<PAGE>
 
                                  EXHIBIT 10.6

                          AGREEMENT AND PLAN OF MERGER


                           Dated as of March 19, 1998


                                     Among


                          ONLINE SYSTEM SERVICES, INC.


                         DURAND ACQUISITION CORPORATION


                                      AND


                          DURAND COMMUNICATIONS, INC.
<PAGE>
 
                               TABLE OF CONTENTS

ARTICLE 1 - THE MERGER........................................................1
     1.1 The Merger...........................................................1
     1.2 Closing..............................................................1
     1.3 Effective Time of the Merger.........................................2
     1.4 Effects of the Merger................................................2
     1.5 Articles of Incorporation; Bylaws....................................2
     1.6 Directors............................................................2
     1.7 Officers.............................................................2

ARTICLE 2 - EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
     CORPORATIONS.............................................................2
     2.1 Exchange of Shares...................................................2
          (a) Common Stock of Sub.............................................2
          (b) Cancellation of Treasury Stock and Parent-Owned Company Common
               Stock..........................................................3
          (c) Conversion of Company Common Stock..............................3
          (d) Dissenting Stockholders.........................................3
          (e) Cancellation and Retirement of Company Common Stock.............3
     2.2 Options, Warrants, etc...............................................3
     2.3 Exchange of Certificates.............................................4
          (a) Exchange Agent..................................................4
          (b) Exchange Procedures.............................................4
          (c) Distributions with Respect to Unexchanged Shares................5
          (d) No Further Ownership Rights in Company Common Stock.............5
          (e) No Fractional Shares............................................5
          (f) No Liability....................................................5

ARTICLE 3 - REPRESENTATIONS AND WARRANTIES....................................6
     3.1 Representations and Warranties of the Company........................6
          (a) Organization, Standing and Corporate Power......................6
          (b) Subsidiaries....................................................6
          (c) Capital Structure...............................................6
          (d) Authority; Noncontravention.....................................7
          (e) Financial Statements; Undisclosed Liabilities...................8
          (f) Absence of Certain Changes or Events............................8
          (g) Litigation......................................................9
          (h) Labor Matters; Employee Matters.................................9
          (i) Tax Returns and Tax Payments....................................11
          (j) State Antitakeover Laws Not Applicable..........................12
          (k) Real Estate.....................................................12
          (l) Compliance with Laws; Environmental Matters.....................12
          (m) Leased Tangible Personal Property...............................13
          (n) Contracts.......................................................13
          (o) Assets..........................................................15
          (p) Intellectual Property...........................................15
          (q) Accounts Receivable.............................................16
          (r) Properties......................................................16

                                       i
<PAGE>
 
          (s) Transactions with Directors, Officers, Employees and 
                Affiliates....................................................16
          (t) Insurance.......................................................16
          (u) Brokers.........................................................16
          (v) Asset Sales; Merger.............................................16
          (w) Pooling of Interests............................................17
          (x) Full Disclosure.................................................17
          (y) Board Recommendation............................................17
          (z) Required Company Vote...........................................17
          (aa) Information Supplied...........................................17
     3.2 Representations and Warranties of Parent.............................17
          (a) Organization, Standing and Corporate Power......................17
          (b) Subsidiaries....................................................18
          (c) Capital Structure...............................................18
          (d) Authority; Noncontravention.....................................18
          (e) SEC Documents; Undisclosed Liabilities..........................19
          (f) Absence of Certain Changes or Events............................20
          (g) Litigation......................................................20
          (h) Tax Returns and Tax Payments....................................20
          (i) Compliance with Laws; Environmental Matters.....................20
          (j) Intellectual Property...........................................21
          (k) Properties......................................................21
          (l) Interim Operations of Sub.......................................21
          (m) Brokers.........................................................22

ARTICLE 4 - COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO MERGER.........22
     4.1 Conduct of Business of the Company...................................22

ARTICLE 5 - ADDITIONAL AGREEMENTS.............................................24
     5.1 Preparation of Proxy Statement; Stockholder Meeting..................24
     5.2 Letter of the Company's Accountants..................................24
     5.3 Parent Access to Information.........................................24
     5.4 Registration of Parent Stock.........................................25
     5.5 Board of Directors...................................................25
     5.6 Best Efforts.........................................................25
     5.7 Expenses.............................................................25
     5.8 Public Announcements.................................................26
     5.9 Takeover Statutes....................................................26
     5.10 Certain Agreements..................................................26

ARTICLE 6 - CONDITIONS PRECEDENT..............................................26
     6.1 Conditions to Each Party's Obligation to Effect the Merger...........26
         ----------------------------------------------------------
          (a) No Injunctions or Restraints....................................26
          (b) Nasdaq Governance Requirements..................................26
          (c) Compliance with Federal and State Securities Laws...............26
     6.2 Conditions to Obligation of Parent and Sub...........................26
          (a) Representations and Warranties..................................26
          (b) Performance of Obligations of the Company.......................27
          (c) Consents, etc...................................................27
          (d) Affiliate Letters...............................................27
          (e) Opinion of Counsel to the Company...............................27

                                      ii
<PAGE>
 
          (f) Opinion of Accountants..........................................28
          (g) CompuLearning Systems, Inc......................................28
          (h) Total Liabilities...............................................28
          (i) Dissenter's Rights..............................................28
          (j) Undertakings of Company Securities Holders......................28
          (k) Noncompete Agreements...........................................28
          (l) Releases, Termination of Agreements.............................28
     6.3 Conditions to Obligation of the Company..............................28
          (a) Representations and Warranties..................................28
          (b) Performance of Obligations of Parent and Sub....................29
          (c) Opinion of Counsel to Parent....................................29

ARTICLE 7 - TERMINATION, AMENDMENT AND WAIVER.................................29
     7.1 Termination..........................................................29
     7.2 Effect of Termination................................................30
     7.3 Amendment............................................................30
     7.4 Extension; Waiver....................................................30

ARTICLE 8 - GENERAL PROVISIONS................................................30
     8.1 Survival of Representations and Warranties...........................30
     8.2  Further Assurances..................................................30
     8.3 Notices..............................................................30
     8.4 Definitions..........................................................31
     8.5 Interpretation.......................................................32
     8.6 Counterparts.........................................................32
     8.7 Entire Agreement; No Third-party Beneficiaries.......................32
     8.8 Governing Law........................................................32
     8.9 Assignment...........................................................32
     8.10 Enforcement.........................................................32
     8.11 Severability........................................................32

                                      iii
<PAGE>
 
                          AGREEMENT AND PLAN OF MERGER

          This AGREEMENT AND PLAN OF MERGER (the "Agreement") is entered into as
of March 19, 1998, by and among ONLINE SYSTEM SERVICES, INC., a Colorado
corporation ("Parent"), DURAND ACQUISITION CORPORATION, a Minnesota corporation
and a direct wholly owned subsidiary of Parent ("Sub"), and DURAND
COMMUNICATIONS, INC., a California corporation (the "Company").

                                    RECITALS

          A.  The Boards of Directors of Parent and the Company have approved,
and deem it advisable and in the best interests of their respective companies
and stockholders to consummate, a merger of Sub with and into the Company (the
"Merger"), with the Company as the surviving corporation in the Merger, upon the
terms and subject to the conditions set forth in this Agreement, pursuant to
which each share of common stock, no par value per share, of the Company
("Company Common Stock") issued and outstanding immediately prior to the
Effective Time (as defined in Section 1.3), other than shares of Company Common
Stock owned, directly or indirectly, by the Company or any subsidiary (as
defined in Section 8.4) of the Company or by Parent, Sub or any other subsidiary
of Parent, will be converted into the right to receive, subject to the terms
hereof, 2.46 shares of common stock, no par value per share, of Parent ("Parent
Stock"); provided, however, that the total number of shares of Parent Stock
exchanged for Company Common Stock shall not exceed 971,250 shares of Parent
Stock.

          B.  The Merger has been approved by a vote of the majority of the
outstanding shares of Company Common Stock entitled to vote thereon for the
approval thereof (the "Company Stockholder Approval").

          C.  For United States Federal income tax purposes, it is intended that
the Merger shall qualify as a reorganization under the provisions of Section 368
of the Internal Revenue Code of 1986, as amended (the "Code") and this Agreement
is intended to be and is adopted as a plan of reorganization within the meaning
of Section 368 of the Code.

                                   AGREEMENT

          NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties agree as
follows:

                                   ARTICLE 1

                                   THE MERGER

          1.1  The Merger  .  Upon the terms and subject to the conditions set
               ----------                                                     
forth in this Agreement, and in accordance with the California General
Corporation Law (the "CGCL") and the Minnesota Business Corporation Act (the
"MBCA"), the Sub shall be merged with and into the Company at the Effective
Time.  Upon the Effective Time, the separate existence of Sub shall cease, and
the Company shall continue as the surviving corporation (the "Surviving
Corporation") having the name Durand Communications, Inc.

          1.2  Closing  .  Unless this Agreement shall have been terminated and
               -------                                                         
the transactions herein contemplated shall have been abandoned pursuant to
Section 7.1, and subject to the satisfaction or waiver 
<PAGE>
 
of the conditions set forth in Article 6, the closing of the Merger (the
"Closing") will take place at 10:00 a.m. Mountain Time within three business
days of the date that the shareholders of Parent approve the Merger (the
"Closing Date"), at the offices of Parent, unless another date, time or place is
agreed to in writing by the parties hereto.

          1.3  Effective Time of the Merger  .  On the Closing Date, the parties
               ----------------------------                                     
shall file articles of merger or other appropriate documents (in any such case,
the "Articles of Merger") executed in accordance with the relevant provisions of
the CGCL and MBCA and shall make all other filings or recordings required under
the CGCL and MBCA.  The Merger shall become effective at such time as the
Articles of Merger is duly filed with the Secretary of State of the State of
California and the Secretary of State of the State of Minnesota, or at such
other time as is permissible in accordance with the CGCL and MBCA and as Parent
and the Company shall agree should be specified in the Articles of Merger (the
time the Merger becomes effective being the "Effective Time").

          1.4  Effects of the Merger. 
               ---------------------    
 The Merger shall have the effects set forth in the CGCL and MBCA.
                                                                  

          1.5  Articles of Incorporation; Bylaws.
          --------------------------------------    

               (a) The Articles of Incorporation of the Company as in effect
          immediately prior to the Effective Time shall be the Articles of
          Incorporation of the Surviving Corporation until thereafter changed or
          amended as provided therein or by applicable law.

               (b) The Bylaws of the Company as in effect at the Effective Time
          shall be the Bylaws of the Surviving Corporation until thereafter
          changed or amended as provided therein or by applicable law.

          1.6  Directors  .  The directors of Sub at the Effective Time shall be
               ---------                                                        
the directors of the Surviving Corporation, until the earlier of their
resignation or removal or until their respective successors are duly elected and
qualified, as the case may be.

          1.7  Officers  .  The officers of the Company at the Effective Time
               --------                                                      
shall be the officers of the Surviving Corporation, until the earlier of their
resignation or removal or until their respective successors are duly appointed
and qualified, as the case may be.

                                   ARTICLE 2

                   EFFECT OF THE MERGER ON THE CAPITAL STOCK
                        OF THE CONSTITUENT CORPORATIONS

          2.1  Exchange of Shares  .  As of the Effective Time, by virtue of the
               ------------------                                               
Merger and without any action on the part of the holder of any shares of Company
Common Stock or any shares of capital stock of Sub:

               (a)  Common Stock of Sub  .  Each share of common stock of Sub
                    -------------------                                      
     issued and outstanding immediately prior to the Effective Time shall be
     converted into one share of common stock of the Surviving Corporation and
     shall be the issued and outstanding capital stock of the Surviving
     Corporation.

                                       2
<PAGE>
 
          (b)  Cancellation of Treasury Stock and Parent-Owned Company
               -------------------------------------------------------
     Common Stock.  Each share of the Company Common Stock that is owned by
     ------------                                                            
     the Company or by any subsidiary of the Company, and each share of Company
     Common Stock that is owned by Parent, Sub or any other subsidiary of Parent
     shall automatically be canceled and retired and shall cease to exist, and
     no cash, Parent Stock or other consideration shall be delivered or
     deliverable in exchange therefor.

          (c) Conversion of Company Common Stock.  Except as otherwise provided
              ----------------------------------
     herein and subject to Section 2.3, at the Effective Time each issued and
     outstanding share of Company Common Stock shall be automatically converted
     into 2.46 fully paid and nonassessable shares of Parent Stock (the "Merger
     Consideration"); provided, however, that the total number of shares of
     Parent Stock exchanged for Company Common Stock shall not exceed 981,671
     shares of Parent Stock.

          (d)  Dissenting Stockholders.  Notwithstanding anything in
               -----------------------
     this Agreement to the contrary, any issued and outstanding shares of
     Company Common Stock held by a person (a "Dissenting Stockholder") who duly
     demands appraisal of his shares of Company Common Stock pursuant to the
     CGCL and complies with all the provisions of the CGCL concerning the right
     of holders of Company Common Stock to demand appraisal of their shares in
     connection with the Merger ("Dissenting Shares") shall not be converted as
     described in Section 2.1(c), but shall become the right to receive such
     cash consideration as may be determined to be due to such Dissenting
     Stockholder as provided in the CGCL.  If, however, such Dissenting
     Stockholder withdraws his demand for appraisal or fails to perfect or
     otherwise loses his right of appraisal, in any case pursuant to the CGCL,
     his shares shall be deemed to be converted as of the Effective Time into
     the right to receive Parent Stock, without interest, pursuant to Section
     2.1(c).  The Company shall give Parent (i) prompt notice of any demands for
     appraisal of shares received by the Company; and (ii) the opportunity to
     participate in and direct all negotiations and proceedings with respect to
     any such demand.  The Company shall not, without the prior written consent
     of Parent, make any payment with respect to, or settle, offer to settle or
     otherwise negotiate any such demands.

          (e) Cancellation and Retirement of Company Common Stock. As of the
              ---------------------------------------------------
     Effective Time, all shares of Company Common Stock (other than shares
     referred to in Section 2.1(b)) issued and outstanding immediately prior to
     the Effective Time, shall no longer be outstanding and shall automatically
     be canceled and retired and shall cease to exist, and each holder of a
     certificate representing any such shares of Company Common Stock shall
     cease to have any rights with respect thereto, except the right to receive
     pursuant to Section 2.3, (i) a certificate or certificates of Parent Stock
     representing the number of full shares of Parent Stock into which the
     shares of Company Common Stock theretofore represented by such canceled and
     retired certificate shall have been converted pursuant to Section 2.1(c),
     and (ii) in lieu of fractional shares of Parent Stock, a cash payment for
     the fair market value of a fractional share to be issued in consideration
     therefor based on the closing bid price for Parent's common stock on the
     Nasdaq Small Cap Market on the day prior to the Closing Date.

     2.2  Options; Warrants, etc.  At the Effective Time, all options,
          ----------------------                                        
warrants, and convertible promissory notes exercisable for or convertible into
Company Common Stock granted or issued prior to the date hereof, which are
outstanding and unexercised or unconverted immediately prior to the Effective
Time (the "Prior Securities"), shall be automatically converted into options,
warrants and convertible promissory notes exercisable for or convertible into
shares of Parent Stock (the "Substitute Securities"), 

                                       3
<PAGE>
 
in accordance with the terms of such options, warrants and convertible
promissory notes, appropriately adjusted (as to both number of shares and
exercise price) as follows:

          (a) The number of shares of Parent Stock covered by each of the
     Substitute Securities shall equal the number of shares of Company Common
     Stock covered by the applicable Prior Security immediately prior to the
     Effective Time, adjusted to reflect the Merger Consideration and rounded to
     the nearest whole number;

          (b) The per share exercise price or conversion price for each
     Substitute Security shall equal the per share exercise price under the
     applicable Prior Option immediately prior to the Effective Time, adjusted
     to reflect the Merger Consideration; and

          (c) In all other respects, the terms of the Substitute Securities
     shall be in such form and contain such other terms as Parent shall
     reasonably require, forms of such securities to be made available to the
     holders of the Prior Securities prior to the Closing Date.

     2.3  Exchange of Certificates.
          ------------------------   

          (a) Exchange Agent . At the Effective Time, Parent shall designate
              --------------
     Corporate Stock Transfer, Inc., Parent's transfer agent (the "Exchange
     Agent"), to act as agent for the holders of shares of Company Common Stock
     in connection with the Merger to issue the certificate or certificates to
     which holders of shares of Company Common Stock shall become entitled
     pursuant to Section 2.1(c). Parent shall authorize and instruct the
     Exchange Agent to issue to the holders of Company Common Stock, in the
     aggregate, certificates representing the number of shares of Parent Stock
     required to effectuate the terms of the Merger. The Exchange Agent shall,
     pursuant to instructions from Parent, issue the certificates provided for
     in Section 2.1(d).

          (b)  Exchange Procedures  .  As soon as practicable after the
               -------------------                                     
     Effective Time, the Exchange Agent shall mail to each holder of an
     outstanding certificate or certificates which prior thereto represented
     shares of Company Common Stock (i) a letter of transmittal (which shall
     specify that delivery shall be effected, and risk of loss and title to such
     certificate shall pass, only upon delivery of such certificates to such
     Exchange Agent), and (ii) instructions for use in effecting the surrender
     of the certificates representing shares of Company Common Stock for shares
     representing Parent Stock.  Upon proper surrender to the Exchange Agent of
     such certificates for cancellation, the holder of such certificates shall
     after the Effective Time be entitled only to a certificate or certificates
     representing the number of full shares of Parent Stock, into which the
     aggregate number of shares of Company Common Stock previously represented
     by such certificate or certificates surrendered shall have been converted
     pursuant to this Agreement plus payment for the fair market value of a
     fractional share as provided in Section 2.3(e).  The Exchange Agent shall
     accept such certificates upon compliance with such reasonable terms and
     conditions as the Exchange Agent may impose to effect an orderly exchange
     thereof in accordance with normal exchange practices.  After the Effective
     Time, there shall be no further transfer on the records of the Company or
     its transfer agent of certificates representing shares of Company Common
     Stock and if such certificates are presented to the Company for transfer,
     they shall be canceled against delivery of certificates for Parent Stock as
     hereinabove provided.  If any certificate for such Parent Stock is to be
     issued in a name other than that in which the certificate for Company
     Common Stock surrendered for exchange is registered, it shall be a
     condition of such exchange that the certificate so surrendered shall be
     properly endorsed, with signature guaranteed, or otherwise in proper form
     for transfer and that the person requesting such 

                                       4
<PAGE>
 
     exchange shall pay to Parent or its transfer agent any transfer or other
     taxes required by reason of the issuance of certificates for such Parent
     Stock in a name other than that of the registered holder of the certificate
     surrendered, or establish to the satisfaction of Parent or its transfer
     agent that such tax has been paid or is not applicable.

          (c) Distributions with Respect to Unexchanged Shares. No dividends or
              ------------------------------------------------
     other distributions with respect to Parent Stock with a record date after
     the Effective Time shall be paid to the holder of any unsurrendered
     certificate for shares of Company Common Stock with respect to the shares
     of Parent Stock represented thereby. Subject to the effect of applicable
     laws, following surrender of any such certificate, there shall be paid to
     the holder of the certificate representing whole shares of Parent Stock
     issued in exchange therefor, without interest, (i) at the time of such
     surrender the amount of dividends or other distributions with a record date
     after the Effective Time theretofore paid with respect to such shares of
     Parent Stock, and (ii) at the appropriate payment date, the amount of
     dividends or other distributions with a record date after the Effective
     Time but prior to such surrender and a payment date subsequent to such
     surrender payable with respect to such shares of Parent Stock.

          (d) No Further Ownership Rights in Company Common Stock. All shares of
              ---------------------------------------------------   
     Parent Stock issued upon the surrender for exchange of certificates
     representing shares of Company Common Stock in accordance with the terms of
     this Article 2 (including any certificates issued pursuant to Section
     2.3(e)) shall be deemed to have been issued in full satisfaction of all
     rights pertaining to the shares of Company Common Stock theretofore
     represented by such certificates.

          (e)  No Fractional Shares.
               --------------------
               (i) No certificates or scrip representing fractional shares
          of Parent Stock shall be issued upon the surrender for exchange of
          certificates representing shares of Company Common Stock, and such
          fractional share interests will not entitle the owner thereof to vote
          or to any rights of a stockholder of Parent; and

               (ii) Notwithstanding any other provision of this Agreement,
          each holder of shares of Company Common Stock converted pursuant to
          the Merger who would have otherwise been entitled to receive a
          fraction of a share of Parent Stock shall receive, in lieu thereof,
          payment in cash of the fair market value of the fractional share, such
          value based on the closing bid price for Parent Common Stock on the
          Nasdaq Small Cap Market on the last business day prior to the Closing
          Date.

          (f)  No Liability  .  None of Parent, Sub, the Company or the
               ------------                                            
     Exchange Agent shall be liable to any person in respect of any shares of
     Parent Stock (or dividends or distributions with respect thereto) delivered
     to a public official pursuant to any applicable abandoned property, escheat
     or similar law.  If any certificates representing shares of Company Common
     Stock shall not have been surrendered prior to five years after the
     Effective Time (or immediately prior to such earlier date on which any
     cash, shares of Parent Stock, any cash in lieu of fractional shares of
     Parent Stock or any dividends or distributions with respect to Parent Stock
     in respect of such certificate would otherwise escheat to or become the
     property of any Governmental Entity (as defined in Section 3.1(d)), any
     such shares, cash dividends or distributions in respect of such certificate
     shall, to the extent permitted by applicable law, become the property of
     the Surviving Corporation, free and clear of all claims or interest of any
     person previously entitled thereto.

                                       5
<PAGE>
 
                                   ARTICLE 3

                         REPRESENTATIONS AND WARRANTIES

    3.1 Representations and Warranties of the Company . The Company represents
        ---------------------------------------------
and warrants to Parent and Sub as follows:

        (a) Organization, Standing and Corporate Power. Each of the Company and
            ------------------------------------------
     each of its Subsidiaries (as defined in Section 3.1(b)) is duly organized,
     validly existing and in good standing under the laws of the jurisdiction in
     which it is incorporated and has the requisite corporate power and
     authority to carry on its business as now being conducted. The Company and
     each of its Subsidiaries is duly qualified or licensed to do business and
     is in good standing in each jurisdiction in which the nature of its
     business or the ownership or leasing of its properties makes such
     qualification or licensing necessary, other than in such jurisdictions
     where the failure to be so qualified or licensed (individually or in the
     aggregate) would not have a material adverse effect (as defined in Section
     8.4) with respect to the Company. Attached as Section 3.1(a) of the
     disclosure schedule ("Disclosure Schedule") delivered to Parent by the
     Company at the time of execution of this Agreement are complete and correct
     copies of the Articles of Incorporation and Bylaws of the Company.

        (b)  Subsidiaries  .  The only direct or indirect subsidiaries of
             ------------                                                
     the Company (the "Subsidiaries") and other ownership interests held by the
     Company in any other person are those listed in Section 3.1(b) of the
     Disclosure Schedule.  Except as set forth in Section 3.1(b) of the
     Disclosure Schedule, all the outstanding shares of capital stock of each
     such Subsidiary which is a corporation have been validly issued and are
     fully paid and nonassessable and are owned (of record and beneficially) by
     the Company, by another Subsidiary (wholly owned) of the Company or by the
     Company and another such Subsidiary (wholly owned), free and clear of all
     pledges, claims, liens, charges, encumbrances and security interests of any
     kind or nature whatsoever (collectively, "Liens").  Except as set forth in
     Section 3.1(b) of the Disclosure Schedule, the Company does not own,
     directly or indirectly, any capital stock or other ownership interest in
     any corporation, partnership, business association, joint venture or other
     entity.

        (c)  Capital Structure  .  The authorized capital stock of the
             -----------------                                        
     Company consists of 1,000,000 shares of Company Common Stock.  As of the
     date of this Agreement, there are (i) 388,474 shares of Company Common
     Stock issued and outstanding, (ii) 6,086 shares of Company Common Stock
     reserved for issuance to certain private investors for an aggregate
     consideration of $140,000; (iii) no shares of Company Common Stock held in
     the treasury of the Company or held by any Subsidiary of the Company; and
     (iv) 89,758 shares of Company Common Stock reserved for issuance upon
     exercise or conversion of outstanding securities of the Company ("Prior
     Securities").  Section 3.1 (c) of the Disclosure Schedule contains a list
     of all Prior Securities, including a description of their terms.  Except as
     set forth above, no shares of capital stock or other equity securities of
     the Company are issued, reserved for issuance or outstanding.  All
     outstanding shares of capital stock of the Company are, and all shares
     which may be issued pursuant to the Prior Securities will be when issued,
     duly authorized, validly issued, fully paid and nonassessable and, except
     as described in Section 3.1(c) of the Disclosure Schedule, are not subject
     to preemptive rights.  There are no outstanding bonds, debentures, notes or
     other indebtedness or other securities of the Company having the right to
     vote on any matters on which stockholders of the Company may vote.  Except
     as set forth above, there are no outstanding securities, options, warrants,
     calls, rights, commitments, agreements, arrangements 

                                       6
<PAGE>
 
     or undertakings of any kind to which the Company or any of its Subsidiaries
     is a party, or by which any of them is bound, obligating the Company or any
     of its Subsidiaries to issue, deliver or sell, or cause to be issued,
     delivered or sold, additional shares of capital stock or other equity or
     voting securities of the Company or of any of its Subsidiaries or
     obligating the Company or any of its Subsidiaries to issue, grant, extend
     or enter into any such security, option, warrant, call, right, commitment,
     agreement, arrangement or undertaking. There are no outstanding contractual
     obligations, commitments, understandings or arrangements of the Company or
     any of its Subsidiaries to repurchase, redeem or otherwise acquire or make
     any payment in respect of or measured or determined based on the value or
     market price of any shares of capital stock of the Company or any of its
     Subsidiaries and, to the knowledge of the Company, there are no irrevocable
     proxies with respect to shares of capital stock of the Company or any
     Subsidiary of the Company. Except as provided in Section 3.1(c) of the
     Disclosure Schedule, there are no agreements or arrangements pursuant to
     which the Company is or could be required to register shares of Company
     Common Stock or other securities under the Securities Act of 1933, as
     amended (the "Securities Act").

          (d)  Authority; Noncontravention  .  The Company has the
               ---------------------------                        
     requisite corporate power and authority to enter into this Agreement and to
     consummate the transactions contemplated hereby.  The execution and
     delivery of this Agreement by the Company and the consummation by the
     Company of the transactions contemplated hereby have been duly authorized
     by all necessary corporate action on the part of the Company and its
     shareholders and no other corporate action on the part of the Company or
     its shareholders is necessary to authorize the execution and delivery of
     this Agreement and the consummation by the Company of the transactions
     contemplated hereby.  This Agreement has been duly executed and delivered
     by the Company and constitutes a valid and binding obligation of the
     Company, enforceable against the Company in accordance with its terms.
     Except as disclosed in Section 3.1(d) of the Disclosure Schedule, the
     execution and delivery of this Agreement does not, and the consummation of
     the transactions contemplated hereby and compliance with the provisions
     hereof will not, (a) conflict with or result in any breach of any provision
     of the articles of incorporation or bylaws of the Company or the comparable
     charter documents of its Subsidiaries or (b) conflict with, or result in
     any breach or violation of, or constitute a default under (with or without
     notice or lapse of time, or both), or give rise to a right of termination,
     cancellation or acceleration under (i) any loan or credit agreement, note,
     bond, mortgage, indenture, lease or other agreement, instrument, permit,
     concession, franchise or license applicable to the Company or any of its
     Subsidiaries or their respective properties or assets or (ii) any judgment,
     order, decree, statute, law, ordinance, rule, regulation or arbitration
     award applicable to the Company or any of its Subsidiaries or their
     respective properties or assets, or (c) result in the creation of any Lien
     upon any of the parties or assets of the Company or any of its
     Subsidiaries, other than, in the case of clauses (b) and (c), any such
     conflicts, breaches, violations, defaults, rights, losses or Liens that
     individually or in the aggregate could not have a material adverse effect
     with respect to the Company or could not prevent, hinder or materially
     delay the ability of the Company to consummate the transactions
     contemplated by this Agreement.  No consent, approval, order or
     authorization of, or registration, declaration or filing with, or notice
     to, any Federal, state or local government or any court, administrative
     agency or commission or other governmental authority or agency, domestic or
     foreign (a "Governmental Entity"), is required by or with respect to the
     Company or any of its Subsidiaries in connection with the execution and
     delivery of this Agreement by the Company or the consummation by the
     Company of the transactions contemplated hereby, except for (i) the filing
     of the Articles of Merger with the Secretary of States of the State of
     California and Minnesota, and appropriate documents with the relevant
     authorities of other states in which the 

                                       7
<PAGE>
 
     Company is qualified to do business and (ii) such other consents,
     approvals, orders, authorizations, registrations, declarations, filings or
     notices as are set forth in Section 3.1(d) of the Disclosure Schedule.

          (e) Financial Statements; Undisclosed Liabilities. The consolidated
              ---------------------------------------------
     financial statements of the Company for the years ended June 30, 1996 and
     1997 audited by KPMG Peat Marwick, LLP and the unaudited balance sheet of
     the Company as of December 31, 1997 and the unaudited statements of income
     and retained earnings of the Company for the fiscal period then ended
     compiled by the Company attached hereto in Section 3.1(e) of the Disclosure
     Schedule (the "Financial Statements") are true, complete and correct and
     have been prepared in accordance with generally accepted accounting
     principles applied on a consistent basis during the periods involved. The
     Financial Statements fairly present the financial position and assets and
     liabilities, whether accrued, absolute, contingent or otherwise, of the
     Company as of the dates thereof and the results of operations and cash
     flows of the Company for the periods then ended (subject, in the case of
     unaudited quarterly statements, to normal year-end audit adjustments).
     Since December 31, 1997, the Company has not incurred any liabilities or
     obligations of any nature (whether accrued, absolute, contingent or
     otherwise) except (i) as and to the extent set forth on the balance sheet
     of the Company as of December 31, 1997 (including the notes thereto), (ii)
     as incurred in connection with the transactions contemplated by this
     Agreement, (iii) as incurred after December 31, 1997 in the ordinary course
     of business and consistent with past practice, (iv) as set forth in Section
     3.1(e) of the Disclosure Schedule, or (v) as would not, individually or in
     the aggregate, have a material adverse effect with respect to the Company.

          (f)  Absence of Certain Changes or Events  .  Except as described
               ------------------------------------                        
     in Section 3.1(f) of the Disclosure Schedule, since December 31, 1997 there
     has not been:

               (i)    any material adverse change in the working capital,
          financial condition, assets, liabilities (whether absolute, accrued,
          contingent or otherwise), operating profits, business or prospects of
          the Company;

               (ii)   any damage, destruction or loss (whether or not covered
          by insurance) affecting the Company's business or its assets;

               (iii)  any increase or decrease in the rates of compensation
          payable or to become payable by the Company to any of its officers,
          directors or employees over or under the rates in effect during the
          year ended December 31, 1997, other than general increases made in
          accordance with past practices which are described in Section 3.1(f)
          of the Disclosure Schedule; or any declaration, payment, commitment,
          or obligation of any kind for the payment by the Company of any bonus
          (other than standard year-end bonuses consistent with past practices
          which are described in Section 3.1(f) of the Disclosure Schedule),
          additional salary or compensation, or retirement, termination or
          severance benefits to officers, directors or employees;

               (iv)   any material amendment or termination of any material
          contract, lease or license to which the Company is a party or by which
          it may be bound, other than in the ordinary course of business;

                                       8
<PAGE>
 
               (v)   any disposition, mortgage, pledge, or subjection to any
          lien, claim, charge, option, or encumbrance of any property or asset
          of the Company, or any cancellation or compromise of any debt or claim
          of the Company other than in the ordinary course of business;

               (vi)  any labor dispute or threat of a labor dispute or any
          attempt or threat of an attempt by a labor union to organize the
          Company's employees;

               (vii) any acquisition by the Company of the assets or capital
          stock of another business entity;

               (viii)any distribution or disposition of the Company's assets
          other than in the ordinary course of business;

               (ix)  any termination of any permit or license issued to the
          Company or to any of its employees or agents;

               (x)   any statute, order, judgment, writ, injunction, decree,
          permit, rule or regulation of any court or any governmental or
          regulatory body adopted or entered or proposed to be adopted or
          entered which may adversely affect the property or business of the
          Company;

               (xi)  any event or occurrence affecting the Company, its business
          or its industry which may cause an adverse change affecting the
          Company's sales, profitability or financial condition or which may
          otherwise adversely affect the Company; or

               (xii) any dividend or distribution declared, set aside or paid in
          respect of the Company Common Stock or any repurchase by the Company
          of shares of Company Common Stock.

          (g)  Litigation.  Except as disclosed in Section 3.1(g) of the
               ----------                                                 
     Disclosure Schedule, there is no suit, action or proceeding or
     investigation pending or, to the knowledge of the Company, threatened
     against or affecting the Company or any of its Subsidiaries or any basis
     for any such suit, action, proceeding or investigation.  There is no
     judgment, decree, injunction, rule or order of any Governmental Entity or
     arbitrator outstanding against the Company or any of its Subsidiaries.

          (h)  Labor Matters; Employee Matters.
               -------------------------------   

               (i)   Neither the Company nor any of its Subsidiaries is a party
          to, or bound by, any collective bargaining agreement, contract or
          other agreement or understanding with a labor union or labor
          organization, nor is it or any of its Subsidiaries the subject of any
          proceeding asserting that it or any Subsidiary has committed an unfair
          labor practice or seeking to compel it to bargain with any labor
          organization as to wages or conditions of employment, nor is there any
          strike, work stoppage or other labor dispute involving it or any of
          its Subsidiaries pending or, to its knowledge, threatened.

               (ii)  No employee of the Company has a written or oral agreement
          (or an assurance pursuant to any employee manual) which would preclude
          the Company from 

                                       9
<PAGE>
 
          terminating such employee's employment at any time with no obligation
          of the Company to make any payment except wages and accrued benefits
          to the date of termination. The Company has not engaged in any
          discriminatory hiring or employment practices nor have any employment
          discrimination complaints been filed against the Company with any
          state or federal agency. The Company has not been threatened by any
          former employee with any suit alleging wrongful termination.

               (iii) The Company has delivered to Parent (i) all employment
          manuals utilized by the Company within the past three (3) years, (ii)
          copies of any determination letters received by the Company from the
          Internal Revenue Service or any other governmental authority with
          respect to any employee benefit plan, (iii) copies of any summary plan
          descriptions or summaries of material modifications relating to any
          employee benefit plan (as defined in Section 3(3) of ERISA) that have
          been prepared or distributed in the past three (3) years, and (iv) any
          annual reports (Form 5500 series) filed for any employee benefit plan
          or fringe benefit plan (within the meaning of Code Section 6039D) for
          plan years ending in June 30, 1997.  All such summary plan
          descriptions, summaries, and annual reports, were true, complete and
          correct, and complied with all requirements applicable thereto, at the
          time such documents were distributed or filed.  The current summary
          plan descriptions comply with all applicable requirements and properly
          describe the current versions of the plans to which they relate.

               (iv)  There are no present or former Company employees, directors
          or independent contractors entitled to (i) pension benefits that are
          "unfunded" as defined under ERISA or (ii) any pension benefit or
          welfare benefit to be paid after termination of employment.  Except
          with respect to continuation coverage under group health plans
          pursuant to Section 4980B of the Code or state law, and except with
          respect to continuation coverage under group life insurance plans
          pursuant to state law, no other benefits (whether or not pursuant to
          any plan or benefit arrangement that is subject to the Employee
          Retirement Income and Security Act ("ERISA")) whatsoever are payable
          to any present or former Company employees after termination of
          employment or to any present or former directors or independent
          contractors after cessation of service to the Company (including, but
          not limited to, any post-retirement medical or death benefits, any
          severance benefits or any disability benefits).

               (v)   There are no arrangements or contracts with any director,
          officer, employee or independent contractor of the Company that
          require any deferred compensation, retirement or welfare benefits to
          be paid or provided following termination of services.

               (vi)  Each "employee welfare benefit plan" (as defined in Section
          3(1) of ERISA) of the Company is either funded through insurance or is
          unfunded for purposes of ERISA.  There are no reserves, assets,
          surplus or prepaid premiums under any such plan, and, the Company is
          not in default under any such plan, and all such plans are in
          compliance with all applicable laws (including, but not limited to,
          ERISA, the Code and the Age Discrimination in Employment Act of 1967).

               (vii) Each of any "employee welfare benefit plan" (as defined
          above) maintained by the Company, any fiduciary thereof, and the
          Company is not subject to any liability (other than normal liabilities
          and expenses associated with maintenance of 

                                       10
<PAGE>
 
          such plan or arrangement as an ongoing benefit plan or arrangement)
          under ERISA or the Code or any other applicable law, including without
          limitation, liability resulting from a partial plan termination.

               (viii) The Company is not subject to any liability (other than
          normal liabilities and expenses associated with maintenance of such
          plan or arrangement as an ongoing benefit plan or arrangement) under
          ERISA or the Code or any other applicable law, including without
          limitation, liability resulting from a partial plan termination or
          from prohibited transactions.

               (ix)   The Company neither maintains, nor has it ever maintained
          or ever been obligated to contribute to, (i) a multi-employer plan
          within the meaning of Section 3(37) of ERISA, or (ii) any employee
          benefit plan within the meaning of Section 3(3) of ERISA.

               (x)    There are and there have been no inquiries, proceedings,
          claims or suits pending or, to the best knowledge of the Company,
          threatened by any governmental agency or authority or by any
          participant or beneficiary against any of the Company's "employee
          welfare benefit plans" (as defined above) with respect to the
          operation of such benefit plans.

               (xi)   The consummation of the transactions contemplated by this
          Agreement will not, alone or together with any other event, (i)
          entitle any employee of the Company to severance pay or any other
          payment, or (ii) accelerate the time of payment or vesting, or
          increase the amount of, compensation due to any such employee.

               (xii)  The Company has no obligation for (i) any long-term
          disability benefits to or for any of the Company's employees who
          become disabled prior to the Closing Date (including any individual
          who is disabled but has not satisfied any applicable waiting period)
          and (ii) any life insurance benefits promised, due and/or payable to
          or for any of the Company's employees who die prior to the Closing
          Date.

          (i)  Tax Returns and Tax Payments.  The Company and each of its
               ----------------------------                                
     Subsidiaries has timely filed, with the appropriate authority, (or, as to
     Subsidiaries, the Company has filed, with the appropriate authority, on its
     behalf) all Tax Returns (as defined below) required to be filed by it, has
     paid (or, as to Subsidiaries, the Company has paid on its behalf) all Taxes
     (as defined below) shown thereon to be due and has provided (or, as to
     Subsidiaries, the Company has made provision on its behalf of) adequate
     reserves in the Financial Statements for any Taxes that have not been paid,
     whether or not shown as being due on any Tax Returns.  All Tax Returns were
     correct as filed.  Except as set forth in Section 3.1(i) of the Disclosure
     Schedule (i) no claim for unpaid Taxes has been asserted by a Tax authority
     or has become a lien (except for liens not yet due and payable) against the
     property of the Company or any of its Subsidiaries or is being asserted
     against the Company or any of its Subsidiaries, (ii) no audit of any Tax
     Return of the Company or any of its Subsidiaries is being conducted by any
     government entity, and (iii) no extension of the statute of limitations on
     the assessment of any Taxes has been granted by the Company or any of its
     Subsidiaries and is currently in effect.  Neither the Company nor any of
     its Subsidiaries is or has been a member of any consolidated, combined,
     unitary or aggregate group for Tax purposes except such a group consisting
     only of the Company and its Subsidiaries.  As used herein, "Taxes" shall
     mean all taxes of any kind, including, without limitation, those on 

                                       11
<PAGE>
 
     or measured by or referred to as income, gross receipts, sales, use, ad
     valorem, franchise, profits, license, withholding, payroll, employment,
     excise, severance, stamp, occupation, premium, value added, property or
     windfall profits taxes, customs, duties or similar fees, assessments or
     charges of any kind whatsoever, together with any interest and any
     penalties, additions to tax or additional amounts imposed by any
     governmental authority, domestic or foreign. As used herein, "Tax Return"
     shall mean any return, report or statement required to be filed with any
     governmental authority with respect to Taxes.

          (j)  State Antitakeover Laws Not Applicable.  No state takeover
               --------------------------------------                      
     statute or similar statute or regulation of the State of California applies
     or purports to apply to this Agreement or the transactions contemplated
     hereby and no provision of the Articles of Incorporation, Bylaws or other
     governing instruments of the Company or any of its Subsidiaries or the
     terms of any rights plan or agreement of the Company would, directly or
     indirectly, restrict or impair the ability of Parent to vote, or otherwise
     to exercise the rights of a stockholder with respect to, securities of the
     Company and its Subsidiaries that may be acquired or controlled by Parent
     by virtue of this Agreement or the transactions contemplated hereby or
     permit any shareholder to acquire securities of the Company or of Parent or
     any of its Subsidiaries on a basis not available to Parent in the event
     that Parent were to acquire securities of the Company.

          (k)  Real Estate.  The Company does not own or have title to any
               -----------                                                  
     real estate, and has never owned or had title to any real estate.  The
     Company does not lease any real estate other than pursuant to real estate
     leases listed in Section 3.1(k) of the Disclosure Schedule, true and
     correct copies of which has been delivered to Parent (the "Leases"), and,
     other than pursuant to the Leases, has not leased any other real estate
     during the past five years.  Each of the Company and the other party
     thereto is not in default under the Lease, and there are no facts which,
     with notice and/or the passage of time, would constitute such a default.
     All buildings leased by the Company pursuant to the Leases are in good
     condition, normal wear and tear excepted, and the heating, air
     conditioning, plumbing and electrical systems of each such building are in
     good operating order, ordinary wear and tear excepted.  The Company has not
     received notice that said buildings do not comply with municipal, state and
     federal statutes, ordinances, rules and regulations applicable to the
     construction of the buildings and their actual use, and the buildings
     comply with said statutes, ordinances, rules and regulations.  No consent
     is required under the Leases in connection with the Merger

          (l)  Compliance with Laws; Environmental Matters.
               -------------------------------------------   

               (i)  The Company and its subsidiaries and their operations and
          assets, including owned or leased real property, are in compliance in
          all material respects with all statutes, laws, regulations,
          ordinances, rules, judgments, orders, decrees or arbitration awards
          applicable thereto, including Environmental Laws (as defined below).

               (ii) There are no legal, administrative, arbitral or other
          proceedings, claims, actions, causes of action, private environmental
          investigations or remediation activities or governmental
          investigations of any nature seeking to impose, or that reasonably
          could be expected to result in the imposition, on the Company or any
          of its Subsidiaries of any liability or obligations arising under
          common law standards relating to environmental protection, human
          health or safety, or under any local, state, federal, national or
          supernational environmental statute, regulation or ordinance,
          including the Comprehensive Environmental Response, Compensation and
          Liability Act of 1980, as 

                                       12
<PAGE>
 
          amended (collectively, "Environmental Laws"), pending or, to the
          knowledge of the Company, threatened, against the Company or any of
          its Subsidiaries, which liability or obligation would have or would
          reasonably be expected to have a material adverse effect on the
          Company or any of its Subsidiaries. To the knowledge of the Company or
          any of its Subsidiaries, there is no reasonable basis for any such
          proceeding, claim, action or governmental investigation that would
          impose any liability or obligation that would have or would reasonably
          be expected to have a material adverse effect on the Company or any of
          its Subsidiaries. To the knowledge of the Company, during or prior to
          the period of (i) its or any of its Subsidiaries' ownership or
          operation of any of their respective current properties, (ii) its or
          any of its Subsidiaries' participation in the management of any
          property, or (iii) its or any of its Subsidiaries' holding of a
          security interest or other interest in any property, there was no
          release or threatened release of hazardous, toxic, radioactive or
          dangerous materials or other materials regulated under Environmental
          Laws in, on, under or affecting any such property which would
          reasonably be expected to have a material adverse effect on the
          Company or any of its Subsidiaries. Neither the Company nor any of its
          Subsidiaries is subject to any agreement, order, judgment, decree,
          letter or memorandum by or with any court, governmental authority,
          regulatory agency or third party imposing any liability or obligations
          pursuant to or under any Environmental Law.

               (m)  Leased Tangible Personal Property.  The Company does
                    ---------------------------------                     
     not lease any personal property other than pursuant to (i) leases in the
     ordinary course of business which can be terminated on not more than 30
     days notice by the Company without payment of any penalty or termination
     payment, and (ii) leases ("Personal Property Leases") which are listed in
     Section 3.1(m) of the Disclosure Schedule, true and correct copies of which
     have been delivered to Parent.  Each of the Company and the other parties
     thereto is not in default under any of the Personal Property Leases, and
     the Company is not aware of any fact which, with notice and/or passage of
     time, would constitute such a default.  No consent is required under the
     Personal Property Leases in connection with the Merger.

               (n)  Contracts.  Section 3.1(n) of the Disclosure Schedule
                    ---------                                              
     lists, and the Company has previously delivered to Parent, true and
     complete copies of, all of the following contracts or other obligations to
     which the Company is a party or by which it is bound:

                    (i)   employment agreements and any other contracts or
               understandings with or loans to any of the Company's
               shareholders, officers, directors, employees, consultants,
               salesmen, distributors or sales representatives, including but
               not limited to any which relate to bonuses or deferred
               compensation

                    (ii)  any employee benefit plan made available by the
               Company to any of its employees;

                    (iii) any collective bargaining agreement or other agreement
               with any union;

                    (iv)  any outstanding contracts with customers;

                                       13
<PAGE>
 
               (v)     any deeds of trust, mortgages, conditional sales
          contracts, security agreements, pledge agreements, trust receipts, or
          any other agreements or arrangements whereby any assets of the Company
          are subject to a lien, encumbrance, charge or other restriction;

               (vi)    any loan agreements (whether for borrowing or lending),
          letters of credit or lines of credit;

               (vii)   any contracts restricting the Company from doing
          business in any areas or in any way limiting competition and any
          contracts which limit, restrict or transfer rights to any technology
          utilized or developed by the Company or which establish rights of a
          supplier or customer to a particular product marketed or being
          developed by the Company; for each such contract, Section 3.1(n) of
          the Disclosure Schedule briefly describes the restrictions or
          limitations contained in the contract;

               (viii)  any construction contracts, or contracts for the
          purchase of equipment, and any contracts calling for aggregate
          payments by the Company in excess of $5,000.00 and which are not
          terminable without cost or liability on notice of 90 days or less;

               (ix)    any joint venture, partnership or limited partnership
          agreement involving the Company;

               (x)     any indemnification by the Company and any guarantees by
          the Company of the obligations of any other party except those
          resulting from the endorsement of customer checks deposited by the
          Company for collection;

               (xi)    any license or franchise agreement, either as licensor or
          licensee or franchisor or franchisee, including any such agreements
          relating to intangible property, and any distributorship, dealership,
          or sales agency agreement.

               (xii)   any insurance policies or contracts;

               (xiii)  any other contracts which may have material impact on
          the Company's results of operations or financial condition; and

               (xiv)   Any commitments to enter into any of the types of
          contracts and obligations referred to in this Section 3.1(n).

          Except as set forth in Section 3.1(n) of the Disclosure Schedule, the
 Company has not received notice of any default under any such contracts,
 obligations or commitments, the Company is not in default under any such
 contracts, obligations or commitments, there are no facts which, with notice
 and/or the passage of time, would constitute such a default, and no other party
 thereto is in default. All such contracts are enforceable by the Company in
 accordance with their terms. No consent is required under the contracts,
 obligations and commitments referred to in this Section 3.1(n) in connection
 with the Merger.

                                       14
<PAGE>
 
          None of the Company's purchase commitments is in excess of the normal,
ordinary, and usual requirements of the Company's business or was made at any
price substantially in excess of then-current market price, or contains terms
and conditions significantly more onerous than those which are usual and
customary in the Company's industry.

          Schedule 3.1(n) of the Disclosure Schedule lists, and the Company has
previously delivered to Parent true and complete copies of all outstanding bids,
proposals to perform services for customers, or unfilled orders quoting prices.

          The Company is not a party to or otherwise bound by any contract,
agreement, plan, lease, license, commitment, or undertaking which is materially
adverse, materially onerous, or materially harmful to any aspect of the
Company's business.

          (o) Assets. The equipment, furniture, computers, and other tangible
              ------
personal property owned, leased or used by the Company in its business is in
good condition, normal wear and tear excepted, and is in good operating order.
Section 3.1(o) of the Disclosure Schedule lists all furniture, equipment, and
other tangible personal property of the Company (other than inventory and
supplies) having an original cost of $5,000.00 or more. Section 3.1(o) of the
Disclosure Schedule also lists all equipment, furniture, computers and other
tangible personal property which (i) is used by the Company or which is located
on the Company's premises and (ii) which is not owned by the Company, except for
items leased under the Personal Property Leases and except for normal personal
property of employees. Except for sales of inventory in the ordinary course of
business, since the date of the most recent balance sheet contained in the
Financial Statements no tangible assets (whatever their original cost) have been
transferred from the Company, whether by sale, dividend or otherwise.

          (p) Intellectual Property . Each of the Company and its Subsidiaries
              ---------------------
owns or has a license to use all of the copyrights, patents, trademarks, service
marks, service names, trade names, applications therefore, technology rights and
licenses, computer software (including any source or object codes therefore or
documentation relating thereto), trade secrets, franchises, know-how,
inventions, and other intellectual property rights (collectively, the
"Intellectual Property") which is used by them in their respective businesses.
All software used in the Company's business and sold by the Company is year 2000
compliant. Each of the Company and its Subsidiaries is the owner of or has a
license to any Intellectual Property sold or licensed to a third party in
connection with their business operations, and have the right to convey by sale
or license any Intellectual Property so conveyed. Neither the Company nor any of
its Subsidiaries is in default under any of their Intellectual Property
licenses. No proceedings have been instituted or are pending, or to the
knowledge of the Company has any person claimed or alleged any rights to such
Intellectual Property. Except as set forth in Schedule 3.1(p) of the Disclosure
Schedule, neither the Company nor any of its Subsidiaries is obligated to any
recurring royalties to any person with respect to any such Intellectual
Property. No officer, director, or employee of the Company or any of its
Subsidiaries is a party to a contract or agreement which requires such officer,
director or employee to assign any interest in any Intellectual Property to the
Company or any of its Subsidiaries and to keep confidential any trade secrets,
proprietary data, customer information,
                                       15
<PAGE>
 
     or other business information of the Company or any of its Subsidiaries and
     to the knowledge of the Company no such officer, director or employee is a
     party to a contract or agreement which requires such officer, director or
     employee to assign any interest in any Intellectual Property to any person
     other than the Company or any of its subsidiaries or to keep confidential
     any trade secrets, proprietary data, customer information, or other
     business information of any person other than the Company or any of its
     Subsidiaries. Except as set forth in Section 3.1(p) of the Disclosure
     Schedule, no officer or director of the Company or any of its Subsidiaries,
     or to the knowledge of the Company, other employee of the Company or any of
     its Subsidiaries, is a party to any contract or agreement which restricts
     or prohibits such officer, director or employee from engaging in activities
     competitive with any person.

          (q)  Accounts Receivable.  All accounts receivable of the
               -------------------                                   
     Company reflected in the most recent balance sheets contained in the
     Financial Statements originated in the ordinary course of its business, are
     valid, and to the knowledge of the Company are fully collectible and not
     subject to any defense, counterclaim or setoff, except and only to the
     extent of the reserve against accounts receivable shown on such balance
     sheet.

          (r)  Properties.  Each of the Company and its Subsidiaries (i) has
               ----------                                                     
     good, clear and marketable title to all the properties and assets reflected
     in the latest balance sheet of the Company contained in the Financial
     Statements as being owned by the Company or one of its Subsidiaries or
     acquired after the date thereof (except properties sold or otherwise
     disposed of since the date thereof in the ordinary course of business),
     free and clear of (a) all Liens except statutory liens securing payments
     not yet due and (b) all real property mortgages and deeds of trust and (ii)
     is the lessee of all leasehold estates reflected in the latest financial
     statements or acquired after the date thereof and is in possession of the
     properties purported to be leased thereunder, and each such lease is valid
     without default thereunder by the lessee or, to the Company's knowledge,
     the lessor.

          (s) Transactions with Directors, Officers, Employees and Affiliates .
              --------------------------------------------------------------- 
     There have been no transactions since December 31, 1997 between the Company
     and any director, officer, employee or affiliate of the Company, except on
     an arm's length basis in accordance with normal business practices. Since
     June 30, 1997 none of the officers, directors, employees or affiliates of
     the Company, or any member of the immediate family of any such persons, has
     been a director of officer of, or has had a material interest in, any firm,
     corporation, association or business enterprise which during such period
     has been a material supplier, customer or sales agent of the Company or has
     competed to a material extent with the Company.

          (t)  Insurance. The Company has not received any notice of
               ---------                                              
     cancellation with respect to any insurance policy of the Company.  All
     premiums due under any such insurance policy have been paid in full.  The
     Company has timely filed all claims or timely notified insurance carriers
     of events or circumstances giving rise to any claims under such policies.

          (u)  Brokers.  Except for the fee payable to National
               -------                                           
     Securities Corporation ("National") pursuant to that certain letter
     agreement dated December 2, 1997, between the Company and National, no
     broker, investment banker, financial advisor or other person is entitled to
     any broker's, finder's, financial advisor's or other similar fee or
     commission in connection with the transactions contemplated by this
     Agreement based upon arrangements made by or on behalf of the Company.

          (v)  Asset Sales; Merger.  The Company has not, except for
               -------------------                                    
     sales of inventory in the ordinary course of business, sold, transferred or
     distributed any significant portion of its assets during the two-year
     period preceding the date hereof nor has the Company taken any other action

                                       16
<PAGE>
 
     which would preclude the Merger from qualifying as a reorganization within
     the meaning of Section 368 of the Code.

          (w)  Pooling of Interests.  To the Company's knowledge,
               --------------------                                
     based on consultation with KPMG Peat Marwick LLP, its independent auditors,
     neither the Company nor any of its officers, directors or stockholders has
     taken any action which would preclude Parent's ability to account for the
     Merger as a pooling of interests.

          (x)  Full Disclosure.  No representation or warranty made
               ---------------                                       
     by the Company under or in connection with this Agreement, no certification
     furnished or to be furnished to Parent pursuant to this Agreement, and no
     agreements, instruments or documents delivered by the Company to Parent or
     its counsel hereunder, contains or will contain any untrue statement of a
     material fact or omits or will omit to state a material fact necessary to
     make the statements contained herein or therein not misleading.

          (y) Board Recommendation.    The Board of Directors of the
              --------------------                                  
     Company, pursuant to an action in writing, has by unanimous action of all
     directors then in office (i) determined that this Agreement and the
     transactions contemplated hereby, including the Merger, are fair to and in
     the best interests of the stockholders of the Company, and (ii) resolved to
     recommend that the holders of the shares of Company Stock approve this
     Agreement and the transactions contemplated herein, including the Merger.

          (z) Required Company Vote.    The Company Stockholder
              ---------------------                            
     Approval which has been obtained prior to the signing of this Agreement,
     being the affirmative vote of a majority of the outstanding shares of the
     Company Common Stock, is the only vote of the holders of any class or
     series of the Company's securities necessary to approve this Agreement, the
     Merger and the other transactions contemplated hereby.  Prior to the
     signing of this Agreement, registered holders of more than 50% of the
     Company Common Stock entitled to vote on the Merger have given Parent
     irrevocable proxies granting Parent the right to vote their shares of
     Company Common Stock at any meeting called to consider the Merger, for the
     approval of this Agreement, the Merger and all transactions contemplated
     herein.

              (aa)  Information Supplied.    None of the information
                    --------------------                            
     supplied or to be supplied by the Company for inclusion or incorporation by
     reference in (i) the proxy statement to be filed with the SEC by Parent in
     connection with the Parent stockholder approval of the Merger (the "Proxy
     Statement") will, at the time the Proxy Statement is filed with the SEC,
     and at any time it is amended or supplemented, contain any untrue statement
     of a material fact or omit to state any material fact required to be stated
     therein or necessary to make the statements therein regarding the Company
     not misleading, except that no representation is made by the Company with
     respect to statements made or incorporated by reference therein based on
     information supplied by Parent for inclusion or incorporation by reference
     therein.

     3.2  Representations and Warranties of Parent.  Parent represents
          ----------------------------------------                      
and warrants to the Company as follows:

          (a)  Organization, Standing and Corporate Power.  Each of Parent and
               ------------------------------------------                       
     Sub is duly organized, validly existing and in good standing under the laws
     of the jurisdiction in which it is incorporated and has the requisite
     corporate power and authority to carry on its business as now being
     conducted.  Each of Parent and Sub is duly qualified or licensed to do
     business and is in 

                                       17
<PAGE>
 
     good standing in each jurisdiction in which the nature of its business or
     the ownership or leasing of its properties makes such qualification or
     licensing necessary, other than in such jurisdictions where the failure to
     be so qualified or licensed (individually or in the aggregate) would not
     have a material adverse effect with respect to Parent.

          (b)  Subsidiaries.  The only direct or indirect subsidiary of Parent
               ------------                                                     
     is Sub.  All the outstanding shares of capital stock of Sub have been
     validly issued and are fully paid and nonassessable and are owned (of
     record and beneficially) by Parent free and clear of all Liens.

          (c)  Capital Structure.  The authorized capital stock of Parent
               -----------------                                           
     consists of 10,000,000 shares of Parent Stock and 5,000,000 shares of
     preferred stock, with such par value as the board of directors of Parent
     may designate.  As of the date of this Agreement:  (i) 3,351,616 shares of
     Parent Common Stock, and 267,500 shares of Parent 10% Preferred Stock
     (which at a future date, may be convertible into Parent Common Stock) are
     issued and outstanding or are reserved for issuance pursuant to signed
     Subscription Agreements; (ii) 1,800,000 shares of Parent Common Stock are
     reserved for issuance upon exercise of authorized but unissued options
     under Parent's 1995 Stock Option Plan; (iv) 1,326,567 shares of Parent
     Common Stock are issuable upon exercise of outstanding options under
     Parent's 1995 Stock Option Plan; and (v) 1,004,000 shares of Parent Common
     Stock are issuable upon exercise of issued and outstanding common stock
     purchase warrants.  Except as set forth above, no shares of capital stock
     or other equity securities of Parent are issued, reserved for issuance or
     outstanding.  All outstanding shares of capital stock of Parent are, and
     all shares of Parent Stock which may be issued pursuant to this Agreement
     will be, when issued, duly authorized, validly issued, fully paid and
     nonassessable and not subject to preemptive rights.  All shares of Parent
     Stock issued pursuant to this Agreement will, when so issued, be registered
     or exempt from registration under any applicable federal or state
     securities laws.  Other than the 10% Preferred Stock, there are no
     outstanding bonds, debentures, notes or other indebtedness or other
     securities of Parent having the right to vote  on any matters on which
     stockholders of Parent may vote.  Except as set forth above, there are no
     outstanding securities, options, warrants, calls, or rights obligating
     Parent or any of its subsidiaries to issue, deliver or sell, or cause to be
     issued, delivered or sold, additional shares of capital stock or other
     equity securities of Parent or any of its subsidiaries or obligating Parent
     or any of its subsidiaries to issue, grant, extend or enter into any such
     security, option, warrant, call, or right.  The authorized capital stock of
     Sub consists of 10,000 shares of common stock, par value $.01 per share.

          (d)  Authority; Noncontravention.  Parent and Sub have all requisite
               ---------------------------                                      
     corporate power and authority to enter into this Agreement and to
     consummate the transactions contemplated by this Agreement.  The execution
     and delivery of this Agreement by Parent and Sub and the consummation by
     Parent and Sub of the transactions contemplated by this Agreement have been
     duly authorized by all necessary corporate action on the part of Parent and
     Sub and no other corporate action on the part of the Company or Sub is
     necessary to authorize the execution and delivery of this Agreement or the
     consummation by Parent and Sub of the transactions contemplated hereby.
     However, the approval of the transactions contemplated in this Agreement of
     the shareholders of Parent, which has not been obtained as of the date of
     this Agreement, is required under applicable rules of The Nasdaq Stock
     Market, Inc. for Parent's Common Stock to continue to be listed on the
     Nasdaq Small Cap Market.  This Agreement has been duly executed and
     delivered by and constitutes a valid and binding obligation of each of
     Parent and Sub, enforceable against such party in accordance with its
     terms.  The execution and delivery of this Agreement does not, and the
     consummation of the transactions contemplated by this Agreement 

                                       18
<PAGE>
 
     and compliance with the provisions hereof will not (a) conflict with or
     result in any breach of any provision of the articles of incorporation or
     bylaws of either Parent or Sub, or (b) conflict with, or result in any
     breach or violation of, or constitute a default under (with or without
     notice or lapse of time, or both), or give rise to a right of termination,
     cancellation or acceleration under (i) any loan or credit agreement, note,
     bond, mortgage, indenture, lease or other agreement, instrument, permit,
     concession, franchise or license applicable to Parent or Sub or their
     respective properties or assets or (ii) any judgment, order, decree,
     statute, law, ordinance, rule, regulation or arbitration award applicable
     to Parent or Sub or their respective properties or assets, or (c) result in
     the creation of any Lien upon any of the properties or assets of Parent or
     Sub, other than, in the case of clauses (b) and (c), any such conflicts,
     breaches, violations, defaults, rights, losses or Liens that individually
     or in the aggregate could not have a material adverse effect with respect
     to Parent or could not prevent, hinder or materially delay the ability of
     Parent to consummate the transactions contemplated by this Agreement. No
     consent, approval, order or authorization of, or registration, declaration
     or filing with, or notice to, any Governmental Entity is required by or
     with respect to Parent or Sub or in connection with the execution and
     delivery of this Agreement by Parent or Sub or the consummation by Parent
     or Sub, as the case may be, of any of the transactions contemplated by this
     Agreement, except for (i) the filing with the SEC of such reports under the
     Securities Act of 1933, as amended (the "Securities Act") and the
     Securities Exchange Act of 1934 (the "Exchange Act") as may be required in
     connection with this Agreement and the transactions contemplated hereby,
     (ii) the filing of the Articles of Merger with the Secretaries of State of
     the State of California and the State of Minnesota and appropriate
     documents with the relevant authorities of other states in which the
     Company is qualified to do business, and (iii) such other consents,
     approvals, orders, authorizations, registrations, declarations, filings or
     notices as may be required under the "takeover" or "blue sky" laws of
     various states.

          (e)  SEC Documents; Undisclosed Liabilities.  Parent has filed all
               --------------------------------------                         
     required reports, schedules, forms, statements and other documents with the
     SEC since May 23, 1996 (collectively, and in each case, including all
     exhibits and schedules thereto and documents incorporated by reference
     therein, the "Parent SEC Documents").  As of their respective dates, the
     Parent SEC Documents complied in all material respects with the
     requirements of the Securities Act or the Exchange Act, as the case may be,
     and the rules and regulations of the SEC promulgated thereunder applicable
     to such Parent SEC Documents, and none of the Parent SEC Documents
     (including any and all financial statements included therein) as of such
     date contained any untrue statement of a material fact or omitted to state
     a material fact required to be stated therein or necessary in order to make
     the statements therein, in light of the circumstances under which they were
     made, not misleading.  The financial statements of Parent included in the
     Parent SEC Documents comply as to form in all material respects with
     applicable accounting requirements and the published rules and regulations
     of the SEC with respect thereto, have been prepared in accordance with
     generally accepted accounting principles (except, in the case of unaudited
     consolidated quarterly statements, as permitted by Form 10-QSB of the SEC)
     applied on a consistent basis during the periods involved (except as may be
     indicated in the notes thereto) and fairly present the consolidated
     financial position of Parent as of the dates thereof and the results of
     operations and changes in cash flows for the periods then ended (subject,
     in the case of unaudited quarterly statements, to normal year-end audit
     adjustments).  Since December 31, 1997, neither Parent nor any of its
     subsidiaries has incurred any liabilities or obligations of any nature
     (whether accrued, absolute, contingent or otherwise) except (i) as and to
     the extent set forth on the balance sheet of Parent as of December 31, 1997
     (including the notes thereto), (ii) the placement of up to $2,675,000
     stated amount of Parent's 10% Preferred Stock, (iii) as 

                                       19
<PAGE>
 
     incurred in connection with the transactions contemplated by this
     Agreement, (iv) as incurred after December 31, 1997 in the ordinary course
     of business and consistent with past practice, (v) as described in the SEC
     Documents filed since September 30, 1997 (the "Recent Parent SEC
     Documents"), or (vi) as would not, individually or in the aggregate, have a
     material adverse effect with respect to Parent.

          (f)  Absence of Certain Changes or Events.  Except as disclosed in
               ------------------------------------                           
     this Agreement, the Recent Parent SEC Documents and the unaudited balance
     sheet of Parent as of December 31, 1997 (including the notes thereto),
     since December 31, 1997, Parent has conducted its business only in the
     ordinary course consistent with past practice, and there is not and has not
     been (i) any material adverse change with respect to Parent; (ii) any
     condition, event or occurrence which, individually or in the aggregate,
     could reasonably be expected to have a material adverse effect or give rise
     to a material adverse change with respect to Parent; or (iii) any
     condition, event or occurrence which could reasonably be expected to
     prevent, hinder or materially delay the ability of Parent to consummate the
     transactions contemplated by this Agreement.

          (g)  Litigation. There is no suit, action or proceeding or
               ----------                                             
     investigation pending or, to the knowledge of Parent, threatened against or
     affecting Parent or Sub or any basis for any such suit, action, proceeding
     or investigation.  There is no judgment, decree, injunction, rule or order
     of any Governmental Entity or arbitrator outstanding against Parent or Sub.

          (h)  Tax Returns and Tax Payments.  Parent has timely filed, with
               ----------------------------                                  
     the appropriate authority, all tax returns required to be filed by it, has
     paid all Taxes shown thereon to be due and has provided adequate reserves
     in the Financial Statements for any Taxes that have not been paid, whether
     or not shown as being due on any Tax Returns.  All Tax Returns were correct
     as filed.  Further, (i) no claim for unpaid Taxes has been asserted by a
     Tax authority or has become a lien (except for liens not yet due and
     payable) against the property of Parent or is being asserted against
     Parent, (ii) no audit of any Tax Return of Parent is being conducted by any
     Government Entity, and (iii) no extension of the statute of limitations on
     the assessment of any Taxes has been granted by Parent and is currently in
     effect.  Parent has not been a member of any consolidated, combined,
     unitary or aggregate group for Tax purposes.

          (i)  Compliance with Laws; Environmental Matters.
               -------------------------------------------   

               (i)  Parent and its operations and assets, including owned or
          leased real property, are in compliance in all material respects with
          all statutes, laws, regulations, ordinances, rules, judgments, orders,
          decrees or arbitration awards applicable thereto, including
          Environmental Laws.

               (ii) There are no legal, administrative, arbitral or other
          proceedings, claims, actions, causes of action, private environmental
          investigations or remediation activities or governmental
          investigations of any nature seeking to impose, or that reasonably
          could be expected to result in the imposition, on Parent of any
          liability or obligations arising under common law standards relating
          to environmental protection, human health or safety, or under any
          local, state, federal, national or supernational environmental
          statute, regulation or ordinance, including the Environmental Laws,
          pending or, to the knowledge of Parent, threatened, against Parent,
          which liability or obligation would have or would reasonably be
          expected to have a material adverse effect on Parent.  To the
          knowledge of the Parent, there is no reasonable basis for any such
          proceeding, claim, 

                                       20
<PAGE>
 
          action or governmental investigation that would impose any liability
          or obligation that would have or would reasonably be expected to have
          a material adverse effect on Parent. To the knowledge of Parent,
          during or prior to the period of (i) its ownership or operation of any
          of its current properties, (ii) its participation in the management of
          any property, or (iii) its holding of a security interest or other
          interest in any property, there was no release or threatened release
          of hazardous, toxic, radioactive or dangerous materials or other
          materials regulated under Environmental Laws in, on, under or
          affecting any such property which would reasonably be expected to have
          a material adverse effect on Parent. Parent is not subject to any
          agreement, order, judgment, decree, letter or memorandum by or with
          any court, governmental authority, regulatory agency or third party
          imposing any liability or obligations pursuant to or under any
          Environmental Law.

          (j) Intellectual Property. Parent owns or has a license to use all of
              ---------------------
     the copyrights, patents, trademarks, service marks, service names, trade
     names, applications therefore, technology rights and licenses, computer
     software (including any source or object codes therefore or documentation
     relating thereto), trade secrets, franchises, know-how, inventions, and
     other intellectual property rights (collectively, the "Intellectual
     Property") which is used in its business. All software used in Parent's
     business and sold by Parent is year 2000 compliant. Parent is the owner of
     or has a license to any Intellectual Property sold or licensed to a third
     party in connection with its business operations, and has the right to
     convey by sale or license any Intellectual Property so conveyed. Parent is
     not in default under any of its Intellectual Property licenses. No
     proceedings have been instituted or are pending, or to the knowledge of
     Parent has any person claimed or alleged any rights to such Intellectual
     Property. Parent is not obligated to any recurring royalties to any person
     with respect to any such Intellectual Property. No officer, director, or
     employee of Parent is a party to a contract or agreement which requires
     such officer, director or employee to assign any interest in any
     Intellectual Property to Parent and to keep confidential any trade secrets,
     proprietary data, customer information, or other business information of
     Parent and to the knowledge of Parent no such officer, director or employee
     is a party to a contract or agreement which requires such officer, director
     or employee to assign any interest in any Intellectual Property to any
     person other than Parent or to keep confidential any trade secrets,
     proprietary data, customer information, or other business information of
     any person other than Parent. No officer or director of Parent, or to the
     knowledge of Parent, other employee of Parent, is a party to any contract
     or agreement which restricts or prohibits such officer, director or
     employee from engaging in activities competitive with any person.

          (k)  Properties.  Parent (i) has good, clear and marketable title to
               ----------                                                       
     all the properties and assets reflected in the latest balance sheet of
     Parent contained in the Financial Statements as being owned by Parent or
     acquired after the date thereof (except properties sold or otherwise
     disposed of since the date thereof in the ordinary course of business),
     free and clear of (a) all Liens except statutory liens securing payments
     not yet due and (b) all real property mortgages and deeds of trust and (ii)
     is the lessee of all leasehold estates reflected in the latest financial
     statements or acquired after the date thereof and is in possession of the
     properties purported to be leased thereunder, and each such lease is valid
     without default thereunder by the lessee or, to Parent's knowledge, the
     lessor.

          (l)  Interim Operations of Sub.  Sub was formed on March 4, 1998,
               -------------------------                                     
     solely for the purposes of engaging in the transactions contemplated
     hereby, has engaged in no other business activities and has conducted its
     operations only as contemplated hereby.

                                       21
<PAGE>
 
          (m)  Brokers.  No broker, investment banker, financial advisor or
               -------                                                       
     other person is entitled to or may be paid any broker's, finder's,
     financial advisor's or other similar fee or commission in connection with
     the transactions contemplated by this Agreement based upon arrangements
     made by or on behalf of Parent.

                                   ARTICLE 4

                             COVENANTS RELATING TO
                      CONDUCT OF BUSINESS PRIOR TO MERGER

     4.1  Conduct of Business of the Company.  From the date of this
          ----------------------------------                          
Agreement to the Effective Time (except as otherwise specifically required by
the terms of this Agreement), the Company shall, and shall cause its
Subsidiaries to, act and carry on their respective businesses in the usual,
regular and ordinary course of business consistent with past practice and, to
the extent consistent therewith, use its best efforts to preserve intact their
current business organizations, keep available the services of their current
officers and employees and preserve their relationships with customers,
suppliers, franchisees, licensors, licensees, advertisers, distributors and
others having business dealings with them to the end that their goodwill and
ongoing businesses shall not be impaired in any material respect at the
Effective Time.  Without limiting the generality of the foregoing, from the date
of this Agreement to the Effective Time, the Company shall not, and shall not
permit any of its Subsidiaries to, without the prior written consent of Parent:

          (a) (i) declare, set aside or pay any dividends on, or make any other
     distributions in respect of, any of its capital stock, other than dividends
     and distributions by a direct or indirect wholly owned Subsidiary of the
     Company to its parent, (ii) split, combine or reclassify any of its capital
     stock or issue or authorize the issuance of any other securities in respect
     of, in lieu of or in substitution for shares of its capital stock, or (iii)
     purchase, redeem or otherwise acquire any shares of capital stock of the
     Company or any of its Subsidiaries or any other securities thereof or any
     rights, warrants or options to acquire any such shares or other securities;

          (b) authorize for issuance, issue, deliver, sell, pledge or otherwise
     encumber any shares of its capital stock or the capital stock of any of its
     Subsidiaries, any other voting securities or any securities convertible
     into, or any rights, warrants or options to acquire, any such shares,
     voting securities or convertible securities or any other securities or
     equity equivalents (including without limitation stock appreciation
     rights), or contractual obligation valued or measured by the value or
     market price of Company Common Stock (other than the issuance of Company
     Common Stock upon the exercise or conversion of stock options, warrants or
     convertible securities or pursuant to antidilution provisions of securities
     outstanding on the date of this Agreement and in accordance with their
     present terms, such issuance, together with the acquisitions of shares of
     Company Common Stock permitted under clause (a) above, being referred to
     herein as "Permitted Changes");

          (c) amend its articles of incorporation, by-laws or other comparable
     charter or organizational documents;

          (d) acquire or agree to acquire by merging or consolidating with, or
     by purchasing a substantial portion of the stock or assets of, or by any
     other manner, any business or any corporation, partnership, joint venture,
     association, or other business organization or division thereof;

                                       22
<PAGE>

          (e) sell, lease, license, mortgage or otherwise encumber or subject to
     any Lien or otherwise dispose of any of its properties or assets except in
     the ordinary course of business consistent with past practice;

          (f) (i) incur any indebtedness for borrowed money or guarantee any
     such indebtedness of another person, issue or sell any debt Securities or
     warrants or other rights to acquire any debt securities of the Company or
     any of its Subsidiaries, guarantee any debt securities of another person,
     enter into any "keep well" or other agreement to maintain any financial
     statement condition of another person or enter into any arrangement having
     the economic effect of any of the foregoing, except for short-term
     borrowings incurred in the ordinary course of business consistent with past
     practice, or (ii) make any loans, advances or capital contributions to, or
     investments in, any other person, other than to the Company or any direct
     or indirect wholly owned Subsidiary of the Company;

          (g) acquire or agree to acquire any assets or make or agree to make
     any capital expenditures except in the ordinary course of business
     consistent with past practice;

          (h) pay, discharge or satisfy any claims (including claims of
     shareholders), liabilities or obligations (absolute, accrued, asserted or
     unasserted, contingent or otherwise), except for the payment, discharge or
     satisfaction, of (i) liabilities or obligations in the ordinary course of
     business consistent with past practice or in accordance with their terms as
     in effect on the date hereof, (ii) liabilities reflected or reserved
     against in, or contemplated by, the most recent financial statements (or
     the notes thereto) of the Company set forth in Section 3.1(e) of the
     Disclosure Schedule, or waive, release, grant, or transfer any rights of
     value or modify or change in any respect any existing license, lease,
     contract or other document, other than in the ordinary course of business
     consistent with past practice;

          (i) adopt or amend in any respect (except as may be required by law or
     by this Agreement) any bonus, profit sharing, compensation, stock option,
     pension, retirement, deferred compensation, employment or other employee
     benefit plan, agreement, trust, fund or other arrangement for the benefit
     or welfare of any employee, director or former director or employee or,
     other than increases for individuals (other than officers and directors) in
     the ordinary course of business consistent with past practice, increase the
     compensation or fringe benefits of any director, employee or former
     director or employee; pay any benefit not required by any existing plan,
     arrangement or agreement, grant any new or modified severance or
     termination arrangement or increase or accelerate any benefits payable
     under its severance or termination pay policies in effect on the date
     hereof, other than any such increase or acceleration provided for under
     such policies as in effect on the date of this Agreement;

          (j) change any material accounting principle used by it, except for
     such changes as may be required to be implemented following the date of
     this Agreement pursuant to generally accepted accounting principles or
     rules and regulations of the SEC;

          (k) take any action that would, or is reasonably likely to, result in
     any of its representations and warranties in this Agreement becoming
     untrue, or result in any of the conditions to the Merger set forth in
     Article 6 not being satisfied;

          (l) except in the ordinary course of business and consistent with past
     practice, make any tax election or settle or compromise any federal, state,
     local or foreign income tax liability;

                                       23
<PAGE>
 
          (m) do anything which would preclude the Company from being a party to
     a pooling of interests transaction; and

          (n) authorize any of, or commit or agree to take any of, the foregoing
     actions.

                                   ARTICLE 5

                             ADDITIONAL AGREEMENTS

          5.1  Preparation of Proxy Statement; Stockholder Meeting.
               --------------------------------------------------- 

               (a) Promptly following the date of this Agreement, Parent shall
     prepare and file with the SEC a Proxy Statement which will be used by
     Parent to solicit approval of its stockholders of this Agreement, the
     Merger and the other transactions contemplated herein. Each of the Company
     and Parent shall use its reasonable best efforts to cause the Proxy
     Statement to be filed with the SEC as promptly as practicable and to have
     the Proxy Statement finalized as promptly as practicable after such filing.
     Parent shall also take any action (other than qualifying to do business in
     any jurisdiction in which it is not now so qualified) required to be taken
     under any applicable state securities laws in connection with the issuance
     of Parent Stock in the Merger, and the Company shall furnish all
     information concerning the Company and the holders of the Company Common
     Stock and rights to acquire Company Common Stock as may be reasonably
     requested in connection with any such action.

               (b) Parent will, as promptly as practicable following the date of
     this Agreement, duly call, give notice of, convene and hold a meeting of
     its stockholders (the "Stockholder Meeting") for the purpose of approving
     this Agreement, the Merger and the transactions contemplated herein. Parent
     will, through its Board of Directors, recommend to its stockholders
     approval of the foregoing matters. Parent will use its reasonable efforts
     to hold such meeting as soon as practicable after the date hereof.

          5.2  Letter of the Company's Accountants.  '  The Company shall use
               -----------------------------------                           
its best efforts to cause to be delivered to Parent a letter of KPMG Peat
Marwick LLP, the Company's independent public accountants, dated a date within
two business days before the date on which the Proxy Statement shall become
effective and addressed to Parent, in form and substance reasonably satisfactory
to Parent and customary in scope and substance for letters delivered by
independent public accountants in connection with registration statements.

          5.3  Parent Access to Information  .
               ----------------------------   

               (a) The Company shall, and shall cause its Subsidiaries,
     officers, employees, counsel, financial advisors and other representatives
     to, afford to Parent and its representatives reasonable access during
     normal business hours during the period prior to the Effective Time to its
     properties, books, contracts, commitments, personnel and records and,
     during such period, shall, and shall cause its Subsidiaries, officers,
     employees and representatives to, furnish promptly to Parent information
     concerning its business, properties, financial condition, operations and
     personnel as Parent may from time to time reasonably request. No
     investigation pursuant to this Section 5.3 shall affect any representations
     or warranties of the Company herein or the conditions to the obligations of
     the parties hereto.

                                       24
<PAGE>
 
          (b) The Company shall report on operational matters and promptly
     advise Parent orally and in writing of any change or event having, or
     which, insofar as can reasonably be foreseen, could have, a material
     adverse effect on the Company and its Subsidiaries taken as a whole.

     5.4  Registration of Parent Stock.  Within one hundred twenty (120) days
          ----------------------------                                    
after the Closing Date, Parent shall prepare and file a registration statement
(including a prospectus, pre- and post-effective amendments, and all exhibits
thereto) (the "Registration Statement"), covering the Parent Stock issued to the
shareholders of the Company in accordance with Section 2.3 of this Agreement and
any Parent Common Stock issuable upon exercise or conversion of the Prior
Securities converted into similar securities of Parent in accordance with
Section 2.2 of this Agreement with the Securities and Exchange Commission (the
"SEC") and use its best efforts to cause the Registration Statement to be
declared effective under the Securities Act of 1933, as amended (the "Securities
Act"), as promptly as practicable after its filing. The Registration Statement
shall be on form SB-2, Form S-1, Form S-3 or such other form as is appropriate
in order to register such Parent Stock with the SEC pursuant to section 5 of the
Securities Act. Parent shall use its best efforts to cause the Registration
Statement to be declared effective by the SEC as soon as possible following the
filing thereof and shall use its best efforts to maintain the Registration
Statement continually effective under the Securities Act for a period of two (2)
years after the date on which the Registration Statement is declared effective
by the SEC. No person may participate in any such registration unless such
person (i) agrees to execute, if so requested by Cohig & Associates, Inc.,
National Securities Corporation or other underwriter of Parent's securities, a
lockup agreement pursuant to which such person agrees not to offer, sell,
contract to sell, pledge, hypothecate, or otherwise dispose of any shares of
Parent Stock (or securities convertible into or exchangeable for Parent Stock )
beneficially owned or otherwise held by such person on the date of such
agreement or acquired on or prior to the effectiveness of the Registration
Statement for a period not to exceed eight months from the date of such
agreement and (ii) completes and executes all questionnaires, powers of
attorney, indemnities and other documents required under the terms of any such
registration.

     5.5  Board of Directors.  Parent shall use its best efforts to cause two
          ------------------                                               
persons selected by the Company and reasonably acceptable to Parent to be
nominated to and elected to serve on Parent's Board of Directors at Parent's
1998 Annual Meeting of Shareholders.

     5.6  Best Efforts.  Each of the parties agrees to use its best efforts to
          ------------                                               
take, or cause to be taken, all actions, and to do, or cause to be done, and to
assist and cooperate with the other parties in doing, all things necessary,
proper or advisable to consummate and make effective, in the most expeditious
manner practicable, the Merger and the other transactions contemplated by this
Agreement. Parent, Sub and the Company will use their best efforts and cooperate
with one another (i) in promptly determining whether any filings are required to
be made or consents, approvals, waivers, permits or authorizations are required
to be obtained under any applicable law or regulation or from any governmental
authorities or third parties in connection with the transactions contemplated by
this Agreement and (ii) in promptly making any such filings, in furnishing
information required in connection therewith and in timely seeking to obtain any
such consents, approvals, waivers, permits or authorizations.

     5.7  Expenses.  Whether or not the Merger is consummated, all costs and
          --------                                                        
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses.


                                       25
<PAGE>
 
     5.8  Public Announcements.  Parent and Sub, on the one hand, and the
          --------------------                                             
Company, on the other hand, will consult with each other before issuing, and
provide each other the opportunity to review and comment upon, any press release
or other public statements with respect to the transactions contemplated by this
Agreement, including the Merger, and shall not issue any such press release or
make any such public statement prior to such consultation, except as may be
required by applicable law, court process or by obligations pursuant to any
listing agreement with any national securities exchange or The Nasdaq Stock
Market, Inc. The parties agree that the initial press release or releases to be
issued with respect to the transactions contemplated by this Agreement shall be
mutually agreed upon prior to the issuance thereof.

     5.9  Takeover Statutes.  If any "fair price," "moratorium," "control share
          -----------------                                                
acquisition" or other form of antitakeover statute or regulation shall become
applicable to the transactions contemplated hereby, the Company and the members
of the Board of Directors of the Company shall grant such approvals and take
such actions as are reasonably necessary so that the transactions contemplated
hereby may be consummated as promptly as practicable on the terms contemplated
hereby and otherwise act to eliminate or minimize the effects of such statute or
regulation on the transactions contemplated hereby.

     5.10 Certain Agreements.  Neither the Company nor any Subsidiary of the
          ------------------                                              
Company will waive or fail to enforce any provision of any confidentiality or
standstill or similar agreement to which it is a party without the prior written
consent of Parent.

                                   ARTICLE 6

                             CONDITIONS PRECEDENT

     6.1  Conditions to Each Party's Obligation to Effect the Merger.  The
          ----------------------------------------------------------
respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:

          (a)  No Injunctions or Restraints.  No temporary restraining order,
               ----------------------------                                    
     preliminary or permanent injunction or other order issued by any court of
     competent jurisdiction or other legal restraint or prohibition preventing
     the consummation of the Merger shall be in effect; provided, however, that
                                                        --------  -------      
     the parties hereto shall use their best efforts to have any such
     injunction, order, restraint or prohibition vacated.

          (b)  Nasdaq Governance Requirements.  The issuance of Parent Stock
               ------------------------------                                 
     pursuant to the Merger shall satisfy all applicable requirements of The
     Nasdaq Stock Market, Inc. for Parent's Common Stock to be listed on the
     Nasdaq Small Cap Market.

          (c)  Compliance with Federal and State Securities Laws.  The issuance
               -------------------------------------------------        
     of Parent's securities to the holders of the Company Common Stock and Prior
     Securities shall be exempt from the registration requirements of the
     Securities Act, and applicable state blue sky laws.

     6.2  Conditions to Obligation of Parent and Sub.  The obligations of Parent
          ------------------------------------------                       
and Sub to effect the Merger are further subject to the following conditions:

          (a)  Representations and Warranties.  The representations and
               ------------------------------
     warranties of the Company set forth in this Agreement shall be true and
     correct in all respects, in each case as of the date of this Agreement and
     as of the Closing Date as though made on and as of the Closing


                                       26
<PAGE>
 
     Date. Parent shall have received a certificate signed on behalf of the
     Company by the chief executive officer of the Company to such effect.

          (b)  Performance of Obligations of the Company.  The Company shall
               -----------------------------------------
     have performed the obligations required to be performed by it under this
     Agreement at or prior to the Closing Date (except for such failures to
     perform as have not had or could not reasonably be expected, either
     individually or in the aggregate, to have a material adverse effect with
     respect to the Company or adversely affect the ability of the Company to
     consummate the transactions herein contemplated or perform its obligations
     hereunder), and Parent shall have received a certificate signed on behalf
     of the Company by the chief executive officer of the Company to such
     effect.

          (c)  Consents, etc.  Parent shall have received evidence, in form and
               -------------
     substance reasonably satisfactory to it, that such licenses, permits,
     consents, approvals, authorizations, qualifications and orders of
     governmental authorities and other third parties as are necessary in
     connection with the transactions contemplated hereby have been obtained,
     except such licenses, permits, consents, approvals, authorizations,
     qualifications and orders which are not, individually or in the aggregate,
     material to Parent or the Company or the failure of which to have been
     received would not (as compared to the situation in which such license,
     permit, consent, approval, authorization, qualification or order had been
     obtained) materially dilute the aggregate benefits to Parent of the Merger.

          (d)  Affiliate Letters.  Parent shall have received the agreements
               -----------------
     from each of the officers and directors of the Company and Parent and from
     each of the beneficial owners of 5% or more of the outstanding shares of
     Company Common Stock and Parent Common Stock, pursuant to which they shall
     have agreed to not take any action which adversely affect the
     appropriateness of pooling of interests accounting for the Merger. The
     agreements shall be in substantially the form of Exhibit 6.2(d) hereto.

          (e)  Opinion of Counsel to the Company.  Parent shall have received,
               ---------------------------------
     on and as of the Closing Date, an opinion of Pollet & Woodbury, counsel to
     the Company, in usual and customary form reasonably acceptable to Parent,
     to the effect that (i) the Company is a corporation duly incorporated,
     validly existing and in good standing under the laws of the State of
     California, (ii) the execution and delivery of this Agreement by the
     Company and the consummation by the Company of the transactions
     contemplated hereby have been duly authorized by all necessary corporate
     and shareholder action, (iii) this Agreement has been duly executed and
     delivered by the Company and constitutes a valid and binding obligation of
     the Company, enforceable in accordance with its terms (subject to customary
     exceptions), and (iv) the execution and delivery of this Agreement does
     not, and the consummation by the Company of the transactions contemplated
     hereby will not, (a) violate the Articles of Incorporation or Bylaws of the
     Company, or (b) to the best knowledge of such counsel based upon due
     inquiry of the Company, conflict with, or result in any breach or violation
     of, or constitute a default under (with or without notice or lapse of time,
     or both), or give rise to a right of termination, cancellation or
     acceleration under (i) any loan or credit agreement, note, bond, mortgage
     indenture, lease or other agreement, instrument, permit, concession,
     franchise, or license applicable to the Company of any of its Subsidiaries
     or their respective properties and assets, or (ii) any judgment, order,
     decree, statute, law, rule, ordinance, regulation or arbitration award
     applicable to the Company or any of its Subsidiaries or their respective
     properties or assets, or


                                       27
<PAGE>
 
     (iii) result in the creation of any Lien upon any of the properties or
     assets of the Company or any of its Subsidiaries.

          (f)  Opinion of Accountants.  Parent shall have received a letter from
               ----------------------
     Arthur Andersen LLP regarding such firm's concurrence with Parent
     management's conclusions as to the appropriateness of pooling of interests
     accounting for the Merger under Accounting Principles Board Opinion No. 16,
     if consummated in accordance with this Agreement. In addition, the
     Company's accountants shall have provided a letter, satisfactory in form
     and substance to Parent, regarding the appropriateness of pooling of
     interests accounting for a transaction involving the Company.

          (g)  CompuLearning Systems, Inc.  The Company shall have completed the
               --------------------------
     acquisition of CompuLearning Systems, Inc., the owner and operator of the
     Electronic University Network, and shall have completed payment in full for
     the purchase price thereof.

          (h)  Total Liabilities.  The total liabilities of the Company and its
               -----------------
     consolidated Subsidiaries shall not exceed $915,000 as of the Closing Date
     plus the amount of any indebtedness incurred by the Company following the
     execution of this Agreement which Parent has previously approved, it being
     understood that the Company expects to require up to $300,000 of additional
     funding to sustain its operations prior to the Closing Date.

          (i)  Dissenter's Rights.  At least 95% of the shareholders of the
               ------------------
     Company shall have waived any dissenter's rights they may have with respect
     to the Merger pursuant to the CGCL.

          (j)  Undertakings of Company Securities Holders.  All of the
               ------------------------------------------
     shareholders of the Company and the holders of the Company's other
     securities shall have completed, executed and delivered to Parent the
     Securities Holder Agreement and Undertakings in substantially the form of
     Exhibit 6.2(j) hereto.

          (k)  Noncompete Agreements.  Andre Durand, Steven Eskow and Sarah
               ---------------------                                         
     Blackmum, executive officers of the Company shall have entered into
     noncompete agreements with Parent in substantially the form of Exhibit
     6.2(k) hereto.

          (l)  Releases, Termination of Agreements.  Parent shall have received
               -----------------------------------                      
     such releases, undertakings or agreements as it shall reasonably require to
     evidence that neither the Company nor any of its affiliates have any
     ongoing obligations or commitments with respect to Durand Brazil or any of
     its officers, directors, shareholders, affiliates or related companies,
     other than the Company's commitments pursuant to the exclusive
     CommunityWare(R) license for Brazil, a copy of which is included as Exhibit
     6.2(l) hereto. In addition, Parent shall have received such evidence as it
     may reasonably require to demonstrate that the Company's agreements with
     Spencer Trask Securities and AJ Capital have been terminated and are of no
     further force and effect.

     6.3  Conditions to Obligation of the Company.  The obligation of the
          ---------------------------------------                          
Company to effect the Merger is further subject to the following conditions:

          (a)  Representations and Warranties.  The representations and
               ------------------------------                            
     warranties of Parent and Sub set forth in this Agreement shall be true and
     correct in all respects, in each case as of the date of this Agreement and
     as of the Closing Date as though made on and as of the Closing Date;


                                       28
<PAGE>
 
     provided, however, that between the date of this Agreement and the Closing
     Date, Parent may have issued or agreed to issue additional securities of
     Parent in connection with one or more private or public offerings of its
     securities or incurred or agreed to incur additional indebtedness in order
     to raise additional working capital.  The Company shall have received a
     certificate signed on behalf of Parent by the chief executive officer of
     Parent to such effect.

          (b)  Performance of Obligations of Parent and Sub  .  Parent and Sub
               --------------------------------------------                   
     shall have performed the obligations required to be performed by them under
     this Agreement at or prior to the Closing Date (except for such failures to
     perform as have not had or could not reasonably be expected, either
     individually or in the aggregate, to have a material adverse effect with
     respect to Parent or adversely affect the ability of Parent to consummate
     the transactions herein contemplated or perform its obligations hereunder),
     and the Company shall have received a certificate signed on behalf of
     Parent by the chief executive officer of Parent to such effect.

          (c)  Opinion of Counsel to Parent  .  The Company shall have received,
               ----------------------------                                     
     on and as of the Closing Date, an opinion of Gray, Plant, Mooty, Mooty &
     Bennett, P.A., counsel to Parent, in usual and customary form reasonably
     acceptable to the Company, to the effect that (i) Parent and Sub are
     corporations duly incorporated, validly existing and in good standing under
     the laws of the state of their incorporation, (ii) the execution and
     delivery of this Agreement by Parent and Sub and the consummation by Parent
     and Sub of the transactions contemplated hereby have been duly authorized
     by all necessary corporate action, (iii) this Agreement has been duly
     executed and delivered by Parent and Sub and constitutes a valid and
     binding obligation of each of Parent and Sub, enforceable in accordance
     with its terms (subject to customary exceptions), and (iv) the execution
     and delivery of this Agreement does not, and the consummation by Parent and
     Sub of the transactions contemplated hereby will not violate the Articles
     of Incorporation or Bylaws of Parent or Sub.

                                   ARTICLE 7

                       TERMINATION, AMENDMENT AND WAIVER

     7.1  Termination.  This Agreement may be terminated and abandoned at any
          -----------                                                      
time prior to the Effective Time of the Merger:

          (a) by mutual written consent of Parent and the Company; or

          (b) by either Parent or the Company if any Governmental Entity shall
     have issued an order, decree or ruling or taken any other action
     permanently enjoining, restraining or otherwise prohibiting the Merger and
     such order, decree, ruling or other action shall have become final and
     nonappealable; or

          (c) by Parent if the Merger shall not have been consummated on or
     before July 31, 1998; or

          (d) by Parent if the Company shall have withdrawn, modified or amended
     in any respect adverse to Parent or Sub its approval or recommendation of
     this Agreement or the Merger; or

          (e) by Parent, if the Company fails to perform any of its material
     obligations under this Agreement; or


                                       29
<PAGE>
 
          (f) by the Company, if Parent or Sub fails to perform any of their
     respective material obligations under this Agreement; or

          (g) by Parent if the Merger cannot be accounted for as a pooling of
     interests.

     7.2  Effect of Termination.  In the event of termination of this Agreement
          ---------------------                                        
by either the Company or Parent as provided in Section 7.1, this Agreement shall
forthwith become void and have no effect, without any liability or obligation on
the part of Parent, Sub or the Company, other than pursuant to the provisions of
Section 5.7 and this Section 7.2. Nothing contained in this Section 7.2 shall,
however, relieve any party for any breach of the representations, warranties,
covenants or agreements set forth in this Agreement prior to any such
termination.

     7.3  Amendment.  This Agreement may be amended by the parties at any time
          ---------                                                        
before or after required approval of the Merger by the stockholders of the
Company; provided, however, that after such approval, there shall be made no
         --------  -------                                                  
amendment that by law requires further approval by such stockholders without the
further approval of such stockholders.  This Agreement may not be amended except
by an instrument in writing signed on behalf of each of the parties.

     7.4  Extension; Waiver.  At any time prior to the Effective Time, the
          -----------------                                             
parties may (a) extend the time for the performance of any of the obligations or
other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties contained in this Agreement or in any document
delivered pursuant to this Agreement or (c) subject to the proviso of Section
7.3, waive compliance with any of the agreements or conditions contained in this
Agreement. Any agreement on the part of a party to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf of
such party. The failure of any party to this Agreement to assert any of its
rights under this Agreement or otherwise shall not constitute a waiver of such
rights.

                                   ARTICLE 8

                              GENERAL PROVISIONS

     8.1  Survival of Representations and Warranties.  The respective
          ------------------------------------------                   
representations and warranties of each of the parties to this Agreement shall
not be deemed to be waived or otherwise affected by any investigation made by
the other parties to this Agreement. The representations of Parent, Sub, and the
Company contained in this Agreement or in any instrument delivered pursuant to
this Agreement shall survive the Merger.

     8.2  Further Assurances.  From time to time, on and after the Effective
          ------------------                                       
Time, as and when requested by Parent or its successors or assigns, the proper
officers and directors of the Company immediately before the Effective Time, or
other proper officers or directors, shall, at Parent's expense, and for and on
behalf and in the name of the Company, or otherwise, execute and deliver all
such deeds, bills of sale, assignments and other instruments and shall take or
cause to be taken such further or other reasonable actions as Parent or its
successors or assigns may deem necessary or desirable in order to confirm or
record or otherwise transfer to the Surviving Corporation title to and
possession of all the properties, rights, privileges, powers, franchises and
immunities of the Company and otherwise to reasonably carry out fully the
provisions and purposes of this Agreement.

     8.3  Notices.  All notices, requests, claims, demands and other
          -------                                                     
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent by overnight


                                       30
<PAGE>
 
courier (providing proof of delivery) to the parties at the following addresses
(or at such other address for a party as shall be specified by like notice):

          (a)  if to Parent or Sub, to:

               Online System Services, Inc.
               1800 Glenarm Place, Suite 800
               Denver, Colorado 80202
               Attention:  Chairman of the Board

               with a copy to:

               Gray, Plant, Mooty, Mooty & Bennett, P.A.
               33 South Sixth Street, Suite 3400
               Minneapolis, Minnesota 55402
               Attention:  Lindley S. Branson

          (b)  if to the Company, to:

               Durand Communications, Inc.
               147 Castilian Drive
               Santa Barbara, California 93117
               Attention:  President

               with a copy to:

               Pollet & Woodbury, a law corporation
               10900 Wilshire Boulevard, Suite 500
               Los Angeles, California 90024
               Attention:  John M. Woodbury, Jr.

     8.4  Definitions.  For purposes of this Agreement:
          -----------                                    

          (a) an "affiliate" of any person means another person that directly or
     indirectly, through one or more intermediaries, controls, is controlled by,
     or is under common control with, such first person;

          (b) "material adverse change" or "material adverse effect" means, when
     used in connection with the Company or Parent, any change or effect that
     either individually or in the aggregate with all other such changes or
     effects is materially adverse to the business, assets, properties,
     condition (financial or otherwise) or results of operations of such party
     and its subsidiaries taken as a whole; provided, however, that, (i) a
                                            --------  -------             
     decline in general economic conditions affecting the Company or Parent
     shall not be deemed to be a "material adverse change" or to have a
     "material adverse effect" with respect to either such party or its
     subsidiaries;

          (c) "person" means an individual, corporation, partnership, joint
     venture, association, trust, unincorporated organization or other entity;
     and


                                       31
<PAGE>
 
          (d) a "subsidiary" of any person means another person, an amount of
     the voting securities, other voting ownership or voting partnership
     interests of which is sufficient to elect at least a majority of its board
     of directors or other governing body (or, if there are no such voting
     interests, 50% or more of the equity interest of which) is owned directly
     or indirectly by such first person.

     8.5  Interpretation.  A reference made in this Agreement to a Section,
          --------------                                            
Exhibit or Schedule, shall be to a Section of, or an Exhibit or Schedule to,
this Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation."

     8.6  Counterparts.  This Agreement may be executed in one or more
          ------------                                                  
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.

     8.7  Entire Agreement; No Third-party Beneficiaries.  This Agreement
          ----------------------------------------------                   
constitutes the entire agreement, and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter of this Agreement. This Agreement is not intended to confer upon
any person other than the parties any rights or remedies.

     8.8  Governing Law.  This Agreement shall be governed by, and construed in
          -------------                                             
accordance with, the laws of the State of Colorado regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.

     8.9  Assignment.  Neither this Agreement nor any of the rights, interests
          ----------                                                  
or obligations under this Agreement shall be assigned, in whole or in part, by
operation of law or otherwise, by any of the parties without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of, and be enforceable by, the
parties and their respective successors and assigns.

     8.10 Enforcement.  The parties agree that irreparable damage would occur in
          -----------                                                    
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the State of Colorado
or of the United States located in the State of Colorado in the event any
dispute arises out of this Agreement or any of the transactions contemplated by
this Agreement, and each party agrees (a) it will not attempt to deny or defeat
personal jurisdiction or venue in any such court by motion or other request for
leave from any such court and (b) it will not bring any action relating to this
Agreement or any of the transactions contemplated by this Agreement in any court
other than any such court.

     8.11 Severability.  Whenever possible, each provision or portion of any
          ------------                                                    
provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law but if any provision or portion of any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability will not affect any other provision
or portion of any provision in such jurisdiction, and this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or


                                       32
<PAGE>
 
unenforceable provision or portion of any provision had never been contained
herein, so long as the economic and legal substance of the transactions
contemplated hereby are not affected in a manner materially adverse to any party
hereto.

     IN WITNESS WHEREOF, Parent, Sub, and the Company have caused this Agreement
to be signed by their respective officers thereunto duly authorized, all as of
the date first written above.

                              ONLINE SYSTEM SERVICES, INC.


                              By: /s/ R. Steven Adams
                                 -----------------------------------------------
                                 R. Steven Adams
                                 Its Chairman of the Board and Chief Executive
                                     Officer


                              DURAND ACQUISITION CORPORATION


                              By: /s/ R. Steven Adams
                                 -----------------------------------------------
                                 R. Steven Adams
                                 Its President


                              DURAND COMMUNICATIONS, INC.


                              By: /s/ Andre Durand
                                 -----------------------------------------------
                                 Andre Durand
                                 Its President


                                       33
<PAGE>
 
                                                                  Exhibit 3.1(z)

                            SHAREHOLDERS' AGREEMENT

     This SHAREHOLDERS' AGREEMENT (the "Agreement") is entered into as of
________________, 1998, by and between ONLINE SYSTEM SERVICES, INC., a Colorado
corporation ("Parent"), and each of the persons whose signature appears on the
signature page hereto (each a "Shareholder" and collectively, the
"Shareholders").

                                    RECITALS
                                        
     A. Concurrently with the execution and delivery of this Agreement, Parent,
     Durand Communications, Inc., a California corporation (the "Company"), and
     Durand Acquisition Corporation, a Minnesota corporation ("Sub"), are
     executing and delivering to each other that certain Agreement and Plan of
     Merger of even date herewith (the "Merger Agreement"), pursuant to which
     Sub will merge with and into the Company (the "Merger") and each share of
     common stock of the Company will be automatically converted into shares of
     common stock of Parent, all pursuant to the terms and conditions of the
     Merger Agreement.

     B. After considering the best interests of the Company and its
     shareholders, reviewing the Merger Agreement, and weighing the
     possibilities of acquisition proposals from parties other than Parent, each
     of the Shareholders has determined that an acquisition of the Company by
     Parent is in the best interests of the Company.

     C. Parent is willing to execute and deliver the Merger Agreement only if
     each of the Shareholders executes and delivers this Agreement and only in
     reliance upon the agreements, representations, and warranties of each of
     the Shareholders contained in this Agreement, and each of the Shareholders
     is willing to execute and deliver this Agreement in order to induce Parent
     to execute and deliver the Merger Agreement.

                                   AGREEMENT
                                        
     NOW THEREFORE, in consideration of the above recitals and the promises set
forth in this Agreement, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:

     1.   Representations and Warranties of the Shareholders.  Each Shareholder
          --------------------------------------------------                   
hereby severally represents and warrants to Parent as follows:

          1.1  Authority; No Violation.  Such Shareholder has all necessary
               -----------------------                                     
     power and authority to enter into and perform all of such Shareholder's
     obligations hereunder.  The execution and delivery of this Agreement by
     such Shareholder and consummation by such Shareholder of the transactions
     contemplated hereby will not violate, conflict with, or constitute a
     default under any contract, commitment, restriction, arrangement, or other
     agreement to which such Shareholder is a party or by which such Shareholder
     is bound, including any proxy, proxy agreement, voting agreement, voting
     trust, shareholders' agreement, or trust agreement.  There is no other
     person, including any beneficiary of or other holder of an interest under
     any trust of which such Shareholder is a trustee, whose consent is required
     for the execution and delivery of this Agreement or the consummation of the
     transactions contemplated hereby.  This Agreement has been duly 


                                       34
<PAGE>
 
     and validly executed and delivered by such Shareholder (and such
     Shareholder's spouse if such spouse's signature is required under
     applicable law in order to convey to Parent the full benefit of this
     Agreement), and constitutes a valid and binding agreement of such
     Shareholder (and such spouse if applicable), enforceable against such
     Shareholder (and such spouse) in accordance with its terms.

          1.2  Ownership of Shares.  Such Shareholder is the beneficial owner or
               -------------------                                              
     record holder of the number of shares of Company Common Stock indicated
     under such Shareholder's name on the signature page hereto (the "Existing
     Shares", and together with any shares of the Company Common Stock acquired
     by Shareholder after the date hereof, the "Shares") and, as of the date
     hereof, the Existing Shares constitute all of the shares of Company Common
     Stock owned beneficially or of record by such Shareholder.  With respect to
     the Existing Shares, such Shareholder has sole voting power, sole power to
     issue instructions with respect to the matters set forth in Section 2
     hereof, sole power to dispose, sole power to demand a dissenting
     shareholder's appraisal rights and sole power to engage in the actions set
     forth in Section 2 hereof, with no restriction on the voting rights, rights
     of disposition or otherwise, subject to applicable federal or state
     securities laws restricting "affiliates" of the Company.

     2.   Voting Agreement, Proxy, and Other Agreements.
          --------------------------------------------- 

          2.1  Agreement to Vote for Merger.  Each Shareholder hereby severally
               ----------------------------                                    
     and irrevocably agrees to vote all of the Shares as follows:  (i) in favor
     of the Merger Agreement, the Merger, and the other transactions
     contemplated by the Merger Agreement; (ii) in favor of any other matter
     necessary to the consummation of the Merger and the other transactions
     contemplated by the Merger Agreement, and (iii) against any other action or
     agreement that would result in a breach in any material respect of any
     covenant, representation or warranty or any other obligation or agreement
     of the Company under the Merger Agreement or that is intended, or could
     reasonably be expected, to impede, interfere with, delay, postpone,
     discourage or adversely affect the consummation of the Merger or the other
     transactions contemplated by the Merger Agreement.  Such Shareholder will
     not enter into any agreement or understanding prior to the Termination Date
     (as defined below) to vote after the Termination Date in any manner
     inconsistent with clauses (i), (ii), or (iii) of the preceding sentence.

          2.2  Irrevocable Proxy.  Each Shareholder hereby severally grants to,
               -----------------                                               
     and appoints, Parent and R. Steven Adams, President of Parent, Robert M.
     Geller, Secretary of Parent, and Thomas S. Plunkett, Chief Financial
     Officer of Parent, in their respective capacities as officers of Parent,
     and any individual who shall succeed to such office of Parent, and any
     other designee of Parent, and each of them, such Shareholder's proxy and
     attorney-in-fact (with full power of substitution and resubstitution), to
     vote the Shares as stated in clauses (i), (ii), and (iii) of Section 2.1.
     This proxy is, and such Shareholder intends this proxy to be, irrevocable
     and coupled with an interest.  This proxy will expire at the close of
     business on the Termination Date.  Such Shareholder will take any and all
     further actions and will execute and deliver any and all further
     instruments (including a proxy separate from this Agreement) as may be
     necessary or desirable, in Parent's sole determination, to effectuate the
     intent of this proxy.  Such Shareholder hereby revokes any and all proxies,
     voting agreements, voting trusts, or 


                                       35
<PAGE>
 
     other arrangements of any kind previously granted by such Shareholder with
     respect to the voting of the Shares.

          2.3  No Transfer of Shares.  Each Shareholder hereby severally agrees
               ---------------------                                           
     not to (i) sell, transfer, assign, or otherwise dispose, by gift or
     otherwise, of any of the Shares or any interest therein, (ii) pledge,
     mortgage, hypothecate, or otherwise encumber any of the Shares or any
     interest therein, (iii) deposit the Shares or any interest therein into any
     voting trust, voting agreement, proxy, or other arrangement of any kind
     with respect to the voting of the Shares, or (iv) enter into any contract,
     option, or other arrangement with respect, directly or indirectly, to the
     foregoing, provided that nothing herein shall be deemed to prohibit (a) the
     pledge of any of the Shares pursuant to the terms of any bank credit
     agreement, or (b) any Shareholder from making bona fide gifts of any of the
     Shares, if the donee of such Shares agrees in writing with Parent to be
     bound by the terms of this Agreement.  Except as expressly set forth above,
     without the prior written consent of Parent, any purported sale, transfer,
     assignment, disposition, pledge, mortgage, hypothecation, encumbrance, or
     deposit of the Shares or any interest therein, or contract, option, or
     other arrangement with respect, directly or indirectly, thereto will be
     null, void, and unenforceable and will have no effect on the agreements,
     including the proxy, contained in this Agreement.

          2.4  Waiver of Appraisal Rights.  Such Shareholder waives any rights
               --------------------------                                     
     of appraisal or rights to dissent from the Merger that such Shareholder may
     have.

          2.5  Stop Transfer.  Each Shareholder hereby severally agrees that
               -------------                                                
     such Shareholder (i) will not request that the Company register the
     transfer (by book-entry or otherwise) of any certificate or uncertificated
     interest representing any of such Shareholder's Shares, unless such
     transfer is made with Parent's prior written consent, (ii) will tender to
     the Company, within fifteen business days of the date of this Agreement,
     all certificates representing such Shareholder's Shares for the Company to
     inscribe thereupon the following legend:  "The shares of Common Stock
     represented by this certificate are subject to a Shareholders' Agreement
     dated as of [date], and may not be sold or otherwise transferred, except in
     accordance therewith.  A copy of such Agreement is available for inspection
     at the principal executive office of the Company", and (iii) will, within
     fifteen business days of the date of this Agreement, no longer hold any
     Shares, whether certificated or uncertificated, in "street name" or in the
     name of any nominee.

     3.   Affiliate Status.  Each Shareholder hereby severally acknowledges that
          ----------------                                                      
such Shareholder may be deemed an "affiliate" of the Company within the meaning
of Rule 145 ("Rule 145") promulgated under the Securities Act of 1933, as
amended (the "Act"), although nothing contained herein should be construed as an
admission of such fact.  Shareholder represents to and covenants with Parent
that such Shareholder will not sell, assign, transfer or otherwise dispose of,
or offer to sell, transfer or otherwise dispose of, the Parent Shares that such
Shareholder receives in the Merger except (i) in conformity with Rule 145, (ii)
pursuant to an effective registration statement under the Act, or (iii) in a
transaction that, in the opinion of independent counsel reasonably satisfactory
to Parent, is exempt from registration under the Act.


                                       36
<PAGE>
 
     4.   Stockholder Capacity.  Each Shareholder is entering this Agreement in
          --------------------                                                 
his capacity as the record and beneficial owner of such Shareholder's Shares,
and not in his capacity as a director of the Company.

     5.   Termination.  The obligations of the Shareholders, other than those
          -----------                                                        
set forth in the last sentence of Section 2.1 and those set forth in Section 3,
shall terminate upon the earlier to occur of (i) termination of the Merger
Agreement in accordance with Article 7 thereof, or (ii) consummation of the
Merger.  The date of such termination is referred to herein as the "Termination
Date".

     6.   Specific Performance.  The Shareholders each acknowledge and agree
          --------------------                                              
with Parent that irreparable damages would occur in the event that any provision
of this Agreement is not performed in accordance with the terms hereof, that
monetary damages would be an inadequate remedy to Parent, and that Parent shall
be entitled to specific performance of the terms hereof, in addition to any
other remedy at law or in equity.

     7.   Miscellaneous.
          ------------- 

          7.1  Definitional Matters.  Any capitalized terms used but not defined
               --------------------                                             
     in this Agreement shall have the respective meanings that the Merger
     Agreement ascribes to such terms.  The phrase "including" shall be deemed
     to mean "including without limitation".

     7.2  Integration.  This Agreement embodies the entire agreement and
          -----------                                                   
     understanding among the parties relative to subject matter hereof and
     supersedes all prior agreements and understandings relating to such subject
     matter.

     7.3  Applicable Law.  This Agreement and the rights of the parties shall be
          --------------                                                        
     governed by and construed and enforced in accordance with the laws of the
     state of Colorado (without regard to its conflicts of laws rules).  The
     venue for any action hereunder shall be in the state of Colorado, whether
     or not such venue is or subsequently becomes inconvenient, and the parties
     consent to the jurisdiction of the courts of the state of Colorado and the
     U.S. District Court, District of Colorado.

     7.4  Counterparts.  This Agreement may be executed in several counterparts
          ------------                                                         
     and as so executed shall constitute one agreement binding on the parties
     hereto.

     7.5  Binding Effect.  Except as herein or otherwise provided to the
          --------------                                                
     contrary, this Agreement shall be binding upon and inure to the benefit of
     the parties and their respective heirs, successors, assigns and personal
     representatives; provided, however, that neither party may assign its
     rights or obligations hereunder without the prior written consent of the
     other party.

     7.6  Notices.  All notices, requests and other communications hereunder
          -------                                                           
     shall be given in writing and deemed to have been duly given or served if
     personally delivered, or sent by first class, certified mail, return
     receipt requested, postage prepaid, to the party at the address as provided
     below, or to such other address as such party may hereafter designate by
     written notice to the other party:

          (a)  If to Parent, to the address of its then principal office.

          (b)  If to Employee, to the address last shown in the records of
          Parent.


                                       37
<PAGE>
 
     7.7  Modification.  This Agreement shall not be modified or amended except
          ------------                                                         
     by a written instrument signed by the parties.

     7.8  Severability.  The invalidity or partial invalidity of any portion of
          ------------                                                         
     this Agreement shall not invalidate the remainder thereof, and said
     remainder shall remain in full force and effect.  Moreover, if one or more
     of the provisions contained in this Agreement shall, for any reason, be
     held to be excessively broad as to scope, activity, subject or otherwise,
     so as to be unenforceable at law, such provision or provisions shall be
     construed by the appropriate judicial body by limiting or reducing it or
     them, so as to be enforceable to the maximum extent compatible with then
     applicable law.

          7.9  Assignment.  Neither party may assign its rights or obligations
               ----------                                                     
     hereunder without prior written consent of the other party.

          7.10  Headings.  The section headings contained in this Agreement are
                --------                                                       
     for reference purposes only and shall not in any way affect the meaning or
     interpretation of this Agreement.

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

                                        ONLINE SYSTEM SERVICES, INC.


                                        By______________________________________
                                                R. Steven Adams
                                                Its: President


                                        [SHAREHOLDERS]


                                       _________________________________________
                                                [Shareholder]
                                                Number of Shares of
                                                Company Stock:__________________


                                       38
<PAGE>
 
                               AFFILIATE LETTER
                                        
Gentlemen:

     The undersigned, a holder of shares of common stock of Durand
Communications, Inc., a California corporation ("DCI") or Online System
Services, Inc., a Colorado corporation ("OSS"), hereby submits this letter
pursuant to Section 6.2(d) of that certain Agreement and Plan of Merger between
DCI, OSS, and Durand Acquisition Corporation, a Minnesota corporation and a
direct wholly owned subsidiary of OSS ("DAC"), pursuant to which DAC will merge
with and into DCI (the "Merger").  The undersigned is either (i) a director of
DCI or OSS, (ii) an officer of DCI or OSS, or (iii) the beneficial owner of five
percent (5%) or more of the outstanding common stock of either DCI or OSS.

     The undersigned hereby represents and warrants to and covenants with DCI,
OSS, and DAC that the undersigned will not, for a period commencing on the date
that is thirty (30) days prior to the consummation of the Merger and ending on
the date that is thirty (30) days after financial statements for the combined
companies which include thirty (30) or more days of the operations of the
combined companies have been released to the general public, sell, assign,
transfer, or otherwise dispose any of the securities of DCI or OSS beneficially
owned or otherwise held by the undersigned as of the date of this letter or
acquired on or prior to the date on which such period ends, including securities
received by the undersigned in connection with the Merger.

     The undersigned acknowledges that OSS and DCI may instruct their respective
transfer agents to place stop transfer orders on any of such securities for
purposes of carrying the representations, warranties and covenants contained in
this letter into effect.

     The undersigned acknowledges that (i) the undersigned has carefully read
this letter and understands the requirements hereof and the limitations imposed
upon the sale, assignment, transfer, or other disposition of securities of DCI
or OSS and (ii) the receipt by OSS of this letter is an inducement and a
condition precedent to OSS's obligations to consummate the Merger.

Dated: _________________, 1998

                                        Very truly yours,

                                        ________________________________________
 

                                       39
<PAGE>
 
              IMPORTANT:   PLEASE READ CAREFULLY BEFORE SIGNING.
              SIGNIFICANT REPRESENTATIONS ARE CALLED FOR HEREIN.

                          SECURITIES HOLDER AGREEMENT
                                      AND
                                 UNDERTAKINGS


Online System Services, Inc.
1800 Glenarm Place
Suite 800
Denver, Colorado  80202

Gentlemen:

     The undersigned (the "Subscriber") hereby tenders this subscription for the
acquisition of shares of the Common Stock ("Common Stock"), of Online System
Services, Inc., a Colorado corporation (the "Company") and/or options, warrants
or convertible notes of the Company ("Derivative Securities") issued in
replacement of similar securities of Durand Communications, Inc., a California
corporation ("Durand"), which are described in the Memorandum dated
____________, 1998 (the "Memorandum").  The Common Stock and Derivative
Securities are to be issued in connection with the proposed merger ("Merger") of
Durand with and into Durand Acquisition Corporation, a Minnesota corporation and
a direct wholly owned subsidiary of the Company ("DAC").  The Common Stock and
Derivative Securities are hereinafter referred to collectively as the
"Securities."  By execution below, the Subscriber acknowledges that the Company
is relying upon the accuracy and completeness of the representations contained
herein in complying with its obligations under applicable securities laws.

     1.   Subscription Commitment.  The Subscriber hereby agrees to the issuance
          -----------------------                                               
of the Securities in exchange for Subscriber's shares of the Common Stock of
Durand in connection with the proposed merger of Durand with and into DAC.

     The Subscriber understands that this subscription is subject to the
completion of the Merger.  Subscriber is the beneficial owner or recordholder of
the number of shares of the Common Stock of Durand indicated under Subscriber's
name on the signature page hereto, and that such number of shares constitutes
all of the shares of Durand Common Stock owned beneficially or of record by the
Subscriber.  With respect to such shares, Subscriber has sole voting power, sole
power to dispose and sole power to demand a dissenting shareholder's appraisal
rights, with no restriction on the voting rights, rights of disposition or
otherwise, subject to applicable federal or state securities laws.

     2.   Representations and Warranties.  In order to induce the Company to
          ------------------------------                                    
accept this subscription, the Subscriber hereby represents and warrants to, and
covenants with, the Company as follows:

     (a) The Subscriber has received and had the opportunity to review the
Memorandum and has been given access to full and complete information regarding
the Company and has utilized such access to the Subscriber's satisfaction for
the purpose of obtaining such information regarding the Company as the
Subscriber has reasonably requested; and, particularly, the Subscriber has been
given reasonable opportunity to ask questions of, and receive answers from,
representatives of the Company concerning 


                                       40
<PAGE>
 
the terms and conditions of the offering of the Securities and to obtain any
additional information, to the extent reasonably available.

     (b) Except for the Memorandum, the Subscriber has not been furnished with
any other materials or literature relating to the offer and sale of the
Securities; except as set forth in the Memorandum, no representations or
warranties have been made to the Subscriber by the Company, any selling agent of
the Company, or any agent, employee, or affiliate of the Company or such selling
agent.

     (c) The Subscriber believes that an investment in the Securities is
suitable for the Subscriber based upon the Subscriber's investment objectives
and financial needs.  The Subscriber (i) has adequate means for providing for
the Subscriber's current financial needs and personal contingencies; (ii) has no
need for liquidity in this investment; (iii) at the present time, can afford a
complete loss of such investment; and (iv) does not have an overall commitment
to investments which are not readily marketable that is disproportionate to the
Subscriber's net worth, and the Subscriber's investment in the Securities will
not cause such overall commitment to become excessive.

     (d) The Subscriber, in reaching a decision to subscribe, has such knowledge
and experience in financial and business matters that the Subscriber is capable
of reading and interpreting financial statements and evaluating the merits and
risk of an investment in the Securities and has the net worth to undertake such
risks.

     (e) The Subscriber was not offered or sold the Securities, directly or
indirectly, by means of any form of general advertising or general solicitation,
including, but not limited to, the following:  (i) any advertisement, article,
notice or other communication published in any newspaper, magazine, or similar
medium of or broadcast over television or radio; or (ii) to the knowledge of the
undersigned, any seminar or meeting whose attendees had been invited by any
general solicitation or general advertising.

     (f) The Subscriber has obtained, to the extent the Subscriber deems
necessary, the Subscriber's own personal professional advice with respect to the
risks inherent in the investment in the Securities, and the suitability of an
investment in the Securities in light of the Subscriber's financial condition
and investment needs.

     (g) The Subscriber recognizes that the Securities as an investment involve
a high degree of risk, including those set forth under the caption "Risk
Factors" in the Memorandum.

     (h) The Subscriber Questionnaire previously delivered by the Subscriber to
the Company is true, complete and correct in all material respects as of the
date hereof; the Subscriber understands that the Company's determination that
the exemption from the registration provisions of the Securities Act of 1933, as
amended (the "Act"), which is based upon non-public offerings and applicable to
the offer and sale of the Securities, is based, in part, upon the
representations, warranties, and agreements made by the Subscriber herein and in
the Subscriber Questionnaire referred to above, and the Subscriber consents to
the disclosure of any such information, and any other information furnished to
the Company, to any governmental authority, self-regulatory organization, or, to
the extent required by law, to any other person.

     (i) The Subscriber realizes that (i) the purchase of the Securities is a
long-term investment; (ii) the purchaser of the Securities must bear the
economic risk of investment for an indefinite period of time because the
Securities have not been registered under the Act or under the securities laws
of any state and, therefore, the Securities cannot be resold unless they are
subsequently registered under said 


                                       41
<PAGE>
 
laws or exemptions from such registrations are available; and (iii) the
transferability of the Securities is restricted and (A) requires conformity with
the restrictions contained in paragraph 3 below and (B) legends will be placed
on the certificate(s) representing the Securities referring to the applicable
restrictions on transferability.

     (j) The Subscriber certifies, under penalties of perjury, that the
Subscriber is NOT subject to the backup withholding provisions of Section
3406(a)(i)(C) of the Internal Revenue Code; and

     (k) Stop transfer instructions will be placed with the transfer agent for
the Securities, and a legend may be placed on any certificate representing the
Securities substantially to the following effect:

          THIS SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
          COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE ACT"), IN
          RELIANCE UPON THE EXEMPTIONS FROM REGISTRATION PROVIDED IN THE ACT AND
          REGULATION D UNDER THE ACT.  AS SUCH, THE PURCHASE OF THIS SECURITY
          WAS NECESSARILY WITH THE INTENT OF INVESTMENT AND NOT WITH A VIEW FOR
          DISTRIBUTION.  THEREFORE, ANY SUBSEQUENT TRANSFER OF THIS SECURITY OR
          ANY INTEREST THEREIN WILL BE UNLAWFUL UNLESS IT IS REGISTERED UNDER
          THE ACT OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
          FURTHERMORE, IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS
          SECURITY OR ANY INTEREST THEREIN, WITHOUT THE OPINION OF COUNSEL
          ACCEPTABLE TO THE COMPANY THAT THE PROPOSED TRANSFER OR SALE DOES NOT
          AFFECT THE EXEMPTIONS RELIED UPON BY THE COMPANY IN ORIGINALLY
          DISTRIBUTING THE SECURITY AND THAT REGISTRATION IS NOT REQUIRED.

     3.   Restricted Nature of the Securities.  The Subscriber has been advised
          -----------------------------------                                  
and understands that (i) the Securities have not been registered under the Act
or applicable state securities laws and that the Securities are being offered
and sold pursuant to exemptions from such laws; and (ii) the Memorandum has not
been filed with or reviewed by certain state securities administrators because
of the limited nature of the offering.  The Subscriber represents and warrants
that the Securities will be acquired for the Subscriber's own account and for
investment purposes only, and without the intention of reselling or
redistributing the same; the Subscriber has made no agreement with others
regarding any of the Securities; and the Subscriber's financial condition is
such that it is not likely that it will be necessary to dispose of any of such
Securities in the foreseeable future.  The Subscriber is aware that, in the view
of the Securities and Exchange Commission, a purchase of such securities with an
intent to resell by reason of any foreseeable specific contingency or
anticipated change in market value, or any change in the condition of the
Company, or in connection with a contemplated liquidation settlement of any loan
obtained for the acquisition of such securities and for which such securities
were pledged, would represent an intent inconsistent with the representations
set forth above.  The Subscriber further represents and agrees that if, contrary
to the foregoing intentions, the Subscriber should later desire to dispose of or
transfer any of such securities in any manner, the Subscriber shall not do so
unless and until (i) said Securities shall have first been registered under the
Act and all applicable securities laws; or (ii) the Subscriber shall have first
delivered to the Company a written notice declaring such holder's 


                                       42
<PAGE>
 
intention to effect such transfer and describe in sufficient detail the manner
and circumstances of the proposed transfer, which notice shall be accompanied
either by a written opinion of legal counsel who shall be reasonably
satisfactory to the Company, which opinion shall be to the Company and
reasonably satisfactory in form and substance to the Company's counsel, to the
effect that the proposed sale or transfer is exempt from the registration
provisions of the Act and all applicable state securities laws, or by a "no
action" letter from the Securities and Exchange Commission to the effect that
the transfer of the Securities without registration will not result in
recommendation by the staff of the Commission that action be taken with respect
thereto.

     4    Residence.  The Subscriber represents and warrants that the Subscriber
          ---------                                                             
is a bona fide resident of, is domiciled in and received the offer and made the
decision to invest in the Securities in the state set forth on the signature
page hereof, and the Securities are being purchased by the Subscriber in the
Subscriber's name solely for the Subscriber's own beneficial interest and not as
nominee for, or on behalf of or for the beneficial interest of, or with the
intention to transfer to, any other person, trust or organization, except as
specifically set forth in paragraph 13 of this Securities Holder Agreement and
Undertakings.

     5    Sophistication.  The Subscriber further represents and warrants that
          --------------                                                      
Subscriber has such knowledge and experience in financial and business matters
so as to be capable of evaluating the merits and risks of an investment in the
Securities and protecting the Subscriber's own interests in this transaction,
and does not desire to utilize the services of any other person in connection
with evaluating such merits and risks.

     6.   Other Representations, Warranties and Agreements of Subscriber.
          -------------------------------------------------------------- 

     (a) The Subscriber hereby waives any rights of appraisal or rights to
dissent from the Merger that the Subscriber may have.

     (b) In order to induce the Company to accept this subscription, Subscriber,
for himself/herself/itself and its successors and assigns, hereby represents and
warrants that, as between Subscriber and (i) Durand, (ii) Andre Durand, and
(iii) the directors, officers, shareholders and affiliates of Durand
Communications, Inc. (collectively the "Parties"), Subscriber has no past,
present and future claims, demands, obligations, duties, liabilities, actions,
causes of action, at law or in equity, whether arising by contract, common law,
statute or otherwise, of any kind and nature against or relating to any of the
Parties arising from or in any way relating to any written or oral
representations, agreements or business relationships among any of them entered
into or in existence prior to the date of this Securities Holder Agreement and
Undertakings.  The Subscriber specifically and expressly acknowledges and agrees
that this representation and warranty covers known and unknown claims for known
and unknown damages, claims for anticipated or unanticipated damages, and claims
for expected and unexpected consequences of all damages which have heretofore
arisen and which may hereafter arise out of any written or oral representations,
agreements or business relationships among any of the Parties and Subscriber
entered into or in existence prior to the date of this Securities Holder
Agreement and Undertakings.

     (c) The Subscriber hereby waives any and all preemptive rights, whether
arising by operation of law, contract or otherwise, which the Subscriber has,
may have or be entitled to with respect to Subscriber's interests in Durand.


                                       43
<PAGE>
 
     (d) The Subscriber hereby waives any and all registration rights (except
for the registration rights granted pursuant to the terms of the Merger
Agreement) which the Subscriber has, may have or be entitled to as a result of
any agreement between Subscriber and any of the Parties regardless of whether
such registration rights exist pursuant to contract or otherwise and regardless
of whether such registration rights relate to the common stock of Durand or any
securities convertible into or exchangeable for such common stock.

     7.   Reliance on Representations.  The Subscriber understands the meaning
          ---------------------------                                         
and legal consequences of the representations, warranties, agreements,
covenants, and confirmations set out above and agrees that the subscription
hereby may be accepted in reliance thereon.  The Subscriber agrees to indemnify
and hold harmless the Company and any selling agent (including for this purpose
their employees, officers, directors, agents and each person who controls either
of them within the meaning of Section 20 of the Securities Exchange Act of 1934,
as amended) from and against any and all loss, damage, liability or expense,
including reasonable costs and attorney's fees and disbursements, which the
Company, or such other persons may incur by reason of, or in connection with,
any representation or warranty made herein (or in the Subscriber Questionnaire
referred to above) not having been true when made, any misrepresentation made by
the Subscriber or any failure by the Subscriber to fulfill any of the covenants
or agreements set forth herein, in the Subscriber Questionnaire or in any other
document provided by the Subscriber to the Company.

     8.   Transferability and Assignability.  Neither this Securities Holder
          ---------------------------------                                 
Agreement and Undertakings nor any of the rights of the Subscriber hereunder may
be transferred or assigned by the Subscriber.  The Subscriber agrees that the
Subscriber may not cancel, terminate, or revoke this Securities Holder Agreement
and Undertakings or any agreement of the Subscriber made hereunder (except as
otherwise specifically provided herein) and that this Securities Holder
Agreement and Undertakings shall survive the death or disability of the
Subscriber and shall be binding upon the Subscriber's heirs, executors,
administrators, successors, and assigns.

     9.   Survival.  The representations and warranties of the Subscriber set
          --------                                                           
forth herein shall survive the sale of the Securities pursuant to this
Securities Holder Agreement and Undertakings.

     10.  Notices.  All notices or other communications hereunder shall be in
          -------                                                            
writing and shall be deemed to have been duly given if delivered personally or
mailed by certified or registered mail, return receipt requested, postage
prepaid, as follows:  if to the Subscriber, to the address set forth below; and
if to the Company to the address at the beginning of this letter, or to such
other address as the Company or the Subscriber shall have designated to the
other by like notice.

     11.  (Applicable to FLORIDA residents only.)  The Subscriber has been
          ---------------------------------------
informed and recognizes that (a) the Securities have not been registered under
the Florida Securities Act, and (b) under Section 517.061(11) of the Florida
Securities Act, the Subscriber may void the sale of any Securities within three
(3) days after the tender of this Securities Holder Agreement and Undertakings
and payment hereunder to the Company.

     12.  Counterparts This Securities Holder Agreement and Undertakings may be
          ------------                                                         
executed in one or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same document.


                                       44
<PAGE>
 
     13.  Title.  Manner in which title is to be held.
          --------                                    

          Place an "X" in one space below:

          (a) _______ Individual Ownership
          (b) _______ Community Property
          (c) _______ Joint Tenant with Right of Survivorship (both parties 
                      must sign)
          (d) _______ Partnership
          (e) _______ Tenants in Common
          (f) _______ Corporation
          (g) _______ Trust
          (h) _______ Other (Describe):

          ______________________________________________________________________

          ______________________________________________________________________
 
          ______________________________________________________________________
    Please print above the exact name(s) in which the Securities are to be held.

                                  SIGNATURES

     The Subscriber hereby represents he has read this entire Securities Holder
Agreement and Undertakings and the Memorandum.

                                                       Dated____________________

                                  INDIVIDUAL


                              Address to which correspondence should be directed


__________________________________________    __________________________________
Signature (Individual)
 
                                              __________________________________


__________________________________________    __________________________________
Signature (All record holders should sign)    City, State and Zip Code


                                    ____________________________________________
__________________________________  Tax Identification or Social Security Number
Name(s) Typed or Printed
                                    (               )
                                    ____________________________________________
                                    Telephone Number

__________________________________________    

__________________________________________    
Number of Shares of Common Stock of Durand
Communications, Inc. Owned


                                       45
<PAGE>
 



                                      46
<PAGE>
 
                CORPORATION, PARTNERSHIP, TRUST, OR OTHER ENTITY

                              Address to which correspondence should be directed


_____________________________       ____________________________________________
Name of Entity
 

By:__________________________       ____________________________________________
  *Signature                        City, State and Zip Code

 
                                    ____________________________________________
Its:_________________________       Tax Identification or Social Security Number
  Title
                                    (               )
                                    ____________________________________________
_____________________________       Telephone Number
Name Typed or Printed

 
                                    ____________________________________________
                                    Number of Shares of Common Stock of Durand
                                    Communications, Inc. Owned


*If Securities are being subscribed for by an entity, the Certificate of
Signatory must also be completed.

                           CERTIFICATE OF SIGNATORY

     To be completed if Securities are being subscribed for by an entity.

     I,_______________________________, am the _________________________________
of _____________________________________________________________ (the "Entity").

     I certify that I am empowered and duly authorized by the Entity to execute
and carry out the terms of this Securities Holder Agreement and Undertakings and
to purchase and hold the Securities, and certify that this Securities Holder
Agreement and Undertakings has been duly and validly executed on behalf of the
Entity and constitutes a legal and binding obligation of the Entity.

     IN WITNESS WHEREOF, I have hereto set my hand this ____ day of ___________.

 
                                                ________________________________
                                                Signature


                                       47
<PAGE>
 
                           NONCOMPETITION AGREEMENT

     This NONCOMPETITION AGREEMENT (the "Agreement") is entered into as of
________________, 1998, by and between ONLINE SYSTEM SERVICES, INC., a Colorado
corporation (the "Corporation"), and _________________ ("Recipient").

                                    RECITALS
                                        
     A. The Corporation, Durand Communications, Inc., a California corporation
     ("DCI"), and Durand Acquisition Corporation, a Minnesota corporation
     ("DAC"), are parties to an Agreement and Plan of Merger of even date
     herewith (the "Merger Agreement"), pursuant to which DAC will merge with
     and into DCI (the "Merger").

     B. Recipient is a shareholder of DCI and will receive shares of the
     Corporation's common stock as consideration for the Merger.

     C. Following the Merger, it is the Corporation's intent that Recipient will
     become an employee of the Corporation and in connection therewith, will be
     paid a salary of $________ per year and will be granted options pursuant to
     the Corporation's Stock Option Plan of 1995 to purchase ________ shares of
     the Corporation's common stock at an exercise price equal to the fair
     market value for the Corporation's common stock on the first day of such
     employment.

     D. As a condition precedent to the closing of the transactions contemplated
     herein and in the Merger Agreement, Recipient has agreed to enter into this
     Agreement for the benefit of the Corporation and its affiliates.


                                   AGREEMENT
                                        
     NOW THEREFORE, in consideration of the above recitals and the promises set
forth in this Agreement, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:

     1.   Definitions.   The following terms, when capitalized and used herein,
          -----------                                                          
have the meanings set forth below.

     1.1  "Affiliates" means any and all entities owned or controlled by Online
           ----------                                                          
     System Services, Inc.

     1.2  "Competing Business" means any individual or entity, other than the
           ------------------                                                
     Corporation or its Affiliates, engaged in, or about to become engaged in,
     (i) any business that consists of developing, marketing, and supporting
     products and services that enable broadband operators to provide high-speed
     Internet access to their customers, (ii) any business that consists of
     developing, marketing and supporting Internet or Intranet community
     building tools and services, training in the use of such tools and services
     or hosting an online service for such communities, or (iii) any business
     that consists of developing, marketing and supporting Internet or Intranet
     courses for colleges, universities and other educational endeavors.

2.   Noncompetition.  From the date hereof through the date that is the later of
     --------------                                                             
the (i) third anniversary of the Closing Date (as that term is defined in the
Merger Agreement) or (ii) the first anniversary of Recipient's termination of
employment with the Corporation or any of its Affiliates 


                                       48
<PAGE>
 
(whichever the case may be, the "Restricted Period"), without the prior written
consent of the Corporation, Recipient will not, directly or indirectly, own,
manage, operate, join, control, render services to or assist in any way any
Competing Business which is located anywhere within the United States or any
foreign country in which the Corporation (i) conducts business activities,
whether directly or with or through one or more other companies, or (ii)
licenses its products or services. The foregoing notwithstanding, nothing herein
shall prevent Recipient from purchasing and owning securities of any entity
whose securities are regularly traded on a national exchange or in an
established over-the-counter market, provided that such purchases do not result
in Recipient owning beneficially at any time more than five percent of any class
of securities of any Competing Business.

     3.   Nonsolicitation.  During the Restricted Period, Recipient agrees that
          ---------------                                                      
Recipient shall not, either directly or indirectly, on Recipient's own behalf or
in the service or on behalf of others, (i) solicit, divert, or appropriate, or
attempt to solicit, divert, or appropriate, to any Competing Business, (a) any
person or entity that was a customer of the Corporation during the Restricted
Period or (b) any person or entity from whom the Corporation solicited business
during the last year of the Restricted Period or (ii) solicit, divert, or hire
away, or attempt to solicit, divert, or hire away, to any Competing Business,
any person employed by or providing services to the Company or one of its
Affiliates, whether or not such person is a full-time employee, temporary
employee, or consultant of the Company or such Affiliate and whether or not such
employment or service is pursuant to written agreement and whether or not such
employment or service is at will.

     4.   Remedies.  Recipient and the Corporation acknowledge and agree that
          --------                                                           
irreparable injury will result to the Corporation and its business if Recipient
breaches this Agreement, and, therefore, in the event of any actual or
threatened breach hereof by Recipient, the Corporation shall be entitled to seek
all rights and remedies available at law and in equity, including without
limitation the right to seek damages for such actual or threatened breach and
the right to seek to enjoin Recipient and all other persons acting in actual or
threatened breach hereof, from commencing or continuing, and to remedy, the
activities which constitute such actual or threatened breach.  The Corporation
shall also be entitled to recover from Recipient the Corporation's reasonable
attorneys' fees and costs in any action for the breach hereof in which the
Corporation substantially prevails.

     5.   Miscellaneous.
          ------------- 

          5.1  Integration.  This Agreement embodies the entire agreement and
               -----------                                                   
          understanding among the parties relative to subject matter hereof and
          supersedes all prior agreements and understandings relating to such
          subject matter.

          5.2  Employment Agreement.  Nothing in this Agreement shall be
               --------------------
          construed to modify the terms of an employment agreement, if any,
          between the Corporation and the Recipient or shall be construed to
          constitute, or evidence, an agreement or understanding, whether
          express or implied, by the Corporation to (i) employ or retain the
          Recipient for any specific period of time or (ii) terminate the
          Recipient only for cause.

          5.3  Applicable Law.  This Agreement and the rights of the parties
               --------------
          shall be governed by and construed and enforced in accordance with the
          laws of the state of Colorado (without regard to its conflicts of laws
          rules). The venue for any action hereunder shall be in the state of
          Colorado, whether or not such venue is or subsequently becomes
          inconvenient, and the parties consent to the jurisdiction of the
          courts of the state of Colorado and the U.S. District Court, District
          of Colorado.


                                       49
<PAGE>
 
     5.4  Counterparts.  This Agreement may be executed in several counterparts
          ------------                                                         
     and as so executed shall constitute one agreement binding on the parties
     hereto.

     5.5  Binding Effect.  Except as herein or otherwise provided to the
          --------------                                                
     contrary, this Agreement shall be binding upon and inure to the benefit of
     the parties and their respective heirs, successors, assigns and personal
     representatives; provided, however, that neither party may assign its
     rights or obligations hereunder without the prior written consent of the
     other party.

     5.6  Notices.  All notices, requests and other communications hereunder
          -------                                                           
     shall be given in writing and deemed to have been duly given or served if
     personally delivered, or sent by first class, certified mail, return
     receipt requested, postage prepaid, to the party at the address as provided
     below, or to such other address as such party may hereafter designate by
     written notice to the other party:

          (a)  If to the Corporation, to the address of its then principal
               office.

          (b)  If to Recipient, to the address last shown in the records of the
               Corporation.

     5.7  Modification.  This Agreement shall not be modified or amended except
          ------------                                                         
     by a written instrument signed by the parties.

     5.8  Severability.  The invalidity or partial invalidity of any portion of
          ------------                                                         
     this Agreement shall not invalidate the remainder thereof, and said
     remainder shall remain in full force and effect.  Moreover, if one or more
     of the provisions contained in this Agreement shall, for any reason, be
     held to be excessively broad as to scope, activity, subject or otherwise,
     so as to be unenforceable at law, such provision or provisions shall be
     construed by the appropriate judicial body by limiting or reducing it or
     them, so as to be enforceable to the maximum extent compatible with then
     applicable law.

     5.9  Assignment.  Neither party may assign its rights or obligations
          ----------                                                     
     hereunder without prior written consent of the other party.

     5.10  Headings.  The section headings contained in this Agreement are for
           --------                                                       
     reference purposes only and shall not in any way affect the meaning or
     interpretation of this Agreement.


                                      50
<PAGE>
 
     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.

                                        ONLINE SYSTEM SERVICES, INC.


                                        By______________________________________
                                            R. Steven Adams
                                            Its: President


                                        [RECIPIENT]


                                        ________________________________________
                                            [Recipient]


                                       51
<PAGE>
 
                                 EXHIBIT 10.7

                               LICENSE AGREEMENT

     This LICENSE AGREEMENT (the "Agreement") is entered into as of October 22,
1997, between Online System Services, Inc., a Colorado corporation ("OSS") with
offices at 1800 Glenarm Place, Suite 1800, Denver, Colorado 80202, and Medical
Education Collaborative, a Colorado nonprofit corporation ("MEC") with offices
at 1800 Jackson Street, Suite 200, Golden CO 80401.

                                   RECITALS

     WHEREAS, OSS develops sophisticated, high-end WorldWide Web ("Web")
products for use in connection with the Internet, including standard and custom
Web sites targeted at the health-care industry; and

     WHEREAS, MEC is a nationally recognized provider of CME in the health-care
industry; and

     WHEREAS, OSS has developed an integrated network or "market space," called
MD Gateway ("MD Gateway"), which provides a Web site through which interested
persons may access medical information and continuing medical education ("CME")
information; and

     WHEREAS, OSS owns the URL Web address "www.mdgateway.com" as well as
certain trademarks, copyrights, and other intellectual property rights
associated with MD Gateway; and

     WHEREAS, MEC desires to improve its existing online medical information
resources and the ability to provide CME information through the Internet for
physicians, nurses, pharmacists and other health-care professionals, and desires
to do so through a license to certain rights in MD Gateway; and

     WHEREAS, OSS desires to license to MEC certain rights in MD Gateway on the
terms and conditions set forth herein,

     NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and other good and valuable consideration, the sufficiency of
which is hereby acknowledged, the parties hereby agree as follows.

                                  ARTICLE I.

                                     GRANT
                                     -----

     1.1  MD Gateway.  OSS grants to MEC and MEC accepts an exclusive license to
          ----------                                                            
use, market, advertise and promote the following items:


                                       52
<PAGE>
 
          (a) MD Gateway, including all hardware and software comprising the
     integrated network and the Web site, as well as a T1 telecommunications
     facility, as identified in Schedule A;

          (b) Copies of all documentation related to the hardware and software
     of MD Gateway including, but not limited to, user's manuals and customer
     support manuals;

          (c) All trademarks used in connection with MD Gateway, which
     trademarks are portrayed in Schedule B;

          (d) All other intellectual property rights in and to MD Gateway
     including, but not limited to, copyright to the layout of the Web site and
     all materials displayed on the Web site on or before the date of this
     Agreement; and

          (e) The URL Web address "www.mdgateway.com".

          (f) The right to use any capacity on the Tl telecommunications faculty
     not required in connection with MD Gateway for other Internet communication
     purposes of MEC.

     1.2  Scope of Exclusivity.  OSS acknowledges and agrees that the exclusive
          --------------------                                                 
rights granted to MEC in Section 1.1 above exclude both OSS and any third party
(defined as any party other than OSS and MEC) from using, advertising,
marketing, or promoting the rights identified in Section 1.1 above while this
Agreement is in effect.

                                  ARTICLE II.

                                     TERM
                                     ----

     2.1  Term.  This Agreement shall commence on the date set forth above and
          ----                                                                
shall continue in effect for a term of five (5) years from such date, unless
sooner terminated in accordance with the provisions of Article VIII below, or
unless renewed in accordance with Section 2.2 below.

     2.2  Automatic Renewal.  This Agreement shall automatically renew for
          -----------------                                               
additional five-year terms unless MEC gives notice to OSS at least 90 days
before the end of a five-year term of this Agreement expressing its desire that
this Agreement not be extended.

                                 ARTICLE III.

                DELIVERY INSTALLATION, ACCEPTANCE, AND TRAINING
                ---------------------------------- --- --------

     3.1  Installation of MD Gateway.  Within 30 days of the execution and
          --------------------------                                      
delivery of this Agreement, OSS shall deliver to the premises of MEC and install
within such premises all of the hardware and software components of MD Gateway
(as identified in Schedule A).  OSS shall also arrange for the installation of a
T1 telecommunications facility to connect the MD Gateway 


                                       53
<PAGE>
 
installation on MEC's premises to an Internet gateway computer network operated
and maintained by OSS.

     3.2  Acceptance.  Unless MEC, within 30 days after the date of delivery of
          ----------                                                           
MD Gateway, notifies OSS in writing to the contrary, MD Gateway shall be deemed
to be acceptable by MEC as of the date of completion of installation.  OSS's
warranty set forth in Section 6.1 shall commence on the date OSS has completed
installation.

     3.4  Standard Training.  OSS shall provide training to two (2) individuals
          -----------------                                                    
chosen by MEC.  The training shall be sufficient to enable those two individuals
to program and operate MD Gateway at a level adequate to act as a replacement of
OSS as the source of all technical support required by MEC.

     3.5  Additional Training.  In addition to the training provided pursuant to
          -------------------                                                   
Section 3.4 above, MEC may request additional training from OSS which OSS may
provide upon terms and conditions acceptable to MEC and OSS.

     3.6 Maintenance.  MEC acknowledges and agrees that this Agreement does not
         -----------                                                           
contemplate any on-going maintenance services by OSS of the equipment and
software installed by OSS on MEC's premises pursuant to Section 3.1 above.  OSS
acknowledges and agrees that OSS shall be responsible for maintaining the Tl
telecommunications facility connecting the MD Gateway system on MEC's premises
with an Internet gateway computer network operated and maintained by OSS.  OSS
further acknowledges and agrees that OSS shall be responsible for the on-going
maintenance of the Internet gateway computer network through which MD Gateway
connects to the Internet and for any on-going maintenance of the redundant
version of MD Gateway and the computer on which it is loaded, all as described
in Section 6.5(c) below.

                                  ARTICLE IV.

                                    PAYMENT
                                    -------

     4.1  Royalty.  MEC agrees to pay OSS, as a royalty for the rights granted
          -------                                                             
to MEC under this Agreement and in consideration of all other obligations and
commitments of OSS under this Agreement, a royalty fee based on the MD Gateway
Revenue as defined in Section 4.2 below and the Webmaster cost as defined in
Section 4.3 below.  The royalty fee shall be calculated at the end of each
calendar quarter in which this Agreement is in effect.  The amount of the
quarterly royalty fee shall be 35 % of the amount by which the quarterly MD
Gateway Revenue exceeds the quarterly Webmaster Cost.  If for any given calendar
quarter, the quarterly MD Gateway Revenue is less than the quarterly Webmaster
Cost then the quarterly royalty fee for such quarter shall be $0.00 and the
amount of the deficiency shall be added to and included in the quarterly
Webmaster Cost of the succeeding calendar quarter.

     4.2  MD Gateway Revenue.  For purposes of this Article IV, MD Gateway
          ------------------                                              
Revenue shall be the sum of all revenue received by MEC, less any refunds
attributable to such revenue, in connection with its operation of MD Gateway
including, but not limited to:


                                       54
<PAGE>
 
          (1) access and usage fees levied on information users of MD Gateway;

          (2) service ("hosting") fees charged to information providers on MD
     Gateway; and

          (3) advertising fees charged to advertisers on MD Gateway.

     4.3  Webmaster Cost.  For purposes of this Article IV, Webmaster Cost shall
          --------------                                                        
be the total cost (salary, benefits and withholdings) incurred by MEC in
connection with the employment of one individual as a Webmaster for MD Gateway.

     4.4  Quarterly Statements.  On or before the 30th day of the month
          --------------------                                         
following each calendar quarter (for purposes of this Agreement, a calendar
quarter shall end on the last day of March, June, September and December), MEC
shall furnish to OSS complete and accurate statements certified to be accurate
by MEC showing the MD Gateway Revenue received and the Webmaster cost incurred
during the preceding calendar quarter.  OSS agrees that no statement shall be
due for the calendar quarter ending September 30, 1997; rather, all information
relevant for the month of September 1997 shall be included in the statement due
in January 1998.

     4.5  Quarterly Payments.  Royalty payments due hereunder shall be due on
          ------------------                                                 
the 30th day of the month following the calendar quarter in which earned, and
payment shall accompany the statements furnished as required above.  The receipt
or acceptance by OSS of any of the statements furnished pursuant to this
Agreement or of any royalties paid hereunder (or the cashing of any royalty
checks paid hereunder) shall not preclude OSS from questioning the correctness
thereof at any time, within two years from date thereof, and in the event that
any inconsistencies or mistakes are discovered in such statements or payments,
they shall immediately be rectified and the appropriate payment shall be made by
MEC.

                                  ARTICLE V.

                                  ACCOUNTING
                                  ----------

     5.1  Books and Records.  MEC agrees to keep accurate books of account and
          -----------------                                                   
records at its principal place of business covering all transactions relating to
the license hereby granted, the MD Gateway Revenue and the Webmaster Cost.

     5.2  Reasonable Inspections.  OSS shall have the right to examine, in
          ----------------------                                          
person or through its legal representatives, all MEC books of account and
records described in Section 5.1 above at any time during reasonable business
hours of MEC upon three days prior written notice, subject only to such
protection as may be necessary to prevent further dissemination of the
inventions, trade secrets and other confidential information of MEC.


                                       55
<PAGE>
 
                                  ARTICLE VI.

            REPRESENTATIONS.  WARRANTIES.  AND ADDITIONAL COVENANTS
            -------------------------------------------------------

     6.1  Representations of OSS.  OSS represents and warrants to MEC as set
          ----------------------                                            
forth in this Section 6.1.  Any inaccuracy of such representations and
warranties as of the date of this License Agreement shall constitute a breach of
this Agreement.

          (a) OSS is a corporation duly organized, validly existing and in good
     standing under the laws of the State of Colorado, U.S.A.  OSS has all
     corporate authority to enter into this License Agreement and all other
     agreements between OSS and MEC, and to perform its obligations hereunder
     and thereunder.  All action required of OSS's members and managers and any
     other similar action by OSS required to authorize the execution and
     delivery of each of the agreements between OSS and MEC has been completed.

          (b) This Agreement is a valid and binding obligation of OSS
     enforceable against OSS in accordance with its terms.

     6.2  Representations of MEC.  MEC represents and warrants to OSS as set
          ----------------------                                            
forth in this Section 6.2.  Any inaccuracy of such representations and
warranties as of the date of this Agreement shall constitute a breach of this
Agreement.

          (a) MEC is a nonprofit corporation duly organized, validly existing
     and in good standing under the laws of Colorado.  MEC has all corporate
     authority to enter into this Agreement.  All actions required of MEC's
     management, shareholders and any other similar action by MEC required to
     authorize the execution and delivery of this Agreement and all other
     agreements between OSS and MEC have been completed.

          (b) This Agreement constitutes a valid and binding obligation of MEC
     enforceable against MEC in accordance with its terms.

     6.3  Warranties of OSS.
          ----------------- 

          (a) OSS hereby warrants that OSS is the legal and beneficial owner of
     the rights granted to MEC pursuant to the exclusive license set forth in
     Article I above, and is the owner of all items to be used in connection
     with such grant of rights.  OSS hereby agrees to indemnify and hold MEC and
     its officers, directors, employees and agents harmless from and against any
     and all loss, cost, damage, liability or expense (including without
     limitation reasonable attorney's fees, court costs and other reasonable
     litigation expenses) suffered, sustained or incurred by MEC or its
     officers, directors, employees or agents as a result of, arising out of or
     in connection with any breach by OSS of the foregoing warranty and
     representation.


                                       56
<PAGE>
 
          (b) OSS agrees to defend or settle, at OSS's expense, any action
     brought against MEC based upon or arising out of any infringement by OSS or
     MEC's use, marketing, advertising, or promoting of MD Gateway of any
     patent, trademark, copyright, trade secret, or other proprietary right.
     OSS further agrees to pay any costs, damages, and attorneys' fees finally
     awarded against MEC in such action by a court of law, after all appeals,
     which are attributable to such claim.

     6.4  Warranties of MEC.  MEC shall indemnify and hold harmless OSS and its
          -----------------                                                    
officers, directors, employees, agents and affiliates ("Indemnified Parties")
from and against any and all claims, causes of action, suits, damages,
liabilities, and/or judgments and settlements including all costs, expenses, and
attorneys' and accountants' fees that an Indemnified Party may incur due to any
breach by MEC of any of its representations, and/or warranties, obligations
under this Agreement.  MEC shall undertake to conduct the defense of such suit
at its own expense, it being understood, however, that OSS has at all times the
option to participate in, or undertake any litigation involving said matters
through counsel of OSS's own selection and at OSS's own expense, subject to the
indemnity and hold harmless obligations of MEC hereunder with respect to such
expense.  MEC shall not make any settlement of any claim, suit, or demand for
which OSS may become responsible hereunder without OSS's written consent, which
shall not be unreasonably withheld.

     6.5  Covenants of OSS.
          ---------------- 

          (a) OSS shall not voluntarily take any action or allow any event
     within its control to occur that, in either case, would cause any of the
     representations and warranties in section 6.1 to become inaccurate.

          (b) During the term of this Agreement, OSS shall not provide Web
     development services to anyone other than MEC in connection with any
     project which is intended to aggregate medical or CME information provided
     by two or more providers.  The parties intend for the terms of this Section
     to be specifically enforceable.

          (c) During the term of this Agreement OSS shall continuously provide
     Internet access for MD Gateway and other MEC uses via the T1
     telecommunications facility and an Internet Gateway computer network as
     described in Section 3.1 above.  OSS shall also maintain a redundant
     version of MD Gateway on an Internet gateway computer, or a computer
     connected to an Internet gateway computer, operated and maintained by OSS,
     which version shall serve as the active version of MD Gateway in the event
     that the T1, telecommunications facility is down or MD Gateway is otherwise
     unavailable from MEC's premises.

          (d) During the term of this Agreement OSS shall take all steps
     necessary to preserve its ownership interest in the items made subject to
     an exclusive license to MEC in Article I.


                                       57
<PAGE>
 
     6.6  Covenants of MEC.
          ---------------- 

          (a) MEC shall not voluntarily take any action or allow any event
     within its control to occur that, in either case, would cause any of the
     representations and warranties in section 6.2 to become inaccurate.

          (b) During the term of this Agreement, MEC shall not engage or work
     with any Internet or Web provider other than OSS to obtain Internet or Web
     development services.  The parties intend for the terms of this paragraph
     (b) to be specifically enforceable.

                                 ARTICLE VII.

                   OWNERSHIP OF INTELLECTUAL PROPERTY RIGHTS
                   -----------------------------------------

     7.1  Rights Owned by OSS.
          ------------------- 

          (a) MEC acknowledges and agrees that MD Gateway is and shall remain a
     proprietary business asset of OSS, and that OSS retains sole ownership of
     all right, title and interest in the items enumerated in Section 1.1 above.

     7.2  Rights Owned by MEC.
          ------------------- 

          (a) OSS acknowledges and agrees that MEC shall own all rights, title
     and interest in any copyrights, trademarks, tradenames, patents, trade
     secrets, or other intellectual property which MEC creates as part of its
     operation of MD Gateway; provided, however, that MEC shall not acquire
     under this Agreement any ownership interest in the trademark "MD Gateway."

                                 ARTICLE VIII.

                                  TERMINATION
                                  -----------

     8.1  Defaults On This Agreement.  As used herein, the term "default" shall
          --------------------------                                           
mean a material breach of this Agreement that is not cured by the breaching
party within 30 days following receipt of written notice of default from the
other party.  In the event of a default by either party, the party not in
default shall be entitled to any and all remedies available at law or in equity,
including but not limited to damages, specific performance and/or termination of
this Agreement.  This Agreement may be terminated by the party not in default,
at any time following a default, by delivery of a written notice of termination
to the defaulting party, and termination shall take effect immediately upon the
giving of notice hereunder.

     8.2  External Conditions.  In the event that (i) MEC discontinues operation
          -------------------                                                   
of MD Gateway, (ii) MEC shall make an assignment for the benefit of creditors,
(iii) MEC shall go into liquidation, or (iv) a trustee is appointed for the
benefit of creditors and the trustee is not discharged within 30 days of his
appointment, whether any of the aforesaid events be the outcome of a voluntary
act of MEC or otherwise, OSS shall be entitled to terminate this 


                                       58
<PAGE>
 
Agreement forthwith by giving notice to such effect to MEC, and termination
shall take effect immediately upon the giving of notice hereunder.

     8.3  Preservation of Intellectual Property Rights Under This Agreement.
          -----------------------------------------------------------------  
The termination of this Agreement for any reason shall be without prejudice to
any of OSS's or MEC's intellectual property rights as described in Article VII
of this Agreement.

     8.4  Mutual Obligations.  Notwithstanding termination of this Agreement,
          ------------------                                                 
the parties shall be required to carry out any provisions hereof which
contemplate performance by them subsequent to such termination, and such
termination shall not affect any liability or other obligation which shall have
accrued prior to such termination.

     8.5  OSS Rights in MD Gateway.  In the event of any termination of this
          ------------------------                                          
Agreement according to the terms hereof, MEC shall immediately discontinue all
use of MD Gateway.  All rights to MD Gateway as described in Section 7.1 above
shall automatically revert to OSS and MEC shall promptly execute any and all
documents reasonably required by OSS in connection with such discontinuance and
reversion.

     8.6  Return of Equipment.  After termination and within twenty-one (21)
          -------------------                                               
days from the date of OSS's written notice of termination to MEC, MEC shall at
its cost return to OSS all hems associated with MD Gateway as identified in
Article I.

     8.7  MEC Intellectual Property.  In the event of termination of this
          -------------------------                                      
Agreement, OSS acknowledges that MEC shall own all right, title and interest in
and to all intellectual property described in Section 7.2 above.

                                  ARTICLE IX.

                           MISCELLANEOUS PROVISIONS
                           ------------------------

     9.1  Assignment.  This Agreement and the fights granted hereunder cannot be
          ----------                                                            
assigned or otherwise transferred by a party hereto without the prior written
consent of the other party hereto.  Any attempted assignment or transfer without
such consent shall be null and void.

     9.2  Relationship of the Parties.  Nothing herein contained shall be deemed
          ---------------------------                                           
or construed to constitute either party hereto the agent of the other party
hereto or to create a partnership or joint venture between the parties hereto,
and neither party shall have any power hereunder to obligate or bind the other
party in any manner whatsoever.

     9.3  Governing Law and Dispute Resolution.  This Agreement shall be
          ------------------------------------                          
governed by and interpreted in accordance with the laws of the State of
Colorado.  Except as provided in Section 9.4 below, any action, claim or suit
initiated in connection with this Agreement shall be prosecuted exclusively
within the courts of the State of Colorado located in Colorado Springs, except
where exclusive federal jurisdiction applies, in which case an action, claim or
suit initiated in connection with this Agreement shall be prosecuted in US
District Court in Denver.


                                       59
<PAGE>
 
     9.4  Arbitration.  In addition to its other rights and remedies under
          -----------                                                     
Section 9.3 above, either party may require that any dispute concerning this
Agreement, its interpretation or application, including any dispute relating to
either party's right to terminate this Agreement, shall be resolved by mandatory
arbitration as set forth below:

          (a) In the event of any disagreement or dispute that a party wishes to
     submit to arbitration, such party (the "Initiating Party") may request
     arbitration by providing a written "notice of dispute" to the other party
     (the "Responding Party") and such notice shall require both parties to
     submit to mandatory and binding arbitration.  The Initiating Party shall
     have the responsibility of notifying the American Arbitration Association's
     Denver Regional Office, which shall conduct the arbitration in accordance
     with the Commercial Arbitration Rules of the American Arbitration
     Association then in effect.

          (b) The arbitrators shall have frill power to decide the dispute
     presented, including the power to order affirmative or negative injunctive
     relief and may award compensatory damages to the prevailing party, if any.
     The arbitrators shall also award reasonable attorneys' fees and costs to
     the prevailing party.  The award rendered by the arbitrators shall be final
     and judgment may be entered upon it in accordance with applicable law in
     any court of competent jurisdiction.

          (c) Arbitration shall be conducted by a three-person panel of
     arbitrators (or such lesser number of arbitrators as may be mutually
     agreed) in accordance with the Commercial Arbitration Rules of the American
     Arbitration Association.  The arbitrators shall be chosen by mutual
     agreement of the parties, or, if no agreement can be reached, by use of the
     procedures of the American Arbitration Association.

          (d) The arbitration hearing shall be held in Denver, Colorado.

     9.5  Notices.  All notices, requests and other communications from one of
          -------                                                             
the parties hereto to any or all of the others shall be given in writing and
deemed to have been duly given or served if personally delivered, or sent by
first class, certified mail, return receipt requested, postage prepaid, to the
party at the address provided below, or to such other address as such party may
hereafter designate by written notice to the other parties.

     If to OSS:          Online System Services, Inc.
     ---------           Attn:  Steve Adams, President                    
                         1800 Glenarm Place           
                         Suite 1800                   
                         Denver, Colorado  80202       
                         

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<PAGE>
 
     If to MEC:          Medical Education Collaborative, Inc.
     ---------           Attn: Charles P. Spickert, President
                         1800 Jackson Street                 
                         Suite 200                           
                         Golden, Colorado  80401              
                         

     9.6  Entire Agreement.  This Agreement constitutes the complete and
          ----------------
exclusive statement of the agreement between the parties, and supersedes all
prior and concurrent proposals and understandings, whether oral or written, and
all other communications between the parties relating to the subject matter of
this Agreement. The parties may, from time to Lime during the continuance of
this Agreement, modify, vary or alter any of the provisions of this Agreement,
but only by an instrument in writing duly executed by all parties hereto.

     9.7  Force Majeure.  If either party is unable to perform any of its
          -------------                                                  
obligations under this Agreement. Other than payments due hereunder, or to enjoy
any of its benefits, other than payments clue hereunder, because of (or if loss
of the Equipment is caused by) natural disaster, actions or decrees of
governmental bodies or communications line failure not the fault of the affected
party (a "Force Majeure Event"), the party who has been so affected shall
immediately give notice to the other party and shall do everything possible to
resume performance. Upon receipt of such notice, all obligations under this
Agreement shall be immediately suspended. If the period of nonperformance
exceeds 15 days from the receipt of notice of the Force Majeure Event, the party
whose ability has not been so affected may by giving notice terminate this
Agreement. However, delays in delivery due to Force Majeure Events shall
automatically extend the delivery date for a period equal to the duration of
such Events; any warranty period affected by a Force Majeure Event shall
likewise be extended for a period equal to the duration of such event.

     9.8  Consent of a Party.  Wherever the consent or approval of a party
          ------------------                                              
hereto is required pursuant to any provisions of this Agreement, the same shall
not be deemed to have been given unless in writing, signed by the party whose
consent or approval is required.

     9.9  Execution of Documents.  Each party agrees to and shall execute any
          ----------------------                                         
and all documents and do any and all acts or things reasonably necessary to
fulfill each party's obligations hereunder, including, if necessary to effect
the intent of the parties or to comply with applicable laws, rulings or
regulations, the execution of two or more separate documents to evidence the
terms and conditions of this Agreement.

     9.10  Binding Agreement  This Agreement shall be binding upon and inure to
           -----------------                                               
the benefit of the legal representatives, parent companies, subsidiaries,
affiliates, related companies, successors, and assigns (subject to approval in
accordance with Section 9.1 above) of the parties hereto.

     9.11  Interpretation.  In the interpretation of this Agreement, words
           --------------                                                 
importing the singular number shall include the plural and visa versa words
importing the neuter gender shall include the masculine and feminine gender and
words importing a corporation shall include a


                                       61
<PAGE>
 
person, except to the extent that such interpretation shall be excluded by or be
repugnant to the context.

     9.12  Signatures.  The individuals signing this Agreement on behalf of the
           ----------                                                      
parties hereto represent and warrant that they have the requisite authority to
do so and to bind the party for whom they sign to the terms of this Agreement.

     9.13  Counterparts.  This Agreement may be executed in one or more
           ------------                                                
counterparts, each of which when so executed shall be an original, but all of
which together shall constitute one agreement.

     Executed as of the date first set forth above.

Online System Services, Inc.               Medical Education Collaborative, Inc.
 
 
By  /s/ R. Steven Adams                    By  /s/ Charles P. Spickert
   -------------------------------            ----------------------------------
    Steve Adams                                Charles P. Spickert, MPH
    President                                  President/CEO


                                       62
<PAGE>
 
                                  SCHEDULE A

                           COMPONENTS OF MD GATEWAY
                           ------------------------

Router Cisco 2501 (IOS IP software set, 2-Serial, 1 Ethernet)
Tylink T-1 CSU/DSU
Accton 10BaseT hub (16 Ports)

WebMaster Workstation (Pentium P5-133, 32MB RAM, I.7 GB HD,
4X CD-ROM w speakers, 3.5" FD, Intel Ethernet Express 10X card)
Microsoft Windows NT Workstation 4.0
Maxtech 14" monitor

Web Server -- Physically located in the web server suite at OSS

Software necessary to support existing and planned web site features (as
currently exist in CME Gateway, MD Gateway and CAA), including but not limited
to database, statistics, e-commerce, broadcast e-mail (e.g., Visual InterDev,
SQL Enterprise Manager)


                                       
<PAGE>
 
                                  SCHEDULE B

                  TRADEMARK RIGHTS ASSOCIATED WITH MD GATEWAY
                  -------------------------------------------

MD GATEWAY(TM)