EMPLOYMENT AGREEMENT
                                     BETWEEN
                             PSW Technologies, Inc.
                                       AND
                                John M. Velasquez


THIS AGREEMENT, made and entered into as of January 25, 1999, by and between PSW
Technologies  Inc.,  with its  principal  offices  located  at 6300  Bridgepoint
Parkway,  Building 3, Suite 200,  Austin,  Texas 78730  (hereinafter  called the
"Company"), and John M. Velasquez (hereinafter called the "Executive").

                                   WITNESSETH

In  consideration  of the mutual  covenants  herein contained and other good and
valuable considerations, the parties hereto agree as follows:


SECTION I - TERM OF EMPLOYMENT AND DUTIES

1.1   Term.  The term of this Agreement shall commence as of January 25, 1999.

1.2  Duties.  Executive  shall be  employed  by Company  as the Vice  President,
     Enterprise  Solutions.   Executive  shall  report  directly  to  the  Chief
     Executive Officer. Executive shall have such responsibilities and authority
     as may from time to time be assigned to  Executive  by the Chief  Executive
     Officer of the  Company or by the Board of  Directors,  provided,  however,
     that the  responsibilities  assigned  shall be of a  character  and dignity
     appropriate  to a senior  executive of the Company.  During the  employment
     period,  the  Executive  agrees to devote  substantially  all of his normal
     business  time and  attention  (reasonable  vacation  and  periods of leave
     excepted) to the affairs of the Company and the promotion of its interests.

1.3  Location.  Unless the Executive otherwise consents,  the principal place of
     the Executive's  employment will be the Austin,  Texas metropolitan area in
     office space to be provided by Company.


SECTION II - COMPENSATION, BENEFITS AND PERQUISITES

2.1  Base Salary. The Executive will receive a base salary at a rate of $225,000
     per annum,  payable in  accordance  with the  Company's  customary  payroll
     practices.   At  least  annually,   the  Chief  Executive  Officer  or  the
     Compensation   Committee  of  the  Board  of  Directors   will  review  the
     Executive's  base salary for  competitiveness  and  appropriateness  in the
     industry,  and in light of such review may, in the sole  discretion  of the
     Company, increase such salary.
<PAGE>

2.2  Transition  Bonus.  In addition to the other  payments  referred to in this
     Agreement, the Company agrees to pay to the Executive a transition bonus of
     $30,000 to be paid as  follows:  $15,000 on April 15,  1999 and  $15,000 on
     July 15, 1999.  Executive must be employed by the Company on these dates in
     order to receive the bonus.

2.3  Annual  Incentive  Bonus. In addition to the other payments  referred to in
     this Agreement, the Executive shall be entitled to participate in an annual
     incentive  bonus  plan with a target  annual  cash bonus of 30% of the base
     salary earned  during the fiscal year.  The actual  achievement  and payout
     shall be based upon criteria established by the Chief Executive Officer and
     approved by the Compensation  Committee of the Board of Directors.  The 30%
     bonus is guaranteed  for calendar year 1999 if the Executive is employed by
     the Company on each of the four equal installment  payment dates: April 15,
     1999; July 15, 1999;  October 15, 1999 and January 15, 2000. For every year
     thereafter  the annual  incentive  bonus plan payments  ("Annual  Incentive
     Bonus")  will be paid in  cash  in  full  on  February  15th of each  year.
     Executive  must be  employed  by the  Company  on  these  dates in order to
     receive the bonus.

2.4  Stock Option Grants.  Executive shall be granted stock options  pursuant to
     the  Company's  1996 Stock  Option Plan (the  "Plan") to  purchase  150,000
     shares of Company  common stock having an exercise  price equal to the fair
     market value  (determined in accordance  with the applicable  provisions of
     the Plan) of Company  common  stock on January 25,  1999.  The options will
     vest as follows:

         Vest Date                  Expiration Date           Number of Shares
         07/25/1999                 01/25/2009                37,500
         07/25/2000                 01/25/2009                37,500
         07/25/2001                 01/25/2009                37,500
         07/25/2002                 01/25/2009                37,500

     The options  granted to the Executive under this Section shall be Incentive
     Stock Options as defined under Section 422 of the Internal  Revenue Code of
     1986, as amended, up to the permitted limitation as of January 25, 1999 and
     any balance  shall be reflected in a  non-qualified  options.  Such options
     shall be subject to, and governed by, the terms and  provisions of the Plan
     except to the extent of  modifications  of such options which are permitted
     by the Plan and which are expressly provided for herein.

2.5  Benefits.  Executive  shall be  entitled  to  participate  in all  employee
     benefit plans of the Company in proportion to his position and compensation
     herein.  "Benefit Plans" shall include,  but not be limited to, group life,
     long term disability,  medical, dental and vision insurance; stock options;
     stock  purchase  or  bonus  plans;  profit  sharing  arrangements;  401(k);
     deferred   compensation;   and  any  other  incentive  compensation  plans.
     Executive  will be entitled to four (4) weeks of paid  vacation  per annum.
     Company shall reimburse Executive for the expense of continuing Executive's
     current family health insurance under COBRA provisions with Dell until such
     coverage is not available.

<PAGE>

SECTION III - TERMINATION  

3.1  Employment  at Will.  This  Agreement is a contract of  employment at will.
     This means that  employment  will continue only so long as both Company and
     Executive  want  it  to  do  so.  Subject  to  the  Notice  of  Termination
     requirement set forth in Section 3.4, Executive is free to quit at any time
     at  his  discretion  and  Company  is,  subject  to the  severance  payment
     provisions of Section 3.2, free to terminate Executive's  employment at any
     time at its  discretion.  If the Agreement is terminated  for reasons other
     than  death,  total  disability,  Cause (as  defined  in Section  3.3),  or
     voluntary termination,  the Executive shall be paid as described in Section
     3.2.

3.2  Severance.  In the event that the  Executive's  employment is terminated by
     the Company  for reasons  other than  death,  total  disability,  Cause (as
     defined in Section 3.3) or voluntary  termination,  the Company will pay to
     the Executive a lump sum payment  equal to three months of the  Executive's
     then  current  base  salary.  The  payment  will  be  made  in  cash on the
     termination  date.  In  addition,  one  third of the  Executive's  unvested
     options shall  automatically  vest,  so that this option shall  immediately
     become  exercisable  for those  particular  Option  Shares as  fully-vested
     shares of Common Stock.

3.3  Cause. Termination by Company of Executive's employment for "cause" as used
     in this  Agreement  shall be limited to gross  negligence or malfeasance by
     Executive  in the  performance  of his  duties  under  the  Agreement,  the
     Executive's  conviction  or plea of "guilty" or "no  contest" to any felony
     crime, or indictment for a felony violation of the federal securities laws.

3.4  Involuntary  Termination.  An  "Involuntary  Termination"  shall  mean  the
     termination of Executive's employment by reasons of
(a)  Involuntary  dismissal or  discharge by the Company for reasons  other than
     Cause, or
(b)  Executive's  voluntary  resignation  following (1) a change in  Executive's
     position with the Company which  materially  reduces  Executive's  level of
     responsibility,  (2) a  reduction  in  Executive's  level  of  compensation
     (including  base  salary,   fringe  benefits  and   participation   in  any
     corporate-performance   based  bonus  or  incentive   programs)  or  (3)  a
     relocation  of  Executive's  place of  employment  by more than  fifty (50)
     miles,  provided  and  only if such  change,  reduction  or  relocation  is
     effected by the Company without Executive's consent.

3.5  Notice of Termination.  The Agreement may be terminated by the Executive or
     the Company immediately upon written notice.

<PAGE>

SECTION IV - CHANGE OF CONTROL

4.1  Change of Control. A "Change of Control" means any of the following events:
(a)  the sale by the  Company  of  substantially  all of its  assets to a single
     purchaser or a group of associated or affiliated purchasers.
(b)  the sale, exchange or other disposition, in one transaction to an entity or
     entities not affiliated with the Company,  of more than fifty percent (50%)
     of the outstanding common stock of the Company.
(c)  the merger or  consolidation  of the Company in a transaction  in which the
     stockholders  of the Company  receive less than fifty  percent (50%) of the
     outstanding voting stock of the new or continuing entity.

4.2  Accelerated Vesting of Options. In the event of a Change in Control, all of
     the options granted but not otherwise  vested shall  automatically  vest so
     that the options  shall,  immediately  prior to the  effective  date of the
     Change in Control, become fully exercisable for all of the options as fully
     vested shares of Common Stock and may be fully  exercised for any or all of
     those  vested  shares.  However,  the  options  shall  not  vest on such an
     accelerated  basis if and to the extent the options are, in connection with
     the Change in  Control,  assumed by the  successor  corporation  (or parent
     thereof),  replaced  with a  comparable  option to  purchase  shares of the
     capital stock of the successor corporation (or parent thereof) or otherwise
     continued  in full  force and  effect  pursuant  to the  Change in  Control
     transaction. The determination of option comparability shall be made by the
     Plan  Administrator,  and such determination shall be final,  binding,  and
     conclusive.

4.3  Voluntary Termination Option Following Change of Control. In the event of a
     Change of  Control,  the  Executive  may at his option  decide to leave the
     Company  within 90 days of the  Change of  Control,  and be paid  severance
     pursuant  to Section 3.2 as though the  Executive  were  terminated  by the
     Company without Cause.

4.4  Involuntary  Termination  Following Change of Control.  Upon an Involuntary
     Termination of Executive's employment within twelve (12) months following a
     Change in Control a portion of the Option  Shares at the time of the Change
     of  Control  (or  any  replacement   grant)  not  otherwise   vested  shall
     automatically vest, so that the Option shall immediately become exercisable
     for those particular Option Shares. The number of Option Shares which shall
     vest upon such an  accelerated  basis in  connection  with the  Involuntary
     Termination  shall  be  equal  to the  number  of  Option  Shares  in which
     Executive would have vested had Executive  remained employed by Company for
     an  additional  three  (3)-year  period  measured  from  the  date  of  his
     Involuntary Termination.

<PAGE>

SECTION V - DISPUTE RESOLUTION

5.0  Dispute Resolution. Before filing a claim in any state or federal court, or
     any state or federal agency, arising out of a dispute under this Agreement,
     both  parties  agree to submit such claim or  controversy  to a third party
     mediator in a good faith effort for  resolution.  Third party mediator will
     be mutually  selected by  Executive  and Company  within 30 days of written
     notification  of dispute by Executive  or Company to the other party.  Such
     mediation shall be non-binding.  Further, costs associated with retaining a
     mediator shall be the responsibility of the losing party.


SECTION VI - NONCOMPETITION, CONFIDENTIALITY AND OWNERSHIP

6.1  Non-competition. Executive shall not during the term of this Agreement, and
     for a period of one year thereafter, directly or indirectly:
(a)  Solicit  or  induce  any  employee  of  Company  to  terminate  his  or her
     employment.
(b)  Perform  any  act  of  direct   competition   with  Company   (whether  the
     solicitation  of sales,  sale,  or marketing  presentation)  to any Company
     customer  or  prospective  customer  with  which the  Executive  had direct
     contact  while  employed by Company  and for twelve (12) months  after such
     employment ends. A Company customer shall be defined as the entire customer
     entity for  entities  with only  regional  or local  offices.  For  Company
     customers  who have  national or worldwide  offices,  the Company  customer
     shall be defined as that  regional or local office with which the Executive
     had contact.
(c)  Accept any opportunity (whether of a contract or full-time employment) with
     a Company  customer if  Executive  learned of the  opportunity  as a direct
     result of the Executive's employment by Company.

6.2  Confidentiality.  The Executive shall not disclose or furnish  confidential
     information about the Company or its customers to any third party except as
     specifically  authorized by Company or as reasonably necessary to carry out
     the duties  performed by the Executive.  Upon  termination,  Executive will
     return to Company all such information, materials, and company equipment in
     his or her  possession.  This  paragraph  shall  survive the  expiration or
     termination of this Agreement.

6.3  Ownership.  Executive  agrees to disclose to Company in writing any and all
     documentation,  inventions,  improvements or discoveries which arise out of
     his or her employment  with Company.  All  copyrightable  work is "work for
     hire" and  Executive  hereby  assigns to Company all rights and interest in
     any  copyrightable  work,  invention or idea made or conceived while in the
     performance  of any job related  duties during the term of this  Agreement.
     Executive will execute any documents,  and at Company's expense provide any
     cooperation  reasonably  necessary to create or record any such transfer of
     ownership.

<PAGE>

SECTION VII - MISCELLANEOUS

7.1  Successors.  The  rights  and  duties  of a party  hereunder  shall  not be
     assignable by that party;  provided,  however, that this Agreement shall be
     binding upon and inure to the benefit of any successor of the Company,  and
     any such successor shall be deemed  substituted for Company under the terms
     of this  Agreement.  The term  successor as used herein  shall  include any
     person,  firm,  corporation or other business  entity which at any time, by
     merger,  purchase or otherwise,  acquires all or  substantially  all of the
     assets or business of the Company.

     This Agreement  shall be binding upon and shall inure to the benefit of the
     Executive, Executive's heirs, executors, administrators and beneficiaries.

7.2  Entire  Agreement.  With  respect to the  matters  specified  herein,  this
     Agreement  contains the entire agreement between the parties and supersedes
     all prior  oral and  written  agreements,  understandings  and  commitments
     between the parties.

7.3  Amendments.  This Agreement may be amended but only by a subsequent written
     agreement of the parties.

7.4  Jurisdiction. This Agreement will be governed by Texas law.

7.5  Notices. Any notice,  request, or other communication required or permitted
     pursuant  to this  Agreement  shall be in writing  and shall be deemed duly
     given  when  received  by the party to whom it shall be given or three days
     after being  mailed by  certified,  registered,  or express  mail,  postage
     prepaid, addressed as follows:

       If to the Company:

         PSW Technologies, Inc.
         6300 Bridgepoint Parkway
         Building 3, Suite 200
         Austin, Texas  78730
         Attention:  General Counsel

       If to the Executive:

         John M. Velasquez
         1406 West 29th Street
         Austin, Texas  78703

Any party may change the  address  to which  communications  are to be mailed by
giving notice of such change in the manner provided above.

<PAGE>

IN WITNESS  THEREOF,  the parties  hereto have executed this Agreement as of the
year and day first above written.

COMPANY - PSW Technologies, Inc.         EXECUTIVE - John M. Velasquez


By: /s/Timothy D. Webb                   By: /s/John M. Velasquez

Name (Print): Timothy D. Webb            Name (Print): John M. Velasquez

Title: Chief Executive Officer