Waste in existence upon the 
          Demised Premises prior to the date of this Lease.

11.2.1    To give to the Landlord, within seven days of the receipt by the 
          Tenant, a true copy of any permission, notice (whether formal or 
          informal), order, direction, complaint, enquiry, request for 
          information or other communication or proposal for any such 
          affecting the Demised Premises made, given or issued to the Tenant 
          by any government department, local or public authority, factory 
          inspector or other competent person or body by virtue of any Act of 
          Parliament.

11.2.2    Without delay to take all requisite steps at the expense of the 
          Tenant to comply with any such notice, order or direction or, where 
          the premises affected thereby are sub-let, to procure compliance by 
          the sublessee.

11.2.3    At the request of the Landlord to make or join with the Landlord in 
          making such objects or representations against or in respect of any 
          such notice order proposal or direction as the Landlord shall deem 
          expedient.

11.3.1    To comply in all respects with the provisions and requirements of 
          the Planning Acts any agreement entered into pursuant to the 
          Planning Acts and all Planning Permissions so far as the same 
          relate to or affect:

          (a)  the Demised Premises;

          (b)  any operations, works, acts or things at any time carried out 
               or omitted on the Demised Premises; or

          (c)  the Permitted User.

11.3.2    As often as occasion shall require at the expense in all respects 
          of the Tenant to obtain all such planning permissions and serve all 
          such notices as may be required for the carrying out of any 
          operations by the Tenant on the Demised Premises or the institution 
          or continuance on them of any use which may constitute Development.

11.3.3    Subject only to any statutory direction to the contrary to pay and 
          satisfy any charge or levy imposed or payable in respect of the 
          carrying out or maintenance of any such operations or the 
          institution or continuance of any such use and to indemnify the 
          Landlord against any liability whether by way of tax or otherwise 
          which may arise by reason thereof.

11.3.4    Notwithstanding any consent which may be granted by the Landlord 
          under this Underlease not to carry out or make any alteration or 
          addition to the Demised


                                       23

<PAGE>
                                                                     Schedule 3

         Premises or any change in the Permitted User before all such notices 
         and all such necessary planning permissions have been produced to 
         the Landlord in accordance with paragraph 5.2. of this Schedule 3.

11.3.5   Unless the Landlord otherwise directs, to carry out and complete 
         before the expiration or sooner determination of the Term:

         (a)  any works required to be carried out to the Demised Premises as 
              a condition of any Planning Permission implemented before such 
              expiration or determination; and 

         (b)  any Development begun upon the Demised Premises in respect of 
              which the Landlord shall or may be or become liable for any 
              tax, charge, fee or levy under the Planning Acts.

11.3.6   The Tenant shall not enter into any planning agreement or planning 
         obligation pursuant to Section 106 of the Town and Country Planning 
         Act 1990.

11.3.7   To comply with all legally enforceable requirements in relation to 
         means of escape from the Demised Premises in case of fire and at the 
         expense of the Tenant to keep the Demised Premises sufficiently 
         supplied and equipped with fire fighting and extinguishing apparatus 
         and appliances of types to be approved from time to time by the 
         appropriate authority and suitable in all respects to the Permitted 
         User which shall be open to the inspection and maintained to the 
         reasonable satisfaction of the Landlord (so far as not opposed to 
         the legal obligation of the Tenant) and not to obstruct the access 
         to or means of working of such apparatus and appliances in any way.

12.      USE OF THE DEMISED PREMISES

12.1     Not to use the Demised Premises other than for the Permitted User.

12.2     Not to use the Demised Premises:

         (a)  for any illegal or immoral purpose;

         (b)  as a residence or sleeping place for any person;

         (c)  for any noisy, noxious or offensive trade or business;

         (d)  for any unlawful betting transaction or unlawful gaming within 
              the meaning of the Acts of Parliament relating to such matters 
              nor make any application for a


                                      24
<PAGE>
                                                                     Schedule 3

              betting office licence or a licensed registration under the 
              said Acts of Parliament in respect of the Demised Premises.

12.3.1   Not to do on the Demised Premises anything which shall or may be or 
         become or cause annoyance, nuisance, damage, inconvenience, 
         disturbance, injury or danger to the Landlord or the owners, tenants 
         or occupiers of the remainder of the Landlord's Estate or of other 
         premises in the neighbourhood and to keep the Landlord and the Head 
         Landlord fully and effectually indemnified against all actions, 
         proceedings, damages, costs, expenses, claims and demands whatsoever 
         arising out of or in consequent of any breach or non-observance of 
         this covenant.

12.3.2   On a written notice being served on the Tenant by the Landlord or 
         any competent authority requiring the abatement of any nuisance 
         caused by vibration, noise, offensive smell or undue emission of 
         smoke, fumes, vapour or dust with all reasonable dispatch after the 
         service of such notice to abate the same accordingly and if the 
         Tenant shall fail so to do then the Landlord shall be entitled to 
         enter upon the Demised Premises and abate such nuisance and all 
         costs charges and expenses incurred in so doing shall be repaid by 
         the Tenant to the Landlord upon demand.

12.4     Not to carry on upon the Demised Premises the manufacture or 
         production of any gas, electricity, steam or hot water unless for 
         the requirements of the Permitted User and not to supply gas, 
         electricity, steam or hot water to any other person.

12.5     Except with the prior written consent of the Landlord to which the 
         provisions of paragraph 5.2 of this Schedule 3 shall apply and 
         strictly in accordance with all relevant acts of Parliament, not to 
         keep, place, store or use in, upon or about the Demised Premises any 
         petrol or other highly inflammable spirit, liquor, fluid or 
         substance or any material of a dangerous combustible, explosive or 
         corrosive nature which may attack or in any way injure by 
         percolation, corrosion, vibration or otherwise the structure of the 
         Demised Premises or any other part of the Landlord's estate or the 
         keeping or use of which may constitute a nuisance to the occupiers 
         of neighbouring or adjoining premises and to comply with all the 
         requirements of any competent authority and of the Insurer in 
         respect of such matters.

12.6     Not to hold any sale by auction, public exhibition or political or 
         other meeting on the Demised Premises.

12.7     Not to permit oil, grease, corrosive, deleterious, objectionable, 
         dangerous, poisonous or explosive matters or substances to enter any 
         of the Service Media and to take all reasonable measures for 
         ensuring that any effluent discharged will not be corrosive or 


                                      25

<PAGE>
                                                                     Schedule 3

          otherwise harmful or cause obstruction or deposit within any of the
          Service Media, the sewage disposal works or to any sewage purification
          process.

12.8      Not to:

          (a)  store goods or materials upon parts of the Landlord's Estate not
               included in the Demised Premises;

          (b)  form any refuse dump or rubbish or scrap heap on the Demised
               Premises or any part of the Landlord's Estate;

          (c)  bring or to keep upon the Demised Premises anything which is or
               may become in the opinion of the Landlord untidy, unclean,
               unsightly or in any way detrimental to the amenity of the
               Landlord's Estate or the neighbourhood and within one month to
               comply with the requirements of any written notice to restore any
               amenity inured as aforesaid and in the event of the Tenant
               failing to comply with such notice to permit the Landlord to
               enter upon the Demised Premises and carry out any works necessary
               to comply with such notice;

          (d)  light any fire on the Demised Premises or the remainder of the
               Landlord's Estate;

12.9      to comply with the arrangements made from time to time by the Landlord
          for the removal of all refuse, rubbish and scrap which may have
          accumulated on the Demised Premises.

12.9.1    to keep the Demised Premises free from weeds, deposits of materials or
          refuse.

13.1      ASSIGNMENT

13.1.1    Not to assign part only of the Demised Premises.

13.1.2    Not to assign the whole of the Demised Premises during the last year
          of the Term.

13.1.3    If the Tenant wishes to assign the whole of the Demised Premises, as a
          pre-condition of giving consent to the same the Landlord shall be
          entitled to require that:

          (a)  the proposed assignee enters into a covenant with the Landlord
               prior to the assignment to pay the rent and to observe and
               perform the Underlease Provisions from the date of the assignment
               until the proposed assignee is released from its obligations to
               pay the rent and observe and perform the


                                          26
<PAGE>
                                                                     Schedule 3

               Underlease Provisions under Section 5(2) of the Landlord and
               Tenant (Covenants) Act 1995 or, if later, under Section 11(2) of
               that Act;

          (b)  the Tenant provides full details of the proposed assignment to
               the Landlord including the amount of any fines, premiums, reverse
               premiums or other financial payments or incentives and any
               non-monetary incentives to be made, given, received or which are
               payable in order to secure the proposed assignment;

          (c)  the proposed assignee provides such evidence as the Landlord any
               reasonably require of its financial status and the financial
               status of any guarantor of the proposed assignee;

          (d)  if reasonably so required by the Landlord, the Tenant (and any
               guarantor for the Tenant other than by way of Authorised
               Guarantee agreement), guarantees to the Landlord the observance
               of the Underlease Provisions by the proposed assignee, such
               guarantee to be in the form set out in Schedule 5 with such
               amendments as may reasonably required to meet the particular
               circumstances;

          (e)  if the Landlord reasonably so requires one or more guarantors
               acceptable to the Landlord enter into covenants, jointly and
               severally if more than one, with the Landlord.  The covenants
               shall:

               (i)   be similar to those set out in Schedule 5 with an
                     appropriate description of the party being guaranteed
                     being substituted for the expression "the Tenant";

               (ii)  contain such other amendments as may be appropriate to the
                     particular circumstances; and

               (iii) be given by separate deed prepared by the Landlord at the
                     cost of the Tenant.

          (f)  the proposed assignee provides the Landlord with an address for
               service in the United Kingdom in case of any breach, non
               observance or non performance of the provision of this
               Underlease;

          (g)  that the proposed assignment is completed prior to the quarter
               day following the grant of the Licence to Assign.

13.1.4    Not to assign the whole of the Demised Premises but subject to
          compliance with the pre-conditions in paragraph 13.1.3 the Tenant may
          do so with the previous licence


                                          27

<PAGE>

                                                                      Schedule 3

         under seal of the Landlord and if so required of the Head Landlord 
         such licences not to be unreasonably withheld.

13.2     UNDERLETTING

13.2.1   In this Clause 13.2 the following words and expressions mean:

         "PERMITTED PART" means the whole of Unit 8 or the whole of Unit 9 in 
         each case together with 15 car parking spaces;

         "PROPER PROPORTION" means a proportion calculated by reference to 
         the ratio which the net internal area of the Underlet Premises bears 
         to the net internal area of the Demised Premises; and

         "UNDERLET PREMISES" means the premises let by any underlease.

13.2.2   Not to underlet part only of the Demised Premises save for a 
         Permitted Part.

13.2.3   Not to underlet the whole of the Demised Premises during the last 
         year of the Term.

13.2.4   If the Tenant wishes to underlet as a whole the Demised Premises or 
         the Tenant wishes to underlet a Permitted Part then as a 
         pre-condition of giving consent to the same the Landlord shall be 
         entitled to require that:

         (a)  any subtenant enters into a covenant with the Landlord prior to 
              the grant of the sublease not to:

              (i)   assign, underlet or charge part only of the Underlet 
                    Premises;

              (ii)  underlet, hold on trust for any party, part with 
                    possession or grant any licence in respect of or share 
                    the occupation of the whole or any part of the Underlet 
                    Premises;

              (iii) assign the whole of the Underlet Premises without the 
                    prior written consent of the Landlord and of Head 
                    Landlord if required, such consent not to be 
                    unreasonably withheld.

         (b)  any underletting which may be approved by the Landlord under 
              the terms of this Lease shall:

              (i)   be without premium;

                                      28
<PAGE>

                                                                      Schedule 3

              (ii)  reserve a rent which is not less than the open market 
                    rental value for the time being of the Underlet Premises 
                    or the Proper Proportion of the Basic Rent payable under 
                    the terms of this Underlease, whichever is the higher at 
                    the time;

              (iv)  provide for rent reviews on similar terms and on the same 
                    dates as this Underlease; and

              (v)   impose on the subtenant a liability to pay all sums for 
                    which the Tenant is liable under this Underlease, other 
                    than the Basic Rent or, in the case of an underletting of 
                    a Permitted Part, a Proper Proportion of such sums.

         (c)  any subtenant or assignee of any devolutionary interest enters 
              into a covenant with the Landlord to observe and perform the 
              Underlease Provisions other than the covenant to pay the Basic 
              Rent, during the period from the date of the assignment or 
              underletting until the earlier of:

              (i)   the determination of the term of this Underlease or the 
                    sublease (as the case may be);

              (ii)  the assignment of this Underlease or the sublease (as the 
                    case may be) with all consents required by this 
                    Underlease or the sublease (as the case may be); or
 
              (iii) the date upon which the Assignee or subtenant is released 
                    from liability by virtue of Section 11(2) of the Landlord &
                    Tenant (Covenants) Act 1995.


13.2.5   Without prejudice to the other provisions of this paragraph 13.2, 
         not to underlet the whole of the Demised Premises or underlet a 
         Permitted Part without the prior licence under seal of the Landlord 
         and if so required of the Head Landlord such licences not to be 
         withheld unreasonably.

13.2.6   If any undertenant wishes to assign or the Tenant wishes to underlet 
         the whole of the Demised Premises or a Permitted Part of the Demised 
         Premises, the Landlord shall, in its reasonable discretion, be 
         entitled to require that one or more guarantors acceptable to the 
         Landlord enter into covenants, jointly and severally if more than 
         one, with the Landlord. The covenants shall:


                                     29
<PAGE>

                                                                      Schedule 3


         (a)  be similar to those set out in Schedule 5 with an appropriate 
              description of the party being guaranteed being substituted for 
              the expression "the Tenant";

         (b)  contain such other amendments as may be appropriate to the 
              particular circumstances; and 

         (c)  be given by separate deed prepared by the Landlord at the cost 
              of the Tenant.

13.2.7   The Tenant shall:

         (a)  not at any time either expressly or by implication waive any 
              breach of the covenants or conditions on the part of any 
              subtenant or assignee of any devolutionary interest comprised 
              in any sublease or devolutionary interest; and

         (b)  enforce any breach of the same at its own cost and expense. 

13.2.8   The Tenant shall:

         (a)  provide full information as to any sub-lettings, including 
              amounts of premiums, rents, rent-free periods, or other incentives
              and any collateral arrangements relating to the same;

         (b)  procure that the rent reserved by any sublease is reviewed 
              strictly in accordance with the provisions of that sublease;

         (c)  not agree any reviewed rent with the subtenant without the 
              prior written consent of the Landlord, such consent not to be 
              unreasonably withheld;

         (d)  not agree the identity of any independent third party who is to 
              determine the revised rent of any rent review without the prior 
              consent of the Landlord; and

         (e)  procure that any representations which the Landlord may wish to 
              make convening the reviewed rent are put forward to such third 
              party at the same time as the Tenant's own. 

13.3     CHARGING

         Not to charge part only of the Demised Premises but without 
         prejudice to the rights of sub-tenants to charge the whole of the 
         Underlet Premises.


                                      30

<PAGE>

                                                                      Schedule 3

13.4     PARTING WITH POSSESSION

         Not to part with or share possession of the whole or any part of the 
         Demised Premises except as permitted by this paragraph 13.

13.5     SHARING OCCUPATION

         Notwithstanding anything in this paragraph 13 the Tenant, if a 
         company incorporated under any of the Companies Acts, shall be 
         entitled to share occupation of the Demised Premises with any other 
         member of the group, as defined in Section 42 of the Landlord and 
         Tenant Act 1954 as originally enacted, of which the Tenant is a 
         member for the time being on terms which do not create any 
         relationship of landlord and tenant provided that:

         (a)  the Tenant shall give notice to the Landlord within fourteen 
              days of the commencement or termination of any such arrangement; 
              and 

         (b)  any such arrangement shall terminate automatically on the tenant 
              and any such member of the group ceasing to be members of the same
              group of companies, as so defined, and the former member of the 
              group occupying the Demised Premises shall immediately vacate 
              them.

13.6     NOTICE

13.6.1   Within twenty-eight days of every assignment, assent, charge, 
         mortgage, transfer, underlease or devolution on death of or relating 
         to the Demised Premises to give written notice thereof to the 
         respective solicitors of the Landlord and the Head Landlord and to 
         furnish each of them with a certified copy of such assignment, assent, 
         charge, mortgage, transfer, underlease or an office Copy Probate of 
         the will or of the Letters of Administration as the case may be and to 
         pay to each of them in respect of each and every such instrument a 
         reasonable registration fee the amount of which shall be determined by 
         contemporary conveyancing practice. 

13.6.2   From time to time on demand during the Term to furnish the Landlord 
         with full particulars of all derivative interests of or in the 
         Demised Premises and of or in all parts of them secretly 
         sublet howsoever remote or inferior including particulars of 
         the rents payable in respect of such derivative interests and 
         such further particulars as the Landlord may require.
                  


                                     31

<PAGE>

                                                                     Schedule 3


14.      INSURANCE

14.1     To notify the Landlord immediately of any circumstances or event 
         affecting the state condition or value of the Demised Premises or 
         which may give rise to a claim under any policy of insurance in 
         respect of the Demised Premises.

14.2     To observe all requirements of the Insurer notified to the Tenant 
         and to indemnify the Landlord against any breach of such requirements.

14.3     Not to do or omit or suffer to be done or omitted any act, matter or 
         thing whatsoever the doing or omission of which would make void or 
         voidable any policy of insurance on the Demised Premises, the 
         Landlord's Estate or the Landlord's fixtures and fittings or cause 
         the premiums payable in respect of any such insurance to be increased 
         beyond the normal rate.

14.4     In the event of the Demised Premises being destroyed or damaged by 
         any of the Insured Risks

         (a)  to give immediate notice to the Landlord forthwith upon the 
              Tenant becoming aware of the same.

         (b)  within one month of such destruction or damage, if so requested 
              by the Landlord, vacate and remove all tenant's fittings and 
              effects from the Demised Premises or such parts of them as may 
              be necessary to enable the Landlord to reinstate; and 

         (c)  pay to the Landlord on demand, whether or not the Landlord 
              actually reinstates, a sum equivalent to any excess applicable 
              to the insurance in respect of the Demised Premises.

14.5     If the Demised Premises, the Landlord's Estate or any part of them 
         are destroyed or damaged by any of the Insured Risks and the 
         insurance money under any insurance against the same effected by the 
         Landlord is wholly or partly irrecoverable by reason solely or in 
         part of any act or default of the Tenant or the Tenant's servants, 
         agents or invitees then and in every such case forthwith to pay to the
         Landlord the whole or the irrecoverable proportion as the case may 
         require of the Full Reinstatement Value.

14.6     If at any time during the Term the Tenant shall become entitled to 
         the benefit of any insurance on the Demised Premises which is not 
         effected or maintained in pursuance of the obligations contained in 
         this Underlease to apply (insofar as the same shall extend)

                                      32

<PAGE>

                                                                     Schedule 3


         all moneys received by virtue of such insurance other than for rent 
         in making good the loss or damage in respect of which the same have 
         been received.

15.      EASEMENTS ETC.

15.1     To do all such things as may be necessary for preventing any 
         encroachment or easement being made or acquired in, over or against 
         the Demised Premises. If any encroachment or easement shall be made 
         or threatened to be made or if any window or opening shall be made 
         or threatened to be opened or made in any neighbouring building 
         (whether already or in future to be erected) which if not obstructed 
         might by lapse of time confer the right to such access of light in 
         favour of any neighbouring property then forthwith to give notice to 
         the Landlord and at the option of the Landlord either to do all 
         things as may be required by the Landlord for the purpose 
         of preventing the making of such encroachment or the acquisition of 
         such easement or right or to permit the Landlord to enter and take 
         measures for preventing the same and if the Tenant shall omit or 
         neglect to do all such things at the earliest possible time the 
         Landlord shall be entitled after giving seven days' due warning of 
         its intention so to do to enter upon the Demised Premises and to do 
         the same provided the Landlord in so entering or being upon the 
         Demised Premises shall not cause any unnecessary interference with 
         the carrying on by the Tenant of the Tenant's business.

15.2     To permit every person or body entitled to any right, easement power 
         or privilege in, over or upon the Demised Premises to exercise the 
         same without hindrance or objection.

15.3     Not to obstruct the Access Road or any footpath on the Landlord's 
         Estate in any way whatsoever and in particular not to permit any 
         vehicles belonging to or calling upon the Tenant to stand other than 
         on the Designated Parking Area and Designated Service Area.

15.4     Not to do anything calculated or likely to cause damage or injury to 
         any mains or apparatus of any statutory undertaker now on in or 
         under the Landlord's Estate or which may be installed during the 
         Term and to take all reasonable precautions to avoid such damage or 
         injury.

16.      REGULATIONS

         To observe and comply with any Regulations.

                                      33



<PAGE>

                                                                      Schedule 3

17.       INFORMATION

          To enable the Landlord or Head Landlord to consider any application by
          the Tenant for which the consent of the Landlord or Head Landlord is
          required to disclose to the Landlord or Head Landlord such information
          as the Landlord or Head Landlord may reasonably require.

18.       DISPLAY OF SIGNS

18.1      Not to erect, affix or display or permit to be erected affixed or
          displayed any advertisement, board, poster, notice, or sign upon the
          Demised Premises except one notice or sign giving the name of the
          Tenant (or sub-tenant) and an indication of the business carried on at
          the Demised Premises the format and location of such notice or sign to
          be previously approved in writing by the Landlord (such approval not
          to be unreasonably withheld).

18.2      Not to erect or place any flag, flagpole or aerial upon the exterior
          of the Demised Premises without the Landlord's prior approval in
          writing.

18.3      To permit the Landlord:

          (a)  at any time during the Term to display on the Demised Premises
               notices for selling the Landlord's interest in the Demised
               Premises or for granting a collateral lease of them;

          (b)  at any time during the last six months of the Term to display on
               the Demised Premises notices for selling or re-letting the same
               PROVIDED THAT any such notice may be affixed and retained without
               interference by the Tenant on some part or parts of the exterior
               of the Demised Premises but not on any fascia or so as to cause
               disturbance to the Tenant's business nor so as to obstruct the
               passage of light or air to the Demised Premises.

18.4      At any such time as referred to in paragraph 18.3 to permit all
          persons by order in writing of the Landlord on prior appointment to
          view the Demised Premises at all convenient hours in the daytime
          without interruption.

19.       YIELDING UP

          At the expiration or sooner determination of the Term peaceably and
          quietly to yield up unto the Landlord the Demised Premises together
          with additions and improvements made to them in the meantime, or if so
          required with all additions and improvements reinstated in accordance
          with paragraph 5.1 of this Schedule 3, and in such state and


                                          34
<PAGE>

                                                                      Schedule 3

          condition as shall be consistent in all respects with a full and due
          performance by the Tenant of the covenants contained in this
          Underlease or any Licence or Deed of Variation supplemental of it and
          all keys to the Demised Premises and all fixtures and fittings (other
          than trade or tenant's fixtures affixed by the Tenant or any sublessee
          of the Tenant) in or upon the Demised Premises or which during the
          Term may have become affixed or fastened to or upon the Demised
          Premises and to remove from the Demised Premises any notice or sign
          showing the name or business of the Tenant and to make good all damage
          caused in so doing.

20.       REMOVAL OF FIXTURES ETC.

20.1      At the expiration or sooner determination of the Term if the Tenant
          shall or shall be required to remove any of the Tenant's trade
          fixtures, fittings plan, or machinery then to remove the same at the
          Tenant's own expense in accordance with the following conditions:

          (a)  to remove plant, machinery, fixtures and fittings and all
               ancillary equipment and supports of any kind, concrete machinery
               beds projecting above the general floor level and any enclosures
               erected solely for the purpose of enclosing and protecting the
               plant which is being removed;

          (b)  to disconnect plant, machinery, fixtures and fittings connected
               to or taking supplies from any of the Service Media in such a
               manner that all redundant means of connecting are removed and
               sealed off at points as close as possible to the various ring
               mains or principal distribution pipes which provide the supplies
               and to carry out any such removal and sealing off entirely in
               accordance with any relevant Act of Parliament and the
               regulations, terms and conditions of any body or institution
               (whether statutory or non-statutory) competent in that behalf and
               so as not to interfere with the continued functioning of the
               Service Media; and

          (c)  to fill all machinery pits and indents in floors and to make good
               the Demised Premises and any other part of the Landlord's Estate
               affected including floors, walls, roads and Service Media after
               the removal of plant, machinery, fixtures and fittings and to
               reinstate to their original condition the Demised Premises to the
               satisfaction of the Landlord and of every competent authority.

20.2      To permit the Landlord:

          (a)  to sell as agent for the Tenant any of the Tenant's property
               remaining in or upon the Demised Premises after vacation of the
               same by the Tenant at the


                                          35
<PAGE>

                                                                      Schedule 3

              determination of the Term which the Tenant shall fail to remove 
              within seven days of the Landlord's request for it to do so;

         (b)  to deduct from the proceeds of sale the expenses of removal, 
              storage and sale and also any arrears of rent or other sums 
              owing to the Landlord under this Underlease and to hold the 
              balance of the proceeds of sale to the order of the Tenant but 
              without accounting to the Tenant for any interest on such 
              balance; and

         (c)  to indemnify the Landlord against any liability to any third 
              party whose property is sold by the Landlord in accordance with 
              this paragraph 20.2 in the innocent but mistaken belief that 
              such property was the property of the Tenant.

21.      INDEMNITY

         To keep the Landlord and the Head Landlord fully and effectively 
         indemnified from and against all liabilities, costs, claims, 
         demands, expenses, actions and proceedings arising in any way 
         whatsoever from:

         (a)  the Tenant's use or occupation of the Demised Premises;

         (b)  the state and condition the Demised Premises;

         (c)  the execution of any works on the Demised Premises;

         (d)  any act or default of the Tenant, its agents or employees in 
              respect of the death of or injury to any person or damage to any 
              property real or personal or the infringement, disturbance or 
              destruction of any right or easement or otherwise; or

         (e)  any losses, costs, damages, expenses incurred consequent upon 
              any forfeiture or disclaimer of this Underlease

         except such as shall be insured against under the provisions of this 
         Underlease or shall be due to any act of the Landlord or Head 
         Landlord their agents or employees acting within the course of their 
         agency or employment

22.      COSTS

22.1     To pay all proper costs, charges and expenses including legal costs 
         and other professional fees or charges which may be incurred by the 
         Landlord or the Head Landlord:


                                      36

<PAGE>

                                                                      Schedule 3

         (a)  in or in contemplation of any proceedings relating to the 
              Demised Premises under Sections 146 and 147 of the Law of 
              Property Act 1925 or under the Leasehold Property (Repairs) Act 
              1938 (whether or not any right of re-entry or forfeiture has 
              been waived by the Landlord or the Tenant has been granted 
              relief by the Court); or

         (b)  in the preparation and service of a schedule of dilapidations 
              before or after the expiry of the Term; or

         (c)  in or in contemplation of any application by the Tenant or a 
              sublessee to any planning authority; or

         (d)  in connection with any application for any consent, licence or 
              approval required by this Underlease whether or not such 
              consent is granted or the application withdrawn; or

         (e)  in exercise of the Landlord's right to carry out the works 
              referred to in paragraphs 5.5, 10, 12.3.2, 12.8 or 15.1; or

         (f)  in abating a nuisance on the Demised Premises and executing all 
              such works as may be necessary for abating such nuisance in 
              compliance with a notice served by any competent authority; or

         (g)  all costs, charges and expenses (on a full indemnity basis) 
              properly incurred in connection with or in pursuing or in 
              procuring the remedying of any breach by the Tenant of any of 
              its covenants or any conditions contained in this Lease.

22.2     To pay to the Landlord the whole or any part of the Full 
         Reinstatement Value as provided in paragraph 14.5 of this Schedule 3.

22.3     To keep the Landlord fully and effectually indemnified against all 
         costs, charges, expenses, claims and demands whatsoever in respect 
         of the said applications consents proceedings and notices.

22.4     To pay all such costs within fourteen days of demand and to pay 
         Interest on the same on and from the fourteenth day after demand up 
         to and including the date on which payment is made

23.      VALUE ADDED TAX

23.1     Where this Underlease requires the Tenant to pay, repay, reimburse 
         or provide any amount or other consideration in respect of a VAT 
         Supply to the Tenant by the


                                      37


<PAGE>


                                                                   Schedule 3


          Landlord that amount or other consideration will be deemed to be 
          exclusive of any Value Added Tax chargeable on that VAT Supply 
          (whether by virtue of a VAT Election made or to be made or 
          otherwise) and the Tenant will pay to the Landlord that Value Added 
          Tax.

23.2      Where this Underlease requires the Tenant to pay, repay, reimburse 
          or provide any amount or other consideration in respect of a VAT 
          Supply by a third party to the Landlord the Tenant will pay to the 
          Landlord a sum equal to any Value Added Tax charged to the Landlord 
          on that VAT Supply which the Landlord is unable to recover.


                                       SCHEDULE 4

                                 (LANDLORD'S COVENANTS)

1.        QUIET ENJOYMENT

          The Tenant paying the yearly rents reserved by this Underlease and 
          observing and performing the Underlease provisions to permit the 
          Tenant quietly to enjoy the Demised Premises during the Term 
          without any interruption by the Landlord or persons lawfully 
          claiming under the Landlord.

2.        TO INSURE

2.1       Subject to payment by the Tenant of the Insurance Contribution and 
          unless such insurance shall be vitiated in whole or in part by any 
          act neglect default or omission of the Tenant or of its servants, 
          agents, licensees or invitees, to insure and keep insured the 
          Demised Premises and the Landlord's Estate for a sum not less than 
          the Full Reinstatement Value with a reputable Insurer against third 
          party employer's and public liability and loss or damage by the 
          Insured Risks.

2.2       Such insurance shall be subject to such exceptions excesses and 
          conditions as the Landlord or its insurers may require.

2.3       If insurance for any of the Insured Risks shall not be available or 
          not be available at a cost which the Landlord considers reasonable, 
          the Landlord shall inform the Tenant, but shall not be obliged to 
          insure against such risks.

2.4       In the event of destruction of or damage to the Demised Premises by 
          any of the Insured Risks, subject to obtaining all planning, 
          bye-law or other consents or permissions necessary to enable the 
          Landlord so to do, to apply all insurance moneys other than in 
          respect of loss of rent, received in respect of such destruction or 
          damage


                                       38

<PAGE>
                                                                   Schedule 4


          towards rebuilding and reinstating the Demised Premises as soon as 
          reasonably practicable.

2.5       To use its reasonable endeavours to obtain all consents necessary 
          for such reinstatement as soon as reasonably practicable.

2.6       When rebuilding or reinstating the Demised Premises the Landlord 
          may use materials of a different quality, type or specification 
          and/or make such changes in the original design, layout or 
          specification of the Demised Premises as the Landlord reasonably 
          deems necessary or desirable.

2.7       To produce to the Tenant at the cost of the Tenant (but not more 
          than once in any calendar year) upon written demand details of all 
          policies and endorsements effected by the Landlord in accordance 
          with this Underlease.

3.        PROVIDE SERVICES

          At the discretion of the Landlord and subject to payment by the 
          Tenant of the Service Contributions, to provide such services as 
          may be required for the efficient management of the Landlord's 
          Estate including, by way of illustration but not of exhaustive list:

          (a)  making, cleaning, lighting, repairing, decorating, 
               maintaining, altering or rebuilding any thing forming or which
               during the Term may form part of the Landlord's Estate (other
               than those which fall within the liabilities of a tenant)
               including the car parking areas, service areas, footpaths,
               Service Media, landscaping, banks, walls, fences and other
               structures;

          (b)  providing, maintaining, repairing, replacing and insuring 
               (save insofar as insured under other provisions of this
               Underlease) any electrical and mechanical equipment and other
               plant, machinery and services on the Landlord's Estate;

          (c)  employing all necessary staff including independent 
               contractors for the purposes of the Landlord's Estate, including
               in particular for the purposes of security and cleansing, and
               making all payments in relation to such employment including the
               payment of the statutory and such other insurances, health,
               pension, welfare and other payments, contributions, taxes and
               premiums that the Landlord may be required to make or at its
               absolute discretion may deem desirable or necessary and the
               provision of uniforms, working clothes, tools, appliances,
               materials and equipment for the proper performance of their
               duties;


                                       39

                                       
<PAGE>

                                                            Schedule 4

         (d)  providing offices, buildings and other structures including 
              accommodation for management of the Landlord's Estate, 
              security personnel and guard dogs and residential 
              accommodation (whether or not situated on some part of the 
              Landlord's Estate) for a caretaker;

         (e)  paying all charges, taxes, assessments, impositions and other 
              outgoings payable by the Landlord in respect of all parts of 
              the Landlord's Estate not exclusively occupied by a tenant and 
              in respect of any residential caretaker's accommodation not 
              situated on the Landlord's Estate but not including parts of 
              the Landlord's Estate intended to be let but not yet let to a 
              tenant;

         (f)  insuring and keeping insured the Landlord's Estate and all its 
              appurtenances (in addition to the insurance of the Demised 
              Premises and all other part of the Landlord's Estate which are 
              let or are intended to be let) in accordance with the 
              Landlord's covenant contained in paragraph 2 of this Schedule 
              4;
              
         (g)  management of the Landlord's Estate including ascertainment of 
              the Estate Costs by surveyors accountants and other 
              professionals;

         (h)  complying with or making representations against or otherwise 
              contesting the incidence of the provisions of any Act of 
              Parliament concerning town planning, public health, highways, 
              streets, drainage or other matters relating or alleged to 
              relate to the Landlord's Estate other than the Demised 
              Premises; and 
              
         (i)  providing telephones, communication facilities, public address 
              systems, fire fighting equipment, security systems and all 
              other services, facilities or amenities for the benefit of the 
              tenants on the Landlord's Estate which the Landlord deems 
              desirable or expedient.

         PROVIDED HOWEVER that the Landlord shall not be liable to the Tenant 
         for any defect or want of repair unless the Landlord has had notice
         of it.


4.       FAILURE OF SERVICES

         Subject to paragraph 8 of Schedule 6 to use its reasonable endeavours 
         to remedy any failure of any of the Service Media or any service 
         provided on the Landlord's Estate.

5.       HEADLEASE

5.1      To pay the rent reserved by the Headlease throughout the Term.


                                     40

<PAGE>

                                                                   Schedule 4

5.2      By way of indemnity only but not further or otherwise to observe and 
         perform all the covenants on the part of the Landlord under the 
         Headlease so far as they do not fall to be observed and performed by 
         the Tenant under the provisions of this Underlease; and

5.3      Where the consent of the Head Landlord shall be required for any 
         matter under this Underlease at the request and cost of the Tenant 
         to use all reasonable endeavours to obtain such consent.




                                      SCHEDULE 5

                                 GUARANTOR'S COVENANTS



1.       GUARANTEE

         If the Tenant fails to comply with any of the Underlease Provisions, 
         the Guarantor guarantees that it shall, on demand by the Landlord, 
         immediately perform and discharge the obligations of the Tenant under
         them.


2.       CONTINUING GUARANTEE

         The guarantee set out in Paragraph 1 is a continuing guarantee and 
         is additional to, and not in substitution for, any other security or 
         guarantee which is or may be held by the Landlord from time to time 
         in respect of the obligations of the Tenant under this Underlease.


3.       FOREBEARANCE AND DELAY

         The Guarantor's liability under Paragraph 1 shall not be affected by 
         any concession, time, indulgence or release granted by the Landlord to
         the Tenant or by any other dealing or variation of this Underlease, 
         subject to Section 18 of the Landlord and Tenant (Covenants) Act 1995,
         or anything else, whether relating to the Tenant, any co-guarantor or 
         any other person, which would, but for this Paragraph 3, operate to 
         discharge or reduce that liability.

4.       PRIMARY OBLIGATION

         If anything, including any legal limitation, disability, liquidation 
         or other incapacity on the part of the Tenant or any disclaimer by a 
         liquidator or trustees in bankruptcy, causes any of the Tenant's 
         obligations under this Underlease and/or the guarantee set out in 
         Paragraph 1 to be or become invalid or unenforceable, the Guarantor
         shall perform and discharge all of the Tenant's obligations under 
         this Underlease as if they were the primary obligations of the 
         Guarantor.

                                        41

 

<PAGE>

                                                                      Schedule 5

5.       INDEMNITY

         The Guarantor shall indemnify and keep indemnified the Landlord 
         against any losses, liabilities, costs and expenses resulting from 
         the failure of the Tenant to observe any of the Underlease 
         Provisions.

6.       SET OFF AND COUNTERCLAIMS

         The Guarantor shall make any payments due from it under this 
         Schedule 5 in full, without any deduction or withholding in respect 
         of any claim, whether by way of set-off, counterclaim or otherwise, 
         asserted from time to time by the Tenant or the Guarantor against 
         the Landlord under this Underlease or in respect of anything else.

7.       RIGHTS AGAINST THE TENANT

         The Guarantor shall not exercise any rights which it may have 
         against the Tenant arising from or otherwise relating to its 
         guarantee under Paragraph 1 or its other obligations under this 
         Schedule 5 unless and until all of the obligations of the Tenant and 
         the Guarantor under this Underlease have been performed and 
         discharged.

8.       ENFORCEMENT OF THE GUARANTEE

         The Landlord may claim under the guarantee set out in Paragraph 1 
         without first making demand of the Tenant or taking any action to 
         claim under or enforce the Tenant's obligations under this Lease or 
         any other right, security or other guarantee which it may hold from 
         time to time in respect of the Tenant's obligations under this 
         Underlease.

9.       TO ACCEPT A NEW LEASE

9.1      In this Paragraph 9, the following expressions mean:

         "EVENT OF DEFAULT" means the disclaimer of this Underlease by either 
         a trustee in bankruptcy of the Tenant, if the Tenant is an 
         individual, a liquidator of the Tenant, if the Tenant is a company; 
         the disclaimer of this Underlease by the Crown, if this Underlease 
         becomes bona vacantia, or the striking off of the Tenant from the 
         register of companies pursuant to the provisions of the Companies 
         Act 1985.

         "LANDLORD'S NOTICE" means a notice in writing requiring the 
         Guarantor to take a New Lease served by the Landlord on the 
         Guarantor within three months of an Event of Default coming to the 
         Landlord's knowledge.


                                      42

<PAGE>

                                                                      Schedule 5

         "NEW LEASE" means a lease of the Demised Premises for a term 
         commencing on the date of the Event of Default, expiring on the date 
         the Term would have expired had there been no Event of Default, 
         reserving rents equivalent to the Basic Rent and Additional Rent and 
         containing terms identical to the Underlease Provisions including 
         an option to determine upon the same date upon which it would have 
         been operable under this Underlease.

9.2      If, following an Event of Default, the Landlord serves a Landlord's 
         Notice requiring the Guarantor to take a New Lease, the Guarantor 
         shall accept a New Lease, execute a counterpart of the New Lease and 
         pay the Landlord's solicitors' costs and disbursements of and 
         incidental to the grant of the New Lease.

9.3      If at the date of the Event of Default any review of the rent under 
         the Underlease has fallen due but the rent review shall not have 
         been agreed or determined prior to the grant of the New Lease then 
         the New Lease shall provide for a review of the rent upon the first 
         day of the term of the New Lease.

9.4      If, following an Event of Default, the Landlord serves a Landlord's 
         Notice requiring the Guarantor to indemnify the Landlord, the 
         Guarantor shall pay to the Landlord on demand the Basic and 
         Additional Rents for the period commencing on the date of the Event 
         of Default and ending on the earlier of:

         (a)  the date twelve months after the date of the Event of Default; 
              and

         (b)  the date, if any, upon which rent becomes payable after the 
              Demised Premises are re-let.

10.      UNCONDITIONAL GUARANTEE

         The Guarantor's obligations under this Schedule 5, including its 
         guarantee under Paragraph 1, are unconditional and irrevocable.

11.      NO ASSIGNMENT OF BENEFIT NECESSARY

         The benefit of the Guarantor's obligations under this Schedule 5, 
         including its guarantee under Paragraph 1, shall pass to the 
         Landlord's successors in title to this Underlease without the need 
         for any assignment of the same.

12.      DURATION OF GUARANTEE

         The guarantee in this Schedule 5 shall remain in full force and 
         effect until the earlier of:


                                      43


<PAGE>

                                                                      Schedule 5

         (a)  the determination of the Term;

         (b)  the assignment of this Underlease by the Tenant in accordance 
              with the provisions of paragraph 13.1 of Schedule 3; or

         (c)  the date upon which the Tenant is released from liability under 
              this Underlease by virtue of Section 11(2) of the Landlord and 
              Tenant (Covenants) Act 1995.

13.      AUTHORISED GUARANTEE AGREEMENT

         If upon the assignment of this Underlease by the Tenant the Tenant 
         is required by the terms of this Underlease to enter into an 
         Authorised Guarantee Agreement with the Landlord then the Guarantor 
         shall also enter into an agreement in the same terms (mutatis 
         mutandis) guaranteeing the obligations of the person or persons or 
         corporation to whom the Tenant assigns this Underlease.

14.      GENERAL

         In this Schedule, any reference to "the Tenant" shall be deemed to 
         refer to the tenant for the time being of this Underlease at the 
         date the Guarantor enters into this guarantee and shall expressly 
         exclude any assignee of the Tenant.



                                  SCHEDULE 6

                                  (PROVISOS)

1.       RE-ENTRY

1.1      In any of the events set out in paragraph 1.2 the Landlord, or any 
         person or persons duly authorised by the Landlord, may at any time 
         re-enter the Demised Premises or any part of them in the name of the 
         whole and repossess and enjoy the same as if this Underlease had not 
         been made. Upon such re-entry, this Underlease shall absolutely 
         cease and determine, but without prejudice to any right of action or 
         remedy of the Landlord in respect of any antecedent breach of any of 
         the Underlease Provisions by the Tenant.

1.2      The Landlord may exercise its rights under paragraph 1.1 if:

         (a)  the Basic Rent or Additional Rent or any part of them remain 
              unpaid for twenty-one days after becoming payable, whether 
              formally demanded or not;


                                      44

<PAGE>

                                                                      Schedule 6

         (b)  any of the Underlease Provisions are not performed or observed 
              by the Tenant;

         (c)  the Tenant or any Guarantor being a company;

              (i)   makes a scheme of arrangement or a voluntary arrangement 
                    or compounds or enters into any composition or 
                    arrangement with its creditors;

              (ii)  has a petition presented for the appointment of an 
                    administrator or an administrator is appointed;

              (iii) has a receiver or manager or administrative receiver 
                    appointed over all or any part of its assets;

              (iv)  has a resolution passed for its voluntary winding-up, 
                    save for the purpose of amalgamation or reconstruction 
                    with the prior consent of the Landlord, or enters 
                    voluntary liquidation;

              (v)   has a petition presented for its winding-up or a 
                    winding-up order is made; or

              (vi)  is removed for any reason from the Register of Companies;

         (d)  the Tenant or any Guarantor being a company incorporated 
              outside the United Kingdom is the subject of any proceedings or 
              events analogous to those referred to in paragraph 1.2(c) in 
              the country of its incorporation;

         (e)  the Tenant or any Guarantor being an individual, or if 
              individuals any one of them:

              (i)   enters into a deed of arrangement with his creditors;

              (ii)  makes or has an application made for an interim order 
                    in connection with a proposal to creditors for a voluntary 
                    arrangement;

              (iii) makes any assignment for the benefit of or enters into 
                    any arrangement voluntary or otherwise with his creditors 
                    either by composition or otherwise; or

              (iv)  has a petition presented for his bankruptcy or is made 
                    bankrupt or;

         (f)  the Tenant, being two or more individuals trading together or 
              practising in partnership and holding the Demised Premises on 
              trust for themselves and


                                      45


<PAGE>

                                                                 Schedule 6

               others as an asset of the partnership, or being an individual,
               holding the Demised Premises on trust for himself and others as
               an asset of the partnership:

               (i)  has a resolution passed to dissolve the partnership, save
                    for the purpose of amalgamation or reconstruction with the
                    consent of the Landlord; or

               (ii) has a petition presented for the winding-up of the
                    partnership.

2.   AVOIDANCE OF WAIVER

     No acceptance of or demand or receipt for rent by the Landlord after
     knowledge or notice received by the Landlord or its agents of any breach
     of any of the Tenant's covenants contained in or implied by this Underlease
     shall operate as a waiver in whole or part of any such breach or of the
     Landlord's right of forfeiture or re-entry in respect of such breach but 
     that for all purposes any such breach shall be a continuing breach and that
     the Tenant shall not be entitled to set up any such acceptance of or demand
     or receipt for rent as defined in any action or proceeding by the Landlord.

3.   COMPENSATION

     Except where any Act of Parliament prohibits or modifies the right to
     compensation being excluded or reduced by agreement neither the Tenant nor
     any sub-lessee (whether immediate or derivative) on quitting the Demised
     Premises or any part thereof shall be entitled to claim any compensation
     from the Landlord under the provisions of the Landlord and Tenants Act 1954
     or any other Act of Parliament.

4.   CESSER OF RENT

4.1  If the Demised Premises shall be destroyed or damaged by any of the Insured
     Risks so as to be unfit for occupation and use then the Basic Rent and
     Additional Rent or a fair and just proportion of them according to the
     nature and extent of the damage sustained shall be suspended and cease to
     be payable except where:

     (a)  the insurance of the Demised Premises has been forfeited or rendered
          void by the act, default, or omission of the Tenant; or

     (b)  the Landlord shall not recover a sum equivalent to the amount of rent
          suspended or ceased.

     Such suspension or cesser shall subsist until the Demised Premises are
     rendered fit for occupation and use or (if shorter) for the period for
     which the Landlord shall have insured against for loss of rent.


                                          46
<PAGE>
                                                                      Schedule 6

4.2  All moneys payable by the Insurer in respect of loss of rent shall be paid
     by the Insurer as agent for the Tenant and shall be accepted by the
     Landlord in satisfaction of the whole, or such part as the landlord shall
     specify, of any rent payable by the Tenant under this Underlease and
     forthwith at the request of the Landlord the Tenant shall give to the
     Insurer such authority or instruction as the Insurer may require to give
     effect to the provisions of this paragraph.

5.   RENT FROM THIRD PARTY

     The acceptance of rent by the Landlord from any party whatsoever other than
     the Tenant shall not be construed as notice or approval of any assignment
     or underletting unless such assignment has been expressly authorised by the
     Landlord and Head Landlord in accordance with the provisions in that
     respect contained in this Underlease.

6.   EFFECT ON OTHER PROPERTY

     Nothing contained in or implied by this Underlease shall impose or be
     deemed to impose any restriction on the use of any land or buildings not
     comprised in this Underlease for building or any other purpose or give the
     Tenant the benefit of or the right to enforce or to have enforced or to
     prevent the release or modification of any covenant agreement or condition
     entered into by any tenant of the Landlord in respect of property not
     comprised in this Underlease or to prevent or restrict in any way the
     development of any land not comprised in this Underlease.

7.   ADDITIONAL RIGHTS

     The Tenant shall not be or become entitled by long user, prescription,
     implication or otherwise to any right to light, air or other right, 
     easement or quasi-easement whatsoever over or from any part of the 
     Landlord's Estate or any other property nor to any covenant or service on 
     the part of the Landlord except as expressly provided by this Underlease.

8.   INTERRUPTION OF SERVICES

     The Landlord shall not be liable, beyond the extent to which such matters
     may be covered by insurance in accordance with the provisions of this
     Underlease, for any loss or injury whether personal or to property
     sustained by the Tenant or any servant agent or visitor of the Tenant
     caused by failure of any of the Service Media or any service provided on
     the Landlord's Estate.


                                          47
<PAGE>

                                                                     Schedule 6

9.       NOTICES

9.1      Every notice to be given pursuant to any of the provisions of this 
         Underlease shall be:

         (a)  in writing;

         (b)  addressed by name to the Landlord, Head Landlord, Tenant or 
              Guarantor as the case may require; and

         (c)  directed to the registered or principal office or last known or 
              last notified address in Great Britain of the Landlord, Head 
              Landlord, Tenant or Guarantor or to the Demised Premises in the 
              case of the Tenant. 

9.2      Notice may be given in the following ways:

         (a)  delivered by hand; or

         (b)  sent by registered or recorded delivery post or via any other 
              official service which may supersede them during the Term; or

         (c)  sent by telex, fax or other instantaneous transmission service.

9.3      Service shall be effected:

         (a)  in the case of delivery by hand on delivery to a responsible 
              person;

         (b)  in the case of sending by post on the date of receipt;

         (c)  in the case of transmission by telex, fax or similar service on 
              the date of receipt.

9.4      Any notice to be given to two or more persons shall be deemed to be 
         given to all of them if addressed to all of them but given to one of 
         them or delivered to their office.

9.5      A duplicate of any notice to be given to the Landlord shall be given 
         simultaneously to the managing agents of the Landlord's Estate the 
         identity and address of whom shall be notified to the Tenant and 
         Guarantor from time to time.

9.6      The provisions of this paragraph 9 shall apply in the case of any 
         notice required to be served pursuant to any Act of Parliament which 
         makes no provision for a mode of service.

9.7      If the foregoing provisions of this paragraph 9 prove ineffective 
         the provisions of Section 196 of the Law of Property Act 1925 as 
         amended by the Recorded Delivery Service Act 1962 shall apply.

                                       48
<PAGE>

                                                                     Schedule 6

10.      LANDLORD'S LICENCE OR CONSENT

         Under whatever provisions of this Underlease the Tenant is required 
         to obtain the licence, approval, agreement or consent of the 
         Landlord which is expressly or impliedly subject to the requirement 
         that it not be unreasonably withheld, such provisions shall be 
         deemed to be subject to the proviso that such licence, approval, 
         agreement or consent shall not be unreasonably withheld, refused or 
         delayed PROVIDED THAT the Landlord's lawful right to require:

         (a)  payment of its proper legal costs and other reasonable costs or 
              expenses incurred in connection with such licence or consent; or

         (b)  payment of a reasonable sum in respect of any damage to or 
              diminution in the value of the Demised Premises or any other 
              part of the Landlord's Estate; or

         (c)  the Tenant's undertaking to reinstate the Demised Premises to 
              their condition before the execution of any improvement to 
              which such licence, approval, agreement or consent refers;

         shall remain unaffected by it.

11.      ARBITRATION

         In case any dispute or difference arise between the parties touching 
         any clause, paragraph, matter or thing contained in this Underlease 
         other than under Schedule 7 or the rights, duties or liabilities of 
         either party under or in connection with this Underlease the parties 
         shall use their best endeavours to resolve such dispute or 
         difference immediately but if the same remain unresolved for a 
         period of two months after its occurrence either party may refer the 
         dispute or difference for the determination of an arbitrator in 
         accordance with the provisions of the Arbitration Act 1996.


                                       SCHEDULE 7

                                 (REVIEW OF BASIC RENT)

1.       RENT REVIEW

1.1      DEFINITIONS

         In this Schedule 7 the following words and expressions mean:

         "ASSUMPTIONS" means the following assumptions which shall apply on a 
         rent review:

                                       49
<PAGE>

                                                                     Schedule 7

          (a)  that the covenants on the part of the Landlord and Tenant have
               been duly observed and performed, but without prejudice to the
               Landlord's and the Tenant's rights in respect of any breach of
               them;

          (b)  that on the Rent Review Date the Premises are fit for immediate
               occupation and use and if then damaged or destroyed that they
               have been fully reinstated;

          (c)  that no work has been carried out, whether pursuant to a licence
               permitting such work or not, which has diminished the rental
               value of the Demised Premises;

          (d)  the Tenant has a right of renewal pursuant to the provisions of
               the Landlord and Tenant Act 1954;

          "DISREGARDS" means the following matters which shall be disregarded on
          any rent review:

          (a)  so far as may be permitted by law, any temporary legal restraint
               on making or recovering any increase in rent;

          (b)  works and improvements carried out during the Term to the Demised
               Premises by the Tenant or any lawful sub-tenant at their own
               expense with all necessary consents.  Works or improvements shall
               not be disregarded if they were carried out pursuant to an
               obligation to the Landlord under this Underlease, under any other
               document or in consideration of any reduction or abatement of
               rent or fee payable under any licence or agreement for more than
               21 years before the Review Date in question;

          (c)  any goodwill attaching to the Demised Premises by reason of the
               business conducted from them;

          (d)  the fact that the Tenant or any lawful sub-tenant occupies the
               Demised Premises; and

          (e)  the fact that a willing tenant may not be able to recover all or
               any part of any value added tax levied by the Landlord on any of
               the rents;

          "HYPOTHETICAL LEASE" means lease:

          (a)  granted with vacant possession in the open market without a
               premium by a willing landlord to an immediately available willing
               tenant;


                                          50
<PAGE>

                                                                     Schedule 7

          (b)  for a term of ten years commencing on the Rent Review Date;

          (c)  containing similar covenants, conditions, provisions, agreements
               and declarations to those contained in the Underlease;

          (d)  excluding the amount of Basic Rent payable under this Underlease;
               and

          (e)  including provisions for the review of the Basic Rent after five
               years identical to these provisions, save for paragraph (e) of
               the Disregards which shall be excluded;

          "MARKET RENT" means the best rent at which the Demised Premises might
          reasonably be expected to be let after the expiry of a rent free
          period of such lengths as would be negotiated in the open market
          between a willing landlord and a willing tenant on the relevant Rent
          Review Date as a whole on the terms of a Hypothetical Lease assuming
          the Assumptions and the Disregards apply.

2.        The Basic Rent shall be reviewed at the Review Date to the greater of:

          (a)  the Market Rent at the Review Date; and

          (b)  the Basic Rent (disregarding any cesser or abatement of rent) for
               the period immediately preceding the Review Date.

3.        ASCERTAINMENT

3.1       The Landlord shall inform the Tenant by notice of its assessment of
          the Market Rent payable at the Review Date specified in such notice
          and if:

          (a)  the Tenant concurs in writing with such assessment the amount
               proposed will be or become the Market Rent payable on and from
               the Review Date;

          (b)  the Tenant disagrees with such assessment it shall give notice to
               the Landlord without undue delay of its assessment of the Market
               Rent whereupon the parties will use their best endeavours to
               agree upon the amount which will be or become the Market Rent
               payable on and from the Review Date.

3.2       If no agreement shall have been reached between the parties within
          three months after service of the Landlord's notice the question of
          the amount of the Market Rent of the Demised Premises at the review
          Date shall be referred to a single arbitrator experienced in the
          rental valuation of the type of property in question whose decision


                                          51

<PAGE>
                                                                     Schedule 7


          shall be final and binding on the Landlord and the Tenant and include
          the incidence of liability for the costs of the arbitration.

     3.3  In default of agreement between the parties the arbitrator shall be
          appointed, by the President for the time being of the Royal
          Institution of Chartered Surveyors on the application to him of either
          party and this paragraph shall be deemed to be a submission to
          arbitration in accordance with the Arbitration Act 1996.

     3.4  If the Landlord shall fail to inform the Tenant of its assessment of
          the Market Rent on or before the expiration of six months from the
          Review Date the Tenant may inform the Landlord by notice of its
          assessment of the Market Rent and the provisions of paragraphs 3.1,
          3.2 and 3.3 shall apply (mutatis mutandis).

     3.5  If the amount of any Market Rent assessed shall be less than that
          currently payable disregarding any abatement or cesser of rent then
          the Market Rent assessed shall be deemed to be equal to that currently
          payable so that the amount of Basic Rent payable by the Tenant under
          the provisions of this Underlease shall never decrease.

     4.   PAYMENT OF INCREASE

          If upon the Review Date the amount of the Market Rent shall not be
          ascertained the Tenant shall continue to pay rent at the yearly rate
          payable immediately prior to the Review Date until the Rent Payment
          Date next following the ascertainment of the Market Rent upon which
          Rent Payment Date the Tenant shall pay the rent for the quarter then
          commencing together with:

          (a)  the balance of the Market Rent payable from the Review Date to
               the Rent Payment Date (being the difference between the Market
               Rent and the previous Market Rent); and

          (b)  interest on such balance but at four percent below the rate
               specified in the definition of Interest.

     5.   STATUTORY RESTRICTIONS

          If on the Review Date the review shall be restricted or restrained by
          any Act of Parliament then the first day of the month next following
          the relaxation removal or modification of such restriction or
          restraint shall be an additional Review Date.

     6.   RECORD OF REVIEW


                                          52

<PAGE>
                                                                     Schedule 7


          After each review of Basic Rent the amount of the Market Rent
          ascertained shall be entered in the Particulars of the Underlease by
          the Tenant and in the Particulars of the Counterpart by the Landlord
          and the parties shall exchange photocopies of such entries as evidence
          of their insertion.

     7.   REVIEW FREQUENCY ON RENEWAL

          On a renewal of this Underlease by virtue of the Landlord and Tenant
          Act 1954 the frequency of rent review during the renewed term shall
          accord with the market practice in respect of new lettings current at
          the determination of the Term.

                                      SCHEDULE 8

                                (SERVICE CONTRIBUTION)

     1.   ASCERTAINMENT OF ESTATE COSTS

          The Estate Costs shall be ascertained as soon as practicable after the
          end of every Accounting year by normal accounting procedures taking
          account of the costs incurred in the provision of the services
          referred to in paragraph 3 of Schedule 4 and any other costs, charges
          or expenses properly incurred in connection with the Landlord's
          Estate.

     2.   NOTIFICATION OF ESTATE COSTS

          A summary statement of the Estate Costs certified as true and fair by
          the Landlord's managing agents or accountants which shall be
          conclusive evidence of the matters it contains shall be given to the
          Tenant and all other tenants on the Landlord's Estate.

     3.   SERVICE CONTRIBUTION ACCOUNT

          Together with such summary statement or as soon as reasonably
          practicable after its delivery, the Tenant shall be given an account
          of the Service Contribution for the Accounting Year in question
          showing its Service Contribution and the total of its Advance 
          Payments.

     4.   BALANCING CHARGE

     4.1  If the Service Contribution exceeds the total of the Advance Payments
          the Tenant will pay the difference on or before the Balancing Charge
          Payment Date together with Interest on such excess on and from the
          Balancing Charge Payment until the date of actual payment.


                                          53
<PAGE>

                                                                     Schedule 8


4.2      If the total of the Advance Payments exceeds the Service 
         Contribution the Landlord will credit the balance to the account of 
         the Tenant and deduct the amount from the Advance Payment next 
         following or if the case so require from successive Advance Payments 
         until such balance is exhausted PROVIDED THAT at the end of the Term 
         by effluxion of time unless this Underlease shall be renewed any 
         such balance will be refunded to the Tenant.

5.       INSPECTION

         Upon giving notice in writing the Tenant may inspect the receipts 
         vouchers and accounts relating to the ascertainment of the Estate 
         Costs but such inspection shall not postpone the Balancing Charge 
         Payment Date nor relieve the Tenant from payment of any balance 
         payable on that date.



THE COMMON SEAL OF                        )

THRUSTMASTER, INC                         )                         [SEAL]

affixed in the presence of                )


Director   [ILLEGIBLE]


Secretary  [ILLEGIBLE]




THE COMMON SEAL OF                        )

STARGAS NOMINEES LIMITED                  )        [STAMP]          [SEAL]

was hereunto affixed in the presence of   )


               Authorised signatory


               Authorised Counter-Signatory

                                          

                                     54

<PAGE>


          BRITISH GAS CORPORATION

                CAMBERLEY

                  UNIT 9
 
                SCALE 1:500
                                                          [MAP]
      DRAWING NO BG/N103/10/08/06/108


















<PAGE>



















                                   [MAP]

<PAGE>


          BRITISH GAS CORPORATION

                CAMBERLEY

                  UNIT 9
 
                SCALE 1:1250
                                                          [MAP]
      DRAWING NO BG/N103/10/08/06/3A


















<PAGE>




                                   [MAP]

<PAGE>




                                   [MAP]






<PAGE>


                                                                   EXHIBIT 11.1
                                          
                                 THRUSTMASTER, INC.
                          STATEMENTS REGARDING COMPUTATION
                               OF PER SHARE EARNINGS
                    (In thousands, except net income per share)
                                    (Unaudited)

<TABLE>
<CAPTION>

                                               March 31,
                                        -----------------------
                                          1998           1997
                                        --------       --------
<S>                                     <C>            <C>
Weighted average number of 
   common shares outstanding--basic       4,303          4,245
                                        -------         ------
Common stock equivalents
   arising from stock options                --            310
                                        -------         ------
Weighted average number of 
   common shares outstanding--diluted     4,303          4,555
                                        -------         ------
                                        -------         ------

Net income (loss)                       $(1,241)        $  289
                                        -------         ------
                                        -------         ------
Net income (loss) per share--basic      $ (0.29)        $ 0.07
                                        -------         ------
                                        -------         ------
Net income (loss) per share--diluted    $ (0.29)        $ 0.06
                                        -------         ------
                                        -------         ------
</TABLE>


<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998, AND THE RELATED STATEMENT OF
INCOME FOR THE PERIOD THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000932290
<NAME> THRUSTMASTER, INC.
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                          DEC-31-1998
<PERIOD-START>                             JAN-01-1998
<PERIOD-END>                               MAR-31-1998
<CASH>                                           2,586
<SECURITIES>                                         0
<RECEIVABLES>                                    7,630
<ALLOWANCES>                                        52
<INVENTORY>                                      5,988
<CURRENT-ASSETS>                                18,021
<PP&E>                                           4,458
<DEPRECIATION>                                   2,278
<TOTAL-ASSETS>                                  20,228
<CURRENT-LIABILITIES>                            1,739
<BONDS>                                              0
                                0
                                          0
<COMMON>                                        13,853
<OTHER-SE>                                       4,553
<TOTAL-LIABILITY-AND-EQUITY>                    20,228
<SALES>                                          6,282
<TOTAL-REVENUES>                                 6,282
<CGS>                                            4,792
<TOTAL-COSTS>                                    4,792
<OTHER-EXPENSES>                                 3,430
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                   3
<INCOME-PRETAX>                                (1,910)
<INCOME-TAX>                                     (669)
<INCOME-CONTINUING>                            (1,241)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   (1,241)
<EPS-PRIMARY>                                    (.29)
<EPS-DILUTED>                                    (.29)
        

</TABLE>


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