Document:

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                          LIABILITY COMPANY AGREEMENT

                                      OF

                    INLAND PACIFIC DEVELOPMENT COMPANY, LLC

                     A DELAWARE LIMITED LIABILITY COMPANY
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                               TABLE OF CONTENTS
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Article 1 DEFINITIONS............................................................................................     1

      1.1    "Accountant"........................................................................................     1
      1.2    "Act"...............................................................................................     1
      1.3    "Affiliate".........................................................................................     1
      1.4    "Agreement".........................................................................................     2
      1.5    "Bankruptcy"........................................................................................     2
      1.6    "Base Rate".........................................................................................     2
      1.7    "Capital Account"...................................................................................     2
      1.8    "Capital Contribution"..............................................................................     2
      1.9    "Certificate of Formation"..........................................................................     2
     1.10    "Code"..............................................................................................     2
     1.11    "Company"...........................................................................................     2
     1.12    "Company Budget"....................................................................................     2
     1.13    "Distributable Cash" and "Start-Up Distributable Cash"..............................................     2
     1.14    "Distribution"......................................................................................     2
     1.15    "Economic Interest".................................................................................     2
     1.16    "Fair Market Value".................................................................................     3
     1.17    "Fiscal Year".......................................................................................     3
     1.18    "Formation Date"....................................................................................     3
     1.19    "Former Member".....................................................................................     3
     1.20    "Former Member's Interest"..........................................................................     3
     1.21    "IPWC"..............................................................................................     3
     1.22    "IPWC Contract".....................................................................................     3
     1.23    "IPWC Development Fees".............................................................................     3
     1.24    "Laws"..............................................................................................     3
     1.25    "Management Committee"..............................................................................     3
     1.26    "Member"............................................................................................     3
     1.27    "Membership Interest"...............................................................................     4
     1.28    "Membership Termination Event"......................................................................     4
     1.29    "Percentage Interest"...............................................................................     4
     1.30    "Person"............................................................................................     4
     1.31    "Preferred Return"..................................................................................     4
     1.32    "Preferred Return Account"..........................................................................     4
     1.33    "President".........................................................................................     4
     1.34    "Project"...........................................................................................     5
     1.35    "Project Budget and Plan"...........................................................................     5
     1.36    "Related IPWC Agreements"...........................................................................     5
     1.37    "Start-Up Capital"..................................................................................     5
     1.38    "Start-Up Distributable Cash".......................................................................     5
     1.39    "Start-Up Period"...................................................................................     5
     1.40    "Start-Up Percentages"..............................................................................     5
     1.41    "Tax Credits".......................................................................................     5
     1.42    "Tax Matters Member"................................................................................     5
     1.43    "Tax Supplement"....................................................................................     5
     1.44    "Transfer"..........................................................................................     6
     1.45    "Treasury Regulations"..............................................................................     6
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Article 2 ORGANIZATIONAL MATTERS...................................................................................      6

   2.1       Name..................................................................................................      6
   2.2       Term..................................................................................................      6
   2.3       Office and Agent......................................................................................      7
   2.4       Purpose of Company....................................................................................      7
   2.5       Intent................................................................................................      7
   2.6       Absence of Other Restrictions.........................................................................      7

Article 3 CAPITAL CONTRIBUTIONS....................................................................................      7

   3.1       Initial Capital Contributions.........................................................................      7
   3.2       Project Capital Contributions.........................................................................      9
   3.3       Call Notice/Bank Accounts.............................................................................     10
   3.4       Capital Accounts......................................................................................     10
   3.5       Preferred Return......................................................................................     10
   3.6       Contribution Accounts and Preferred Return Accounts...................................................     10
   3.7       Capital Matters.......................................................................................     11
   3.8       IPWC Development Fees.................................................................................     11
   3.9       Failure to Contribute Capital.........................................................................     11

Article 4 MEMBERS..................................................................................................     12

   4.1       Limited Liability.....................................................................................     12
   4.2       Admission of Additional Members.......................................................................     12
   4.3       Withdrawal............................................................................................     12
   4.4       Lack of Member Authority..............................................................................     13

Article 5 MANAGEMENT AND CONTROL OF THE COMPANY....................................................................     13

   5.1       Management of the Company by Management Committee.....................................................     13
   5.2       President of Company..................................................................................     15
   5.3       Performance of Duties; Liability of Members and Officers..............................................     16
   5.4       Major Decisions.......................................................................................     17
   5.5       Competing Activities..................................................................................     18
   5.6       Contracts with Affiliates.............................................................................     19
   5.7       Company Opportunities.................................................................................     19
   5.8       Expenses..............................................................................................     19

Article 6 PROFITS, LOSSES, DISTRIBUTIONS AND TAX MATTERS...........................................................     20

   6.1       Allocation of Income and Losses.......................................................................     20
   6.2       Definition of "Distributable Cash"....................................................................     20
   6.3       Timing of Distributions...............................................................................     20
   6.4       Order of Distribution.................................................................................     20
   6.5       Start-Up Period Distributions.........................................................................     21
   6.6       Form of Distribution..................................................................................     21

Article 7 TRANSFER OF INTERESTS....................................................................................     21

   7.1       Transfer of Interests.................................................................................     21
   7.2       Permitted Transfers...................................................................................     21
   7.3       Substitution of Members...............................................................................     22
   7.4       Further Restrictions on Transfer of Interests.........................................................     22
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    7.5      Election to Dissolve..................................................................................  22

Article 8 CONSEQUENCES OF MEMBERSHIP TERMINATION EVENTS............................................................  22

    8.1      Dissolution of Company................................................................................  22
    8.2      Admission or Conversion...............................................................................  23
    8.3      Optional Buy-Out......................................................................................  23

Article 9 ACCOUNTING, RECORDS, REPORTING BY MEMBERS................................................................  25

    9.1      Books and Records/Financial Reports...................................................................  25
    9.2      Bank Accounts; Invested Funds.........................................................................  25
    9.3      Accounting Matters....................................................................................  25

Article 10 DISSOLUTION AND WINDING UP..............................................................................  26

   10.1      Dissolution...........................................................................................  26
   10.2      Date of Dissolution...................................................................................  26
   10.3      Winding Up............................................................................................  26
   10.4      Distributions in Kind.................................................................................  26
   10.5      Order of Payment of Proceeds Upon Dissolution.........................................................  27
   10.6      Limitations on Payments Made in Dissolution...........................................................  27
   10.7      Certificate of Cancellation...........................................................................  27
   10.8      Compensation for Services.............................................................................  27

Article 11 INDEMNIFICATION.........................................................................................  27

   11.1      Indemnification.......................................................................................  27
   11.2      Contract Right; Expenses..............................................................................  28
   11.3      Insurance.............................................................................................  28

Article 12 BUY/SELL................................................................................................  28

   12.1      Put/Call Offering Notice..............................................................................  28
   12.2      Exercise of Put/Call..................................................................................  29
   12.3      Notice................................................................................................  29
   12.4      Designee..............................................................................................  30
   12.5      Closing...............................................................................................  30
   12.6      Company Accountant....................................................................................  31
   12.7      Timing of Put/Call and Default Buy-Out................................................................  31

Article 13 MISCELLANEOUS...........................................................................................  31

   13.1      Amendments............................................................................................  31
   13.2      Offset Privilege......................................................................................  31
   13.3      Arbitration...........................................................................................  31
   13.4      Notices...............................................................................................  33
   13.5      Attorney's Fees.......................................................................................  33
   13.6      Jurisdiction..........................................................................................  33
   13.7      Complete Agreement....................................................................................  33
   13.8      Binding Effect........................................................................................  33
   13.9      Section Headings......................................................................................  34
  13.10      Interpretation........................................................................................  34
  13.11      Severability..........................................................................................  34
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   13.12     Multiple Counterparts.................................................................................     34
   13.13     Securities Representations and Warranties.............................................................     34

Article 14 DEFAULT REMEDIES........................................................................................     34

    14.1     Events of Default.....................................................................................     34
    14.2     Remedies..............................................................................................     35
    14.3     Cumulative Remedies...................................................................................     36
    14.4     Litigation Without Termination........................................................................     36
    14.5     No Waiver.............................................................................................     36
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                                      iv
<PAGE>

                          LIABILITY COMPANY AGREEMENT

                                      OF

                    INLAND PACIFIC DEVELOPMENT COMPANY, LLC

                     A DELAWARE LIMITED LIABILITY COMPANY

This Limited Liability Company Agreement ("Agreement") is dated as of January 1,
2000 (the "Effective Date"), and is made by and between Inland Pacific Partners,
LLC, a Delaware limited liability company ("Inland") and Southwest Water
Company, a Delaware corporation ("SWC") (collectively, the "Members" and
individually, a "Member") with reference to the following facts:

A.   The parties desire to form Inland Pacific Development, LLC (the "Company")
     as a limited liability company under the laws of the State of Delaware.

B.   In furtherance thereof, the parties filed a Certificate of Formation on
     November 13, 1999 (the "Formation Date") with the Secretary of State for
     the State of Delaware and desire to adopt a limited liability company
     agreement to govern their respective rights and obligations as Members of
     the Company from and after the Formation Date (as defined in Section 1.18).

NOW, THEREFORE, in consideration of the mutual covenants contained herein and
for other good and valuable consideration, the receipt of which is acknowledged,
the Members agree that the following shall be the Limited Liability Company
Agreement of the Company.

                                   ARTICLE 1
                                   DEFINITIONS

When used in this Agreement, the following terms have the following meanings:

1.1       "Accountant" shall mean the Company's independent certified public
           ----------
          accounting firm, which initially shall be Ernst & Young Kenneth
          Leventhal, but may be replaced by the Management Committee from time
          to time.

1.2       "Act" means the Limited Liability Company Act of the State of
           ---
          Delaware, as amended from time to time (or any corresponding
          provisions of any succeeding law).

1.3       "Affiliate" of a Member means (a) a Person directly or indirectly
           ---------
          (through one or more intermediaries) controlling, controlled by or
          under common control with that Member; (b) an officer, director,
          partner, shareholder, member or immediate family member of that
          Member; (c) a member of the immediate family of an officer, director,
          partner, shareholder, or member of that Member, or (d) a Person
          directly or indirectly controlled by or under common control with any
          member of Inland. For these purposes "control" means the possession,
          direct or indirect, of the power to direct or cause the direction of
<PAGE>

          the management and policies of a Person, whether through the ownership
          of voting securities, by contract, or otherwise.

1.4       "Agreement" means this Limited Liability Company Agreement of Inland
           ---------
          Pacific Development Company, LLC, as originally executed and as
          amended from time to time.

1.5       "Bankruptcy"  of a Member means the occurrence of any event of
           ----------
          bankruptcy  specified in Section  18-304(a) and (b) of the Act.

1.6       "Base Rate" means the commercial loan rate of interest announced
           ---------
          publicly from time to time by Bank of America in San Francisco,
          California, as such bank's "reference rate" or "prime rate" from time
          to time in effect.

1.7       "Capital Account" shall mean with respect to each Member, the
           ---------------
          "Adjusted Capital Account" which the Company establishes and maintains
          for that Member pursuant to Article 1 of the Tax Supplement.

1.8       "Capital Contribution" of a Member, at any particular time, means the
           --------------------
          amount of money or the value of property which that Member has
          contributed to the capital of the Company. The value of any Capital
          Contribution of property (other than money) shall be its Fair Market
          Value as determined by the Management Committee using such reasonable
          methods of valuation as it may adopt.

1.9       "Certificate of Formation" means the Certificate of Formation of the
           ------------------------
          Company as filed under the Act with the Delaware Secretary of State on
          November 13, 1999.

1.10      "Code" means the Internal Revenue Code of 1986, as amended from time
           ----
          to time (or any corresponding provisions of any succeeding law).

1.11      "Company" means Inland Pacific Development Company, LLC, a Delaware
           -------
          limited liability company.

1.12      "Company Budget" means the annual budget of the projected costs (i) to
           --------------
          fund the day to day administration and operation of the Company,
          including, without limitation, the Quincey Employment Agreement, and
          (ii) to assist in the business development of Inland Pacific Water
          Company. All costs identified in the Company Budget are referred to
          herein as "Operating Costs".

1.13      "Distributable Cash" and "Start-Up Distributable Cash" have the
           ------------------       ---------------------------
          meanings specified in Section 6.2.

1.14     "Distribution" means the transfer of money or property by the Company
          ------------
          to one or more Members without separate consideration.

1.15      "Economic Interest" means a share, expressed as a percentage, of one
           -----------------
          or more of the Company's Net Income, Net Losses, Distributable Cash or
          other

                                                                          Page 2
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          Distributions, but does not include any other rights of a Member,
          including, without limitation, the right to vote or participate in the
          management of the Company or the right to information concerning the
          business and affairs of the Company.

1.16      "Fair Market Value" shall mean the value of the Company's assets if
           -----------------
          sold for all cash in an arms-length negotiated sale as determined by
          the Members (or the appraised value if the Members are unable to agree
          on that value), or as determined by the Management Committee where
          stated herein.

1.17      "Fiscal Year" means the Company's fiscal year, which shall be the
           -----------
          calendar year.

1.18      "Formation Date" means the date the Certificate of Formation is filed
           --------------
          with the Delaware Secretary of State.

1.19      "Former Member" has the meaning specified in Section 8.2.
           -------------

1.20      "Former Member's Interest" has the meaning specified in Section 8.2.
           ------------------------

1.21      "IPWC" means Inland Pacific Water Company, a California corporation.
           ----

1.22      "IPWC Contract" means a municipal water or wastewater contract
           -------------
          entered into by IPWC.

1.23      "IPWC Development Fees" has the meaning set forth in Section 3.8.
           ---------------------

1.24      "Laws" means all federal, state and local laws, statutes, moratoria,
           ----
          initiatives, referenda, ordinances, rules, regulations, standards,
          orders, judicial decisions, common law and other governmental, quasi-
          governmental and utility company requirements (including those
          relating to the environment, health and safety, or handicapped
          persons).

1.25      "Management Committee" means the committee appointed by the Members to
           --------------------
          manage the overall business and affairs of the Company and to make all
          policy decisions of the Company. Initially, the Management Committee
          shall be comprised of those individuals named in Schedule 1.25 hereto.
          The initial appointees (and all subsequent appointees) to the
          Management Committee are referred to in this Agreement collectively as
          the "Managers." As used herein, the terms "approval by the Managers"
          or "approval by the Management Committee" means approval by a majority
          in number of the Managers, except where this Agreement expressly
          requires the unanimous approval of the Managers.

1.26      "Member" means each Person who is an initial signatory to this
           ------
          Agreement and any Person who is subsequently admitted as a Member in
          accordance with Sections 7.3 or 8.2(a) of this Agreement. A Person who
          holds a mere Economic Interest but who has not been admitted as a
          Member is referred to herein as an "Interest Holder". Except where
          "unanimous approval" is

                                                                          Page 3
<PAGE>

          expressly required, "approval by the Members" or "approval of a
          majority-in-interest of the Members" as used herein means approval by
          Members that own, individually or collectively, a majority of the
          Percentage Interests owned by all Members then authorized to vote.

1.27      "Membership Interest" means a Member's total interest as a Member of
           -------------------
          the Company, including that Member's Economic Interest, its right to
          inspect the books and records of the Company and its right, to the
          extent specifically provided in this Agreement, to participate in the
          business, affairs and management of the Company and to vote or grant
          consent with respect to matters coming before the Company.

1.28      "Membership Termination Event" with respect to any Member means one or
           ----------------------------
          more of the following: the death, insanity, permanent disability,
          withdrawal, resignation, expulsion, Bankruptcy, dissolution, Transfer,
          or occurrence of any other event which terminates the continued
          membership of that Member in the Company, including the occurrence of
          any of the events set forth in Section 18-304 of the Act, excepting a
          Transfer of a Member's Membership Interest which is made in accordance
          with the provisions of Section 7.2 shall not constitute a Membership
          Termination Event.

1.29      "Percentage Interest" means the percentage of a Member's Membership
           -------------------
          Interest in Company set forth opposite the name of that Member in
          Schedule 1.29, as such percentage may be adjusted from time to time
          pursuant to the provisions of this Agreement, or, as to an Interest
          Holder who owns a mere Economic Interest in Company, the percentage of
          that Person's Economic Interest. The Percentage Interest of the
          Members for all matters of Net Income and Net Loss related to the
          Start-Up Capital, Operating Costs, and IPWC Development Fees during
          the Start-Up Period shall be SWC -55%, Inland - 45% (the "Start-Up
          Percentages")); thereafter such Percentage Interests for all matters
          under this Agreement shall adjust to and remain SWC - 25%; Inland -
          75%, unless further adjusted by reason of Transfer or dilution
          pursuant to the terms of this Agreement.

1.30      "Person" means any entity, corporation, company, association, joint
           ------
          venture, joint stock company, partnership, trust, limited liability
          company, limited liability partnership, real estate investment trust,
          organization, individual (including personal representatives,
          executors and heirs of a deceased individual), nation, state,
          government (including agencies, departments, bureaus, boards,
          divisions and instrumentalities thereof), trustee, receiver or
          liquidator.

1.31      "Preferred Return" shall have the meaning specified in Section 3.5
           ----------------
          hereof.

1.32      "Preferred Return Account" shall have the meaning given such term in
           ------------------------
          Section 3.6(b) hereof.

1.33      "President" means the individual employed by the Company to supervise
           ---------
          the day to day operations of the Company and to carry out the policy
          decisions of

                                                                          Page 4
<PAGE>

          the Management Committee. The initial President of the Company shall
          be Robb Quincey ("Quincey") in accordance with the terms of that
          certain Employment Agreement attached hereto as Appendix B (the
          "Quincey Employment Agreement").

1.34      "Project" means a specific water or wastewater related opportunity or
           -------
          other opportunity for investment by Company in utility (sewer, water,
          gas, electric, phone, CATV, solid waste, water treatment, etc.) and
          natural resource management projects, including, without limitation,
          the acquisition, lease and/or sale of water rights, water rights
          transfers, the acquisition and/or operation of utility companies,
          including water or wastewater companies, the financing, construction,
          and/or operation of water and wastewater infrastructure and other
          utilities, groundwater retention, recharge and management, NPDES
          projects, wetlands management, air quality projects, and/or operating
          as a utility purveyor.

1.35      "Project Budget and Plan" means, for each Project, a plan for the
           -----------------------
          acquisition, development, management, operation, marketing and/or
          disposition of the Project and a proforma budget which identifies
          projected capital requirements, costs, and revenues for the Project.

1.36      "Related IPWC Agreements" means the Certificate of Formation, the
           -----------------------
          Cooperative Services Agreement dated December 31, 1999, the IPWC
          Stockholders Agreement dated December 31, 1999, and the Agreement for
          Services dated December 31, 1999.

1.37      "Start-Up Capital" means all Capital Contributions made by Inland and
           ----------------
          SWC during the Start-Up Period to pay the Operating Costs.

1.38      "Start-Up Distributable Cash" has the meaning specified in Section
           ---------------------------
          6.2.

1.39      "Start-Up  Period" means the period  commencing upon the Formation
           ----------------
          Date and ending two(2) years after the Effective Date.

1.40      "Start-Up  Percentages" means SWC - 55%, Inland - 45% as further
           ---------------------
          described in Sections 1.29, 3.1(b), 3.8, Appendix A, and Schedule
          1.29.

1.41      "Tax Credits" means all credits against income or franchise taxes and
           -----------
          credits allowable to Members under state, federal, or other tax
          statutes.

1.42      "Tax Matters Member" means the Member appointed pursuant to the
           ------------------
          provisions of Section 5.5 of the Tax Supplement to serve as the "Tax
          Matters Member" of the Company for purposes of Sections 6221-6233 of
          the Code. Initially, the Tax Matters Partner shall be the Member named
          on Schedule 1.41 hereto.

1.43     "Tax Supplement" means Appendix A attached hereto.
          --------------

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<PAGE>

1.44      "Transfer" means, with respect to a Membership Interest or any
           --------
          interest therein, including the Economic Interest, the sale,
          assignment, transfer, disposition, pledge, hypothecation or
          encumbrance, whether direct or indirect, voluntary, involuntary or by
          operation of law, and whether or not for value, of (a) all or any part
          of that Membership Interest or interest therein or (b) a controlling
          interest in any Person which directly or indirectly through one or
          more intermediaries holds that Membership Interest or interest
          therein, provided a Transfer of a controlling interest in SWC shall
          not constitute a Transfer for purposes of this Agreement. Further, the
          addition or substitution of any member of Inland where such new member
          acquires more than a twenty-five percent (25%) interest in Inland
          shall constitute a Transfer. A Transfer referred to in clause (b)
          above, except to an "Affiliate," is referred to in this Agreement as a
          "Change in Control".

1.45      "Treasury Regulations" means the regulations of the United States
           --------------------
          Treasury Department pertaining to income tax.

References in this Agreement to "Articles," "Sections," "Appendices" and
"Schedules," shall be to the Articles, Sections, Appendices and Schedules of
this Agreement, unless otherwise specifically provided; all Appendices and
Schedules to this Agreement are incorporated herein by reference; any of the
terms defined in this Agreement may, unless the context otherwise requires, be
used in the singular or the plural and in any gender depending on the reference;
the words "herein", "hereof" and "hereunder" and words of similar import, when
used in this Agreement, shall refer to this Agreement as a whole and not to any
particular provision of this Agreement; and except as otherwise specified in
this Agreement, all references in this Agreement (a) to any Person shall be
deemed to include such Person's permitted heirs, personal representatives,
successors and assigns; and (b) to any agreement, any document or any other
written instrument shall be a reference to such agreement, document, or
instrument together with all exhibits, schedules, attachments and appendices
thereto, and in each case as amended, restated, supplemented or otherwise
modified from time to time in accordance with the terms thereof; and (c) to any
Law(s) shall be deemed references to such Law(s) as the same may be
supplemented, amended, consolidated, superseded or modified from time to time.

                                   ARTICLE 2
                            ORGANIZATIONAL MATTERS

2.1       Name. The name of the Company shall be "Inland Pacific Development
          ----
          Company, LLC." The business of the Company may be conducted under that
          name or, upon compliance with applicable law, under any other name
          approved by the Members.

2.2       Term. The term of the Company's existence shall commence upon the
          ----
          Formation Date, and shall continue until such time as it is terminated
          pursuant to Article 10.

                                                                          Page 6
<PAGE>

2.3       Office and Agent. The principal office of the Company shall be at 1156
          ----------------
          N. Mountain Avenue, Upland, California 91786, or at such other place
          as a majority of the Managers may determine from time to time. The
          Company may also have such offices within and without the State of
          California as a majority of the Managers may from time to time
          determine. The name and business address of the Company's agent for
          service of process in the State of Delaware is Corporation Service
          Company, or as may otherwise be determined by approval of the Managers
          from time to time.

2.4       Purpose of Company. Subject to any express limitation set forth in
          ------------------
          this Agreement, the Company may engage in any lawful activity in
          furtherance of, or related to any Projects (as defined in Section
          1.34) with an emphasis on the Inland Empire region of Southern
          California.

2.5       Intent. It is the intent of the Members that the Company shall always
          ------
          be operated in a manner consistent with its treatment as a
          "partnership" for Federal and state income tax purposes. It also is
          the intent of the Members that the Company not be operated or treated
          as a "partnership" for purposes of Section 303 of the United States
          Bankruptcy Code. No Member, Manager, President, or other officer of
          Company shall take any action inconsistent with that express intent.

2.6       Absence of Other Restrictions. The Members acknowledge that as of the
          -----------------------------
          date of this Agreement, the only restrictions on SWC and its
          Affiliates and Inland and its Affiliates regarding the conducting of
          their respective businesses are set forth in Section 5.5 hereof and in
          that certain Cooperative Services Agreement between SWC and Inland
          dated December 31, 1999, and that no other restrictions on their
          activities have been created hereby or shall be deemed to exist, as a
          matter of fiduciary duty, corporate opportunity or otherwise.

                                   ARTICLE 3
                             CAPITAL CONTRIBUTIONS

3.1       Initial Capital Contributions.
          -----------------------------

          (a) Pre-Formation Capital. Pursuant to the terms of Section 5.3 of
              ---------------------
              that certain Agreement Regarding Formation of Companies between
              Inland and SWC dated September 22, 1999 (the "Formation
              Agreement"), Inland and SWC shall pay all of the "Consultant Fees"
              and related Operating Costs between August 1, 1999 and the
              Effective Date in accordance with the following percentages:

                           Inland                      45%
                           SWC                         55%

              As of the Effective Date, SWC has paid $110,000 and Inland has
              paid $90,000 toward such Consultant Fees and Operating Costs and
              SWC and

                                                                          Page 7
<PAGE>

               Inland shall each be credited with Start-Up Capital Contributions
               in those respective amounts.

          (b)  Start-Up Capital Contributions. In addition to the Pre-Formation
               ------------------------------
               Treasury Department pertaining to Section 3.1(a), SWC and Inland
               agree to contribute, as required by the Management Committee, all
               capital required to fund the Company Budget during the Start-Up
               Period in accordance with the following percentages to a maximum,
               in the aggregate, of Five Hundred Thirty-five Thousand Dollars
               ($535,000.00) per year; provided the Company Budget may be
               increased in the aggregate a maximum of five percent (5%) over
               the previous Company Budget approved by the Management Committee
               in any twelve-month period by majority approval of the Management
               Committee and any further increase in the Company Budget shall be
               a Major Decision and require the unanimous vote of the SWC
               Manager and Inland Senior Manager.

                      SWC                                55%
                      Inland                             45%

          (c)  Termination of Cooperative Services Agreement.  In the event that
               ---------------------------------------------
               Treasury Department pertaining to terminate the Cooperative
               Services Agreement, then SWC shall, within thirty (30) days
               following the delivery or receipt of such notice of termination,
               elect, by written notice to Inland (the "Election Notice"), to
               either withdraw as a Member of Company, whereupon the terms of
               Article 8 herein shall apply, or remain as a Member of Company
               notwithstanding such termination of the Cooperative Services
               Agreement. In the event SWC fails to deliver that Election Notice
               to Inland, SWC shall conclusively be deemed to have elected to
               withdraw.

               Upon the election by SWC (or deemed election) to withdraw as a
               Member, and notwithstanding anything to the contrary in this
               Article 3, SWC shall cease to have any further obligation to pay
               for any Operating Costs of Company except SWC shall pay Company a
               percentage of the lump sum amount of Two Hundred Seventeen
               Thousand Five Hundred Dollars ($217,500) (the "Termination
               Payment") ($217,500 equals nine (9) months of a total one-time
               annual severance payment of Two Hundred Ninety Thousand Dollars
               ($290,000) which would be payable to Quincey in twenty-four (24)
               semi-monthly installments under the Quincey Employment Agreement
               assuming such Agreement was terminated without cause at the same
               time as termination of the Cooperative Services Agreement) as
               follows:

               (i)    During any portion of the nine (9) month period following
                      the delivery or receipt of the notice terminating the
                      Cooperative Services Agreement which is within the two (2)
                      year Start-Up Period, SWC shall pay fifty-five percent
                      (55%) of the Termination Payment, and

                                                                          Page 8
<PAGE>

               (ii)   During any portion of such nine (9) month period following
                      the Start-Up Period, SWC shall pay twenty-five percent
                      (25%) of the Termination Payment.

               For example, if a notice terminating the Cooperative Services
               Agreement is delivered by SWC to Inland eighteen (18) months
               after the Effective Date, and SWC elected to withdraw as a Member
               of the Company, then SWC would cease to have any further
               obligation to make any further Capital Contributions to Company
               except, SWC would be required to pay Company its Termination
               Payment equal to Ninety-seven Thousand Eight Hundred Sixty-nine
               Dollars ($97,869) calculated as follows:

               (i)    Six (6) months at $13,291 ($217,500 / 9 x 55%)

               (ii)   Three (3) months at $6,041 ($217,500 / 9 x 25%)

               Such Termination Payment would be due and payable in full fifteen
               (15) days after SWC's election to withdraw (or deemed election to
               withdraw).

               If SWC elects not to withdraw as a Member of Company upon the
               termination of the Cooperative Services Agreement, then SWC shall
               continue to make all Capital Contributions as required in
               Sections 3.1(b) and 3.2 at the percentages set forth in those
               Sections.

               Company shall not be required to terminate or amend the Quincey
               Employment Agreement by reason of the termination of the
               Cooperative Services Agreement; rather SWC and Inland have agreed
               herein to calculate the Termination Payment payable by SWC as if
               the Quincey Employment Agreement was terminated concurrent with
               termination of the Cooperative Services Agreement. The
               Termination Payment shall be paid by SWC whether or not the
               Quincey Employment Agreement is terminated if SWC elects to
               withdraw as a Member of Company upon termination of the
               Cooperative Services Agreement.

3.2       Project Capital Contributions. In addition to the Start-Up Capital
          -----------------------------
          Contributions set forth in Section 3.1, the Members shall contribute
          from time to time, in accordance with their Percentage Interests, cash
          in amounts as required by the Management Committee to fund all Project
          Budgets, to fund the Company Budget after the Start-Up Period, and
          otherwise pay the costs of the Company (a "Project Capital
          Contribution"). As of the Formation Date, such Percentage Interests,
          for all matters under this Agreement, excepting (i) Start-Up Capital
          Contributions under Section 3.1(b), and (ii) Net Loss, Net Income, and
          Distributions related to such Start-Up Capital Contributions as set
          forth in the Tax Supplement (Sections 2.2 and 2.3) and Section 6.5 of
          this Agreement, are: SWC- 25%, Inland - 75% (which Percentages are
          subject to adjustment by reason of Transfer or dilution pursuant to
          the terms of this

                                                                          Page 9
<PAGE>

          Agreement). Upon the Formation Date, SWC and Inland shall contribute
          the following initial Project Capital Contributions to the Company to
          fund future Projects:

                      SWC                            $10,000
                      Inland                         $30,000

3.3       Call Notice/Bank Accounts.  Notice requesting a Capital Contribution
          -------------------------
          (a "Call Notice") shall, upon unanimous approval of the Management
          Committee in accordance with Section 5.4, be sent to each Member by
          the President and within thirty (30) days after the mailing of such
          notice, each Member shall contribute its respective Percentage
          Interest) of such Capital, in cash or by certified check, to the
          Company. During the Start-Up Period, Company shall maintain separate
          bank accounts for deposit of Start-Up Capital Contributions and
          Project Capital Contributions, respectively. Upon distribution of the
          Start-Up Distributable Cash (as defined in Section 6.2) pursuant to
          Section 6.5, the Start-Up Capital Contribution account shall be closed
          by Company. All requests for Capital Contributions are "Major
          Decisions" which require unanimous written approval of the Management
          Committee in accordance with Section 5.4.

3.4       Capital Accounts.  The Company shall establish and maintain an
          ----------------
          individual Capital Account for each Member as set forth in the Tax
          Supplement.

3.5       Preferred Return. Each Member shall earn a preferred return on its
          ----------------
          Capital Contributions, except for the Start-Up Capital, in an amount
          calculated like interest and accrued on the balance outstanding from
          time to time in each Members' Contribution Account (as defined in
          Section 3.6(a) below) at Bank of America's Base Rate, compounded
          monthly, and determined on a cumulative basis.

3.6       Contribution Accounts and Preferred Return Accounts.
          ---------------------------------------------------

          (a)  Contribution Account. The Company shall maintain for accounting
               --------------------
               purposes the following memorandum account ("Contribution
               Account") for each Member. The initial balance of such account
               shall be the Member's Initial Capital Contributions set forth in
               Section 3.1. The balance of such account shall be increased by,
               and as of the date of, each additional Capital Contribution made
               by such Member. The balance of the Contribution Account of each
               Member shall be decreased by any Distributions to such Member
               under Sections 6.4(b) and 10.5.

          (b)  Preferred Return Account. The Company shall maintain for
               ------------------------
               accounting purposes the following memorandum account ("Preferred
               Return Account") for each Member. The initial balance of such
               account shall be zero; and the balance of such account shall be
               increased by the accrued Preferred Return of each Member. Such
               return shall commence as of the funding of a Members' Capital
               Contributions

                                                                         Page 10
<PAGE>

               pursuant hereto (excepting any Start-Up Capital shall not earn a
               Preferred Return), shall be cumulative, and shall compound
               monthly (as of the last date of each calendar month). Further,
               the balance of the Preferred Return Account of each Member (as
               the same may be increased by such compounding) shall be decreased
               by any Distributions to such Member under Sections 6.4(a) and
               10.5, but only to the extent any Distribution relates to
               Distribution of the Preferred Return.

3.7       Capital Matters. Except as otherwise expressly provided in this
          ---------------
          Agreement or as otherwise agreed in writing by the Members, (i) no
          Member shall be entitled to receive interest on such Members' Capital
          Contributions, (ii) no Member shall be required or obligated to
          contribute additional Capital to the Company, (iii) no Capital
          Contributions of any Member may be withdrawn by such Member, (iv) no
          Member shall have the right to demand or receive property other than
          cash in return for such Members' Capital Contributions, and (v) except
          as provided in Section 6.4(b), no Member shall have the right to the
          return of all or any portion of its Capital Contributions before the
          dissolution and termination of the Company and then only to the extent
          of the cash and other property, if any, distributable to the Members
          upon Company liquidation.

3.8       IPWC Development Fees.  IPWC will pay Company an annual fee (a "IPWC
          ---------------------
          Development Fee") in accordance with the Cooperative Services
          Agreement during each year of an IPWC Contract. Company shall use all
          IPWC Development Fees to first pay all Operating Costs identified in
          the Company Budget. All such IPWC Development Fees paid during the
          Start-Up Period shall be allocated to the Adjusted Capital Accounts of
          the Members for purposes of Net Income, Net Loss, and Distributions in
          accordance with the Start-Up Percentages. All IPWC Development Fees
          paid after the Start-Up Period shall be allocated in accordance with
          the Member's Percentage Interests at that time.

3.9       Failure to Contribute Capital. If a Member fails to timely contribute
          -----------------------------
          (the "Non-Contributing Member") all or any portion of the cash amounts
          required of it by a Call Notice delivered pursuant to Section 3.3 (the
          "Default Amount"), then the other Member (the "Contributing Member")
          (provided such other Member has contributed all of the capital
          required of such Member pursuant to Section 3.3 with respect to that
          particular Call Notice) shall have the right, but not the obligation,
          at its sole discretion, to either (a) loan to the Non-Contributing
          Member all or any portion of the Default Amount within thirty (30)
          days following such default (a "Member Loan") with a proportional
          amount of the Non-Contributing Member's Membership Interest as
          security for such Member Loan and an assignment of any Distributions
          otherwise payable to the Non-Contributing Member under Sections 6.4
          and 6.5 until the Member Loan is repaid in full; the Member Loan shall
          earn Interest equal to the lesser of four hundred (400) basis points
          over the Base Rate, or the maximum rate permitted by law (the "Default
          Rate"); the Non-Contributing Member hereby

                                                                         Page 11
<PAGE>

          irrevocably appoints the Contributing Member as its attorney-in-fact
          with full power and authority to prepare, execute, acknowledge,
          deliver, file and/or record, as appropriate, any documents,
          instruments and agreements reasonably necessary to memorialize the
          Member Loan, including, without limitation, any note evidencing the
          Member Loan, or (b) contribute all or any portion of the Default
          Amount to the Company as an additional Capital contribution whereupon
          the Percentage Interests of the Non-Contributing Member shall be
          decreased at a dilution ratio of 1.25:1 (the "Dilution Ratio")
          determined by dividing the Default Amount paid by Contributing Member
          by the total amount of all Capital Contributions of all Members
          (including the Default Amount paid by Contributing Member) and
          multiplying the quotient by the Dilution Ratio; the resulting
          percentage is the amount by which the Percentage Interest of the Non-
          Contributing Member is decreased, and the Percentage Interest of the
          Contributing Member, increased; the Non-Contributing Member shall have
          no right to cure this default after the Default Amount is contributed
          by the Contributing Member. In addition to the remedies provided in
          this Section 3.9, the Contributing Member shall also have the right to
          exercise all other rights and remedies at law or in equity.

                                   ARTICLE 4
                                    MEMBERS

4.1       Limited Liability. Except as required under the Act or as expressly
          -----------------
          set forth in this Agreement, no Member or Manager shall be personally
          liable for any debt, obligation or liability of the Company, whether
          that liability or obligation arises in contract, tort or otherwise,
          except intentional misconduct, fraud, or gross negligence.

4.2       Admission of Additional Members. Subject to compliance with applicable
          -------------------------------
          law, additional Members may be admitted to the Company from time to
          time upon the unanimous vote of all Members and upon such terms and
          conditions as the Members may determine unanimously, and any such
          additional Members shall be granted Membership Interests and may
          participate in the management, Net Income, Net Losses, Tax Credits and
          Distributions of the Company on such terms as the Members unanimously
          approve.

4.3       Withdrawal. From and after the date which is six (6) months after the
          ----------
          Effective Date, any Member may withdraw or resign from the Company at
          any time and for any reason upon two hundred seventy (270) days prior
          written notice to the other Members. Any such withdrawal or
          resignation shall constitute a Membership Termination Event and shall
          be subject to the provisions of Article 8. Any Member who effects a
          voluntary withdrawal or resignation other than as permitted in the
          preceding sentence, or as set forth in Section 3.1(c), shall cease to
          be a Member, and shall forfeit its rights to receive any further
          Distributions, including any Distributions under Article 6 and Article
          10 herein, and forfeit its right to receive the fair value of its
          Membership Interest as of the date of such withdrawal as otherwise
          provided in Section 18-604 of the Act, and the Percentage Interests of
          the remaining

                                                                         Page 12
<PAGE>

          Member(s) shall be increased, pro rata, based upon the relative
          Percentage Interest(s) of such remaining Members, by the total amount
          of the Membership Interest forfeited by the withdrawing Member.

4.4       Lack of Member Authority. Unless otherwise expressly stated in this
          ------------------------
          Agreement, no Member, except the Management Committee, has the power
          to act for or on behalf of the Company, to do any act that would be
          binding on the Company or to make any expenditures or incur any
          obligations on behalf of the Company. The Management Committee may
          delegate certain powers to act on behalf of the Company to officers,
          agents and other Persons.

                                   ARTICLE 5
                     MANAGEMENT AND CONTROL OF THE COMPANY

5.1       Management of the Company by Management Committee. Except as otherwise
          -------------------------------------------------
          expressly provided herein, the business and affairs of the Company
          shall be managed and controlled exclusively by the Management
          Committee.

          (a)  Management and Management Committee.
               -----------------------------------

               (i)   The Management Committee shall consist of three (3)
                     individuals, each of whom shall be an Affiliate of a Member
                     or a senior employee of a Member. SWC shall appoint one
                     Person to serve on the Management Committee (the "SWC
                     Manager") and Inland shall appoint two Persons
                     (collectively, the "Inland Managers", and individually,
                     each, an "Inland Manager"); Robb Quincey may be an Inland
                     Manager notwithstanding his employment by Company. The
                     members of the Committee are referred to herein as the
                     "Managers". Each Manager shall serve on the Management
                     Committee until replaced by the Member appointing such
                     Manager or removed pursuant to Section 8.2(b). The
                     Management Committee initially shall consist of the
                     following persons: Anthony Garnier (SWC Manager), Bill
                     McIntyre (Inland Senior Manager), and Robb Quincey (Inland
                     Manager). Each Member shall also designate an alternate
                     Person(s) to act for it if its appointed Manager is
                     unavailable. Any written act, approval, consent, or vote of
                     a Manager or alternate(s) so designated shall be deemed to
                     be the act, approval, consent, or vote of the Member which
                     designated such Manager and alternate(s) and neither the
                     Company, Manager, nor any Member shall be required to
                     inquire into the authority of such Manager or alternate(s)
                     as to such written act, approval, consent, or vote on
                     behalf of the Member which designated such Manager and
                     alternate(s). Any such Manager or alternate(s) may be
                     replaced by a successor Manager or alternate(s) by written
                     notice delivered to the Management Committee and to the
                     other Member. Any such notice from Inland shall identify
                     whether the successor Manager

                                                                         Page 13
<PAGE>

                     is serving in the capacity of "Senior Manager" or "Manager"
                     for purposes of Section 5.4. Until such further written
                     notice, the designated Managers and alternates of the
                     Members shall be as set forth in Schedule 1.25 attached
                     hereto. In the event SWC acquires more than a fifty percent
                     (50%) Membership Interest in Company under this Agreement
                     after the Start-Up Period, then SWC shall have the right to
                     appoint a second Manager and Inland shall have the right to
                     appoint only one Manager.

               (ii)  All powers of the Company shall be exercised by or under
                     the authority of the Management Committee. Decisions of the
                     Management Committee within its scope of authority shall be
                     binding upon the Company and each Member, in its capacity
                     as a Member of Company. Except as otherwise expressly
                     provided in this Agreement, no action may be taken by any
                     Member to bind the Company without the approval of the
                     Management Committee.

               (iii) Meetings of the Management Committee shall be held at the
                     principal place of business of the Company or at any other
                     place that a majority of the Managers determine. In the
                     alternative, meetings may be held by conference telephone,
                     provided that each Manager can hear the others and it has
                     been confirmed so, and it has been confirmed that there are
                     no unauthorized people on the telephone. The presence of
                     the SWC Manager and either of the Inland Managers in person
                     or via telephone conference shall constitute a quorum for
                     the transaction of business. Meetings shall be held once
                     each month, or otherwise in accordance with a schedule
                     established by the Management Committee. In addition, any
                     Manager or Member may convene a meeting of the Management
                     Committee at the Company's principal place of business upon
                     at least three (3) business days' prior written notice to
                     all Members and Managers. The Management Committee also may
                     make decisions, without holding a meeting, by unanimous
                     written consent of all of the Managers. Minutes of each
                     meeting and a record of each decision shall be kept by the
                     President (defined herein) and shall be given to the
                     Members promptly after the meeting.

               (iv)  Decisions of the Management Committee shall require the
                     approval of a majority of the Managers, except that "Major
                     Decisions" (as defined in Section 5.4) shall require the
                     written consent of the SWC Manager and the Senior Inland
                     Manager.

          (b)  Agency Authority.  Subject to Section 5.4 below, Inland, any two
               -----------------
               (2) Managers, or, subject to Section 5.2(c), President, acting
               alone, is/are

                                                                         Page 14
<PAGE>

               authorized to endorse all checks, drafts and other evidences of
               indebtedness made payable to the order of the Company and to
               execute, on behalf of the Company, all agreements, contracts,
               commitments, checks, instruments and other documents approved by
               the Management Committee. The Management Committee shall have the
               right to delegate in writing any or all of their authority,
               rights and/or obligations, whether arising hereunder, under the
               Act or otherwise, to any one or more officers, agents or other
               duly authorized Persons. Any note, mortgage, deed of trust,
               evidence of indebtedness, contract, certificate, statement,
               conveyance or other instrument or obligation in writing, and any
               assignment or endorsement thereof, executed or entered into
               between the Company and any other Person, when signed by Inland,
               any two (2) Managers, or by President is not invalidated as to
               the Company by any lack of authority of such Persons in the
               absence of actual knowledge on the part of the other Person that
               such Persons had no authority to execute the same on behalf of
               the Company.

          (c)  Meetings of Members; Written Consent.  Annual Meetings of the
               ---------------------------------------
               Members shall be held at such time and place within or without
               the State of California as the Members shall determine. No
               regular meetings of Members are required, but if such meetings
               are held, they shall be noticed, held and conducted pursuant to
               the Act. Members may participate in any meeting through the use
               of conference telephones or similar communications equipment as
               long as all Members participating can hear one another. A Member
               so participating is deemed to be present in person at the
               meeting. Any action which may be taken by the Members at a
               meeting may also be taken without a meeting, if a consent in
               writing setting forth the action so taken is signed by Members
               having not less than the minimum votes that would be necessary to
               authorize that action at a meeting of the Members duly called and
               noticed.

5.2       President of Company.
          --------------------

          (a)  Appointment of President.  The Management Committee shall appoint
               ------------------------
               an individual to supervise the day-to-day operations of the
               Company and such person shall be designated as "President." Such
               appointment, if the appointee is other than one of the
               individuals listed in Schedule 1.25, shall be a "Major Decision"
               pursuant to Section 5.4. The President shall be subject to the
               general supervision and control of the Management Committee and
               shall carry out the policy decisions made by the Managers. At all
               meetings of the Management Committee and meetings of the Members,
               the President shall be present and shall report to the Management
               Committee and Members on the operation of the Company including
               all Projects, or any other matters as any Manager or Member may
               request. Robb Quincey shall be employed by Company pursuant to
               the terms of the Quincey

                                                                         Page 15
<PAGE>

               Employment Agreement as the initial President of the Company and
               shall continue to serve as the President until terminated by the
               vote of the SWC Manager and Inland Senior Manager (other than
               Quincey) in accordance with the Quincey Employment Agreement.

          (b)  Project Plan and Budgets.  The President shall prepare a
               ------------------------
               Project Plan and Budget for each Project, and submit the Project
               Plan and Budget to the Management Committee for approval by the
               SWC Manager and Inland Senior Manager. The President shall also
               prepare and submit annual, operating budgets (a "Company Budget")
               to the Company and Management Committee for its approval. The
               initial Company Budget approved by the Management Committee is
               attached hereto as Schedule 5.2(b). All subsequent Company
               Budgets and any amendments thereto shall require the majority
               approval of the Management Committee, except any aggregate
                                                     ------
               increase in the Company Budget in excess of five percent (5%)
               over the previous Company Budget approved by the Management
               Committee in any twelve-month period shall be a Major Decision
               requiring the unanimous consent of the SWC Manager and Inland
               Senior Manager.

          (c)  Signing Authority of President. Subject to prior approval by the
               ------------------------------
               Management Committee and Section 5.4 below, the President shall
               have the full power to execute, for and on behalf of the Company,
               any and all documents and instruments which may be necessary to
               carry on the business of the Company, including, without
               limitation, any and all deeds, contracts, leases, mortgages,
               deeds of trust, promissory notes, guarantees, security
               agreements, and financing statements pertaining to the Company's
               assets or obligations.

5.3       Performance of Duties; Liability of Members and Officers. No Member,
          --------------------------------------------------------
          Manager, or President shall be liable to the Company or to any other
          Member for any losses or damages suffered by them, as a result of
          actions taken within the scope of authority conferred upon them by
          this Agreement, or by the Management Committee and in the ordinary
          course of business of the Company, except as the result of fraud,
          deceit, gross negligence, reckless or intentional misconduct or a
          knowing violation of law or this Agreement by that Member, Manager or
          President or as a result of acts from which that Member, Manager, or
          President derives an improper personal benefit either directly or
          indirectly. The Managers and President shall perform their duties in
          good faith, in a manner they reasonably believe to be in the best
          interests of the Company and the Members. In performing their duties,
          the Managers and President shall be entitled to rely on information,
          opinions, reports or statements, including financial statements and
          other financial data, of the following persons or groups unless they
          have knowledge concerning the matter in question that would cause such
          reliance to be unwarranted and provided that the Managers and
          President act in good faith and after reasonable inquiry when the need
          therefor is indicated by the circumstances:

                                                                         Page 16
<PAGE>

          (a)  one or more agents of the Company whom the Managers or President,
               as the case may be, reasonably believe to be reliable and
               competent in the matters presented; or

          (b)  any attorney, independent accountant or other Person as to
               matters which the Managers or President, as the case may be,
               reasonably believe to be within such Person's professional or
               expert competence.

5.4       Major Decisions. Neither President, nor any Member or Manager, may,
          ---------------
          without the unanimous written consent of the SWC Manager and Inland
          Senior Manager, take any of the following actions (in each case the
          taking of which shall be referred to as a "Major Decision"):

          (a)  Spend or commit to be spent any of the Company's capital or funds
               for a Project until the Project Plan and Project Budget for the
               Project is approved by unanimous consent of the SWC Manager and
               Inland Senior Manager;

          (b)  Incur any expenses or liabilities in excess of $25,000 not
               identified in a Company Budget or Project Budget previously
               approved by unanimous consent of SWC Manager and Inland Senior
               Manager;

          (c)  Sell or encumber any property or assets of the Company not
               identified for sale or encumbrance in an approved Project Plan;

          (d)  Contract on behalf of, or otherwise bind, the Company in
               furtherance of a Project until the Project Plan and Project
               Budget is approved by unanimous consent of the SWC Manager and
               Inland Senior Manager including, making any binding commitments
               on behalf of the Company to representatives of any City, County,
               or other governmental agency;

          (e)  Issue any public announcement or press release relating to the
               Company, or any Project;

          (f)  Do any act in contravention of this Agreement;

          (g)  Possess, assign, or use funds or other property of the Company
               for other than a Company purpose;

          (h)  Make, execute, or deliver on behalf of the Company an assignment
               for the benefit of creditors, or cause the Company to be subject
               to the authority of any trustee, custodian, or receiver or to be
               subject to any proceeding for bankruptcy, insolvency,
               reorganization, arrangement, readjustment of debt, relief of
               debtors, dissolution, or liquidation or similar proceedings;

          (i)  Employ or contract with any Affiliate of a Member or any other
               person or entity in which any Member or Affiliate of a Member has
               a direct or indirect financial interest where such contract
               provides for the payment

                                                                         Page 17
<PAGE>

               for materials or services at a rate which exceeds the rate that
               would be charged by a third party contractor in a competitive
               arms-length transaction and/or includes any profit-mark-up;

          (j)  Except where any of such matters is only civil in nature and does
               not involve amounts in excess of $25,000, (i) confess a judgment
               against the Company, (ii) settle or adjust any claims against the
               Company; or (iii) defend, or discontinue the defense of, or
               prosecute, or discontinue the prosecution of, any legal action or
               proceedings against, or on behalf or in the name of, the Company;

          (k)  Do any act which would make it impossible to carry on the
               business of the Company;

          (l)  Take any action or make any decision not reasonably contemplated
               in this Agreement;

          (m)  Make any in-kind distributions as provided for in Section 10.4;

          (n)  Call for any Capital Contributions;

          (o)  Effectuate any change in number of the Managers;

          (p)  Sell or otherwise issue any additional Membership Interests in
               the Company except as permitted in Section 7.2;

          (q)  Make any amendment to this Agreement; or

          (r)  Increase the Company Budget in excess of five percent (5%) over
               the previous Company Budget approved by the Management Committee
               in any twelve-month period.

5.5       Competing Activities. Each Member and Manager shall be obligated to
          --------------------
          present any investment opportunity to the Company if the opportunity
          concerns a Project within the Inland Empire region of Southern
          California (Riverside/San Bernardino Counties and incorporated cities
          therein other than the City of Barstow). Each such Project shall be
          presented to the Company for consideration by the Management
          Committee. The election to proceed with a Project shall be a Major
          Decision. If the SWC Manager does not approve of a Project and/or
          related Project Budget and Plan then Inland may proceed with the
          Project independent of the Company for its own account or recommend
          such opportunity to Persons other than the Company or the other
          Members. Likewise, if Inland's Senior Manager does not approve of a
          Project and/or related Project Budget and Plan then SWC may proceed
          with the Project independent of the Company for its own account or
          recommend such opportunity to Persons other than the Company or the
          other Members. Without limiting the foregoing, any water rights
          acquired by Company which Company elects to lease, sell, or transfer
          shall first be offered for lease or sale, at the election of Company,
          to IPWC at a market rate. In the event IPWC elects not to lease or
          purchase such water rights, the rights shall next

                                                                         Page 18
<PAGE>

          be offered for lease or sale by Company to SWC; if SWC elects not to
          lease or purchase such water rights, the rights may then be offered to
          unaffiliated third parties at a price equal to or greater than the
          price offered to IPWC and SWC. Notwithstanding any of the foregoing
          restrictions in this Section 5.5, any opportunity by a Member or
          Manager outside the scope of this covenant does not need to be
          presented by a Member or Manager to the Company; provided Quincey may
          not proceed with any opportunity independent of the Company if such
          conduct would violate any of Quincey's obligations under the Quincey
          Employment Agreement.

5.6       Contracts with Affiliates. If the Company uses the personnel or
          -------------------------
          resources of an Affiliate of a Member or Manager, or otherwise
          contracts directly or indirectly with an Affiliate of a Member or
          Manager for services or materials, the payment or compensation
          therefor shall be at competitive arm's-length rates, and such services
          and materials shall be comparable in quality, type, size, and
          specifications as would be obtained in a competitive arm's-length
          transaction with third-party contractors. All contracts or agreements
          with Affiliates of Managers or Members shall be subject to the prior
          written approval of the Managers appointed by the non-affiliated
          Members in their reasonable discretion. The non-affiliated Managers
          acting alone shall have the right on behalf of the Company to send any
          appropriate notice of default or termination, to institute legal
          proceedings and/or to take such other action as may be necessary or
          appropriate to enforce the rights and protect the interests of the
          Company pursuant to any agreement now or hereafter entered into
          between the Company and an Affiliate of a Member or Manager with
          respect to any other rights or remedies of the Company running against
          or in connection with any Affiliate of a Member or Manager. Non-
          affiliated Members shall mean those Members without a direct or
          indirect interest in the contracts or agreements with the Affiliate,
          financial or otherwise.

5.7       Company Opportunities. Except as provided in Section 5.5 above, and
          ---------------------
          except as otherwise provided in any contract to which Company is a
          party, no Member shall be obligated to present any prospective
          project, business venture, investment opportunity or economic
          advantage to the Company or to any other Members or Managers, even if
          the opportunity is one of the character that, if presented to the
          Company or the other Members or Managers, could be taken by the
          Company or the other Members or Managers, and each Member or Manager
          shall have the right to hold any such prospective project, business
          venture, investment opportunity or economic advantage for its own
          account or to recommend the same to Persons other than the Company or
          the other Members or Managers.

5.8       Expenses. Subject to Sections 5.4 and 5.6 above, the Company shall
          --------
          reimburse the Members and Managers, for all reasonable out-of-pocket
          costs and expenses incurred by them (or by their Affiliates with
          approval of the Management Committee) in connection with the business
          and affairs of the Company; provided all organizational expenses
          (including, without limitation,

                                                                         Page 19
<PAGE>

          legal and accounting fees and costs) incurred by each Member to form
          the Company shall not be reimbursed by Company.

                                   ARTICLE 6
                PROFITS, LOSSES, DISTRIBUTIONS AND TAX MATTERS

6.1       Allocation of Income and Losses. The agreement of the Members
          -------------------------------
          concerning the maintenance of Capital Accounts, the allocation of
          income and loss, deficit restoration, and other related matters is set
          forth in Appendix A, attached hereto and made a part hereof.

6.2       Definition of "Distributable Cash". The term "Distributable Cash"
          ---------------------------------
          means all cash of the Company on hand and in banks, saving and loan
          associations and cash equivalents, on the date of any proposed
          distribution pursuant to this Agreement, after payment or provision
          for payment of Company obligations (actual and anticipated),
          including, without limitation, provision for working capital needs and
          reserves, interest carry, warranties and contingent liabilities of the
          Company as reasonably determined by President and approved by the
          Management Committee. The term "Start-Up Distributable Cash" as used
          herein means Distributable Cash generated from any IPWC Development
          Fees paid to Company by IPWC during the Start-Up Period (as prorated
          through the expiration of the Start-Up Period) or from any Start-Up
          Capital Contributions. The President shall prepare and deliver to the
          Management Committee a quarterly report summarizing the sources and
          uses of such reserve funds. Notwithstanding anything provided in
          Section 6.4 to the contrary, no Distributions shall be made to the
          Members until the Company's outstanding debts, if any, to the Members
          have been fully repaid.

6.3       Timing of Distributions. Subject to the provisions of this Article 6
          -----------------------
          and Article 10 (Dissolution and Winding Up), payments and
          distributions to the Members of Distributable Cash shall be made at
          such times as approved by the Management Committee, but in no event no
          less frequently than annually.

6.4       Order of Distribution. Except as provided in Section during the Start-
          ---------------------
          Up Period, and Sections 3.9 and 10.5, Distributable Cash shall be
          distributed in the following order of priority (taking into account,
          as applicable, the Members then existing Preferred Return Account and
          Contribution Account balances);

          (a)  First: To the Members, pro rata in accordance with the ratios of
               -----
               their respective accrued and unpaid Preferred Returns until each
               Member's respective Preferred Return Account is zero.

          (b)  Second. To the Members pro rata in accordance with the ratios of
               ------
               their respective Capital Contributions which have not yet been
               repaid until each Member's respective Contribution Account is
               zero.

          (c)  Third. To the Members in proportion to the positive balance, if
               -----
               any, in each such Member's Capital Account.

                                                                         Page 20
<PAGE>

     (d)  Remainder. Subject to a Member's repayment of any such Member's
          ---------
          outstanding Member Loan pursuant to Section 3.9, all Distributable
          Cash in excess thereof shall be distributed to the Members pro rata in
          accordance with their respective Percentage Interest.

6.5  Start-Up Period Distributions. All Start-Up Distributable Cash Fees shall,
     -----------------------------
     be distributed 55% to SWC and 45% to Inland and Section 6.4 above shall not
     apply to such distributions of Start-Up Distributable Cash. Upon expiration
     of the Start-Up Period, Company shall make a special distribution to Inland
     and SWC of all remaining Start-Up Distributable Cash of Company as of such
     expiration date in accordance with the Start-Up Percentages (SWC - 55%,
     Inland - 45%). Thereafter, all Distributable Cash distributed after the
     Start-Up Period under Section 6.4(d) shall be distributed in accordance
     with the then Percentage Interests of the Members (SWC - 25%, Inland -
     75%), as such percentages may be adjusted upon Transfer or dilution.

6.6  Form of Distribution. No Member has any right to demand and receive any
     --------------------
     Distribution from the Company in any form other than money. No Member may
     be compelled to accept from the Company a Distribution of any asset in kind
     in lieu of a proportionate Distribution of money being made to other
     Members.

                                   ARTICLE 7
                             TRANSFER OF INTERESTS

7.1  Transfer of Interests. Except as permitted by Sections 7.2 and 8.3, no
     ---------------------
     Member shall be entitled to Transfer all or any part of its Membership
     Interest except with the prior written consent of the other Member(s),
     which consent may be given or withheld, conditioned or delayed as the other
     Member(s) may determine in its sole and absolute discretion. Any attempted
     Transfer without such prior written consent shall constitute a Membership
     Termination Event (as of the date of such attempted Transfer) and shall be
     null and void ab initio, and the transferee shall not become a Member. A
                   -- ------
     Member who elects to Transfer its Membership Interest is referred to herein
     as a "Transferring Member"; the remaining Member(s) is referred to as the
     "Remaining Member."

7.2  Permitted Transfers. Subject to the provisions of Section 7.3, the
     -------------------
     restrictions upon Transfer specified in Section 7.1 shall not apply to any
     Transfer of all or any part of a Transferring Member's Membership Interest
     to an Affiliate of such Transferring Member (an "Affiliate Transferee") nor
     shall it include a Change in Control, merger or sale of all assets of SWC.
     The Remaining Member shall receive a minimum of sixty (60) days prior
     written notice from Transferring Member of the proposed transfer to an
     Affiliate (a "Transfer Notice"). Any Affiliate Transferee permitted under
     the preceding sentence shall, subject to Section 7.3(b) and (c), hold the
     Membership Interest or part thereof transferred by the Transferring Member
     subject to all the provisions of this Agreement. Except for any Transfer to
     an Affiliate Transferee permitted

                                                                         Page 21
<PAGE>

     under the initial sentence of this Section 7.2, no Member shall Transfer
     all or any part of its Membership Interest until such Transferring Member
     first offers that Membership Interest for sale to the other Remaining
     Member by written notice (the "Withdrawal Offer") whereupon the terms of
     Section 8.3 shall apply. For purposes of this Section 7.2, the Member
     seeking to transfer its interest shall be deemed to be the "Withdrawing
     Member" as used in Section 8.3.

7.3  Substitution of Members. Notwithstanding anything in this Agreement to the
     -----------------------
     contrary, any transferee of the whole or any part of a Membership Interest
     shall hold only the Economic Interest of the Transferring Member as an
     Interest Holder and shall not become a substituted Member in the place of a
     Transferring Member unless and until all of the following conditions are
     satisfied:

     (a)  The Remaining Member(s) unanimously consents to the admission of the
          transferee as a Member;

     (b)  The Transferring Member and the transferee execute and acknowledge
          such other instrument or instruments as the Management Committee may
          deem necessary or desirable to effectuate the admission, including the
          written acceptance and adoption by the transferee of all of the terms
          and conditions of this Agreement as the same may have been amended;
          and

     (c)  At the election of the other Members, the transferee pays to the
          Company a transfer fee which is sufficient, in the reasonable
          discretion of the other Members, to cover all expenses incurred by the
          Company in connection with the Transfer and substitution.

7.4  Further Restrictions on Transfer of Interests. In addition to other
     ---------------------------------------------
     restrictions set forth in this Agreement, no Member shall Transfer all or
     any part of such Member's Membership Interest: (i) without compliance with
     all federal and state securities laws, (ii) if the Transfer would cause the
     tax termination of the Company under Code Section 708, (iii) or if the
     Transfer would otherwise result in adverse tax consequences to the Company
     and/or the non-transferring Members.

7.5  Election to Dissolve.  The Remaining Member(s) may vote to dissolve the
     --------------------
     Company in accordance with Section 10.1 in the event of a Transfer.

                                   ARTICLE 8
                 CONSEQUENCES OF MEMBERSHIP TERMINATION EVENTS

8.1  Dissolution of Company. The occurrence of a Membership Termination Event as
     ----------------------
     to any Member other than the last and only remaining Member shall not
     dissolve the Company unless the Remaining Member(s) votes to dissolve in
     accordance with Section 10.1. Upon the occurrence of a Membership
     Termination Event as to the last and only remaining Member, the Company

                                                                         Page 22
<PAGE>

     shall dissolve unless the personal representative or other successor-in-
     interest of the last and only remaining Member consents in writing within
     ninety (90) days of that Membership Termination Event to the continuation
     of the Company and to the admission of such personal representative or
     other successor-in-interest, or its designee or nominee, as a Member.

8.2  Admission or Conversion. Upon the occurrence of a Membership Termination
     -----------------------
     Event with respect to a Member under circumstances where the Company does
     not dissolve, the Remaining Member(s) shall determine which one of the
     following shall occur and give written notice thereof, within sixty (60)
     days after the Membership Termination Event, to the Member who suffered the
     Membership Termination Event (the "Former Member"):

     (a)  the Former Member's personal representative or other successor-in-
          interest shall be admitted as a Member of the Company in the place and
          stead of the Former Member to the extent of the Former Member's
          Membership Interest (the "Former Member's Interest"); or

     (b)  the Former Member's Interest shall be converted to a bare Economic
          Interest, with no voting rights and no rights to appoint a Manager
          (except the right to participate in decisions regarding confessions,
          judgments and suits against Members), and the Former Member's
          representative or other successor-in-interest shall become the
          Interest Holder of that Economic Interest. The Former Member's
          Interest shall also be converted if the Remaining Member(s) fails to
          approve a substitution under Section 8.2(a) within the aforementioned
          60-day period. Additionally, the Former Member shall not be subject to
          additional Capital Contributions, following the expiration of the 270-
          day period set forth in Section 4.3.

8.3  Optional Buy-Out.
     ----------------

     (a)  The Member causing the Membership Termination Event (the "Withdrawing
          Member") shall be deemed to offer for sale (the "Withdrawal Offer") to
          the other Member (the "Remaining Member") the Membership Interest of
          the Withdrawing Member (the "Withdrawal Interest").

     (b)  The Withdrawal Offer shall be and remain irrevocable for a period (the
          "Withdrawal Offer Period") ending at 11:59 p.m. local time at the
          Company's principal office on the sixtieth (60th) day following the
          date of the Membership Termination Event provided that the sixty (60)
          day period shall be extended during a period of automatic stay
          pursuant to bankruptcy. At any time during the Withdrawal Offer
          Period, the Remaining Member may accept the Withdrawal Offer by
          notifying the Withdrawing Member (the "Withdrawal Notice") of its
          acceptance.

     (c)  If the Remaining Member accepts the Withdrawal Offer (the "Purchasing
          Member"), the Withdrawal Notice shall fix a closing date

                                                                         Page 23
<PAGE>

          (the "Withdrawal Closing Date") for the purchase that shall not be
          earlier than ten (10) or later than sixty (60) days after
          determination of the Withdrawal Purchase Price (as defined in (d)
          below).

     (d)  The Purchasing Member shall purchase the Withdrawal Interest for a
          price (the "Withdrawal Purchase Price") equal to the amount the
          Withdrawing Member would be entitled to receive pursuant to Section
          6.4 (taking into account Section 10.5) if the Company sold all of the
          Company assets to a third party at their Fair Market Value as of the
          date of the Withdrawal Notice. If the Withdrawing Member and
          Purchasing Member are unable to reach agreement on the Withdrawal
          Purchase Price within thirty (30) days after expiration of the
          Withdrawal Offer Period, then the Fair Market Value shall be
          determined within thirty (30) days by an independent M.A.I. appraiser
          or other qualified appraiser; each Member shall select an appraiser
          from a list of five (5) appraisers to be prepared by the Company's
          Accountant; if the Members each select a different appraiser, the
          Company Accountant shall select one of the remaining three (3)
          appraisers to conduct the appraisal; if the Members select the same
          appraiser, then that appraiser shall complete the appraisal. The Fair
          Market Value shall be determined by Appraiser as of the date of the
          Withdrawal Notice. Upon completion of the appraisal, the Company's
          Accountant (defined in Section 1.1) shall, within 30 days, determine
          the Withdrawal Purchase Price based upon the Fair Market Value. The
          Purchasing Member shall approve or disapprove of the Withdrawal
          Purchase Price on or before the Withdrawal Closing Date. If approved,
          the Withdrawal Purchase Price shall be paid in cash on the Withdrawal
          Closing Date. Company shall pay the cost of the appraisal. The
          determination of the Appraiser and Accountant shall, for purposes of
          this Agreement, be binding and conclusive on the parties.

     (e)  If the Remaining Member fails to accept the Withdrawal Offer, or if
          the Purchasing Member disapproves of the Withdrawal Purchase Price, or
          if not all of the Withdrawal Interest is purchased by the Purchasing
          Member, then the Withdrawing Member or the Withdrawing Member's
          successor, as the case may be, shall continue to be a Former Member
          pursuant to Section 8.2 as to that portion of the Withdrawal Interest
          retained by the Withdrawing Member, and Withdrawing Member may sell or
          otherwise Transfer all or any part of its Membership Interest to any
          Person, including any other Member, provided such Membership Interest
          shall be converted to a mere Economic Interest pursuant to Section
          7.3.

     (f)  If the Purchasing Member fails to complete its purchase on the
          Withdrawal Closing Date (a "Defaulting Purchaser"), then the
          Withdrawing Member may either sell or Transfer its Membership Interest
          in accordance with (e) above, or elect to dissolve the Company in
          accordance with Article 10.

                                                                         Page 24
<PAGE>

                                   ARTICLE 9
                   ACCOUNTING, RECORDS, REPORTING BY MEMBERS

9.1  Books and Records/Financial Reports. The books and records of the Company
     -----------------------------------
     shall be kept, and the financial position and the results of its operations
     recorded by the President (or by Inland, if no President has been appointed
     or if otherwise elected by Inland), in accordance with the accounting
     method of the Company approved by the Management Committee. The books and
     records of the Company shall reflect all the Company transactions and shall
     be appropriate and adequate for the Company's business. Each Member and its
     duly authorized representative shall have complete access to all such books
     and records at any time. The President (or Inland if no President has been
     appointed or if otherwise elected by Inland) shall cause the Company to
     deliver to each Member the following:

     (a)  Quarterly Tax Information:  Within forty-five (45) days following the
          --------------------------
          end of each calendar quarter, a statement of pre-tax net income (loss)
          of the Company for the then most recently completed calendar quarter
          and the current balance of each Member's Capital Account; and

     (b)  Annual Tax Information.  Within ninety (90) days following the end of
          ----------------------
          each calendar year, a final financial statement of the Company for the
          previous calendar year prepared in accordance with generally accepted
          accounting principles, consistently applied. Management Committee may
          elect to cause the Accountant to audit the Financial Statements of the
          Company at the Company's expense. Further, any Member may elect to
          cause the Accountant to audit such statements at such Member's
          expense; provided, however, that under all circumstances, the
          statements of the Company shall only be audited once a year. The year
          end financial statements of the Company shall include a balance sheet,
          an income statement, statement of cash flow, statement of sources and
          uses of funds and such other information and reports as the Management
          Committee may reasonably request.

9.2  Bank Accounts; Invested Funds. All funds of the Company shall be deposited
     -----------------------------
     in such account or accounts of the Company as approved by the Management
     Committee and shall not be commingled with the funds of any other Person.
     All withdrawals therefrom shall be made upon checks signed by such Persons
     and in such manner as the Management Committee may approve. Temporary
     surplus funds of the Company may be invested in commercial paper, time
     deposits, short-term government obligations or other investments approved
     by the Management Committee.

9.3  Accounting Matters.  All decisions as to accounting matters shall be
     ------------------
     approved by the Management Committee.

                                                                         Page 25
<PAGE>

                                  ARTICLE 10
                          DISSOLUTION AND WINDING UP

10.1 Dissolution.  The Company shall be dissolved, its assets disposed of and
     -----------
     its affairs wound up upon the first to occur of the following:

     (a)  the unanimous vote of the Members or unanimous vote of the Remaining
          Member(s) after (i) receipt of a Transfer Notice or Withdrawal Offer,
          or (ii) a Membership Termination Event;

     (b)  the occurrence of a Membership Termination Event as to the last and
          only remaining Member if that Member's personal representative or
          other successor-in-interest fails to consent to the continuation of
          the Company in accordance with Section 8.1 within ninety (90) days
          after the occurrence of that event;

     (c)  the Company's Bankruptcy;

     (d)  the occurrence of an event which makes it unlawful for the business of
          the Company to be continued; and

     (e)  the expiration of twenty-five (25) years from the Formation Date.

10.2 Date of Dissolution. Dissolution of the Company shall be effective on the
     -------------------
     day on which the event occurs giving rise to the dissolution, but the
     Company shall not terminate until the assets of the Company have been
     liquidated and distributed as provided herein. Notwithstanding the
     dissolution of the Company, prior to the termination of the Company the
     business of the Company and the rights and obligations of the Members, as
     such, shall continue to be governed by this Agreement.

10.3 Winding Up. Upon the occurrence of any event specified in Section 10.1, the
     ----------
     Company shall continue solely for the purpose of winding up its affairs in
     an orderly manner, liquidating its assets and satisfying the claims of its
     creditors. The President, or any other person designated by the Management
     Committee, shall be responsible for overseeing the winding up and
     liquidation of the Company, shall take full account of the liabilities and
     assets of the Company, shall cause its assets either to be sold or
     distributed, as they may determine, and shall cause the proceeds therefrom,
     to the extent sufficient, to be applied and distributed as provided in
     Section 10.5. The President shall give written notice of the commencement
     of winding up by mail to all known creditors and claimants whose addresses
     appear on the records of the Company.

10.4 Distributions in Kind. Any non-cash assets distributed to any Members shall
     ---------------------
     require the approval of the SWC Manager and Inland Senior Manager in
     accordance with Section 5.4. Following such approval, any non-cash asset
     distributed to one or more Members shall first be valued at its Fair Market
     Value to determine the Net Income or Net Loss that would have resulted if

                                                                         Page 26
<PAGE>

     that asset had been sold for that value, the Net Income or Net Loss shall
     then be allocated pursuant to the Tax Supplement, and the Members' Capital
     Accounts shall be adjusted to reflect those allocations. The amount
     distributed and charged to the Capital Account of each Member receiving an
     interest in the distributed asset shall be the Fair Market Value of the
     interest (net of any liability secured by the asset that the Member assumes
     or takes subject to). The Fair Market Value of that asset shall be
     determined by an independent M.A.I. appraiser or other qualified appraiser
     selected by the Members in accordance with the selection process set forth
     in Section 8.3(d).

10.5 Order of Payment of Proceeds Upon Dissolution.
     ---------------------------------------------

     (a)  Liquidating Distributions. After determining that all known debts and
          -------------------------
          liabilities of the Company, including, without limitation, debts and
          liabilities to Members who are creditors of the Company, have been
          paid or adequately provided for, the remaining assets shall promptly
          be distributed to the Members in accordance with Section 6.4, after
          taking into account income and loss allocations for the Company's
          taxable year during which the liquidation occurs.

     (b)  No Liability.  No Member shall have any liability to the Company,
          ------------
          any other Member, or any creditor of the Company on account of any
          deficit balance in its Capital Account.

10.6 Limitations on Payments Made in Dissolution. Except as otherwise
     -------------------------------------------
     specifically provided in this Agreement, each Member shall be entitled to
     look only to the assets of the Company for the return of that Member's
     positive Capital Account balance and shall have no recourse for its Capital
     Contributions and/or share of Net Income (upon dissolution or otherwise)
     against any other Member.

10.7 Certificate of Cancellation. Upon completion of the winding up of the
     ---------------------------
     Company's affairs, the Members shall cause a Certificate of Cancellation to
     be filed with the Delaware Secretary of State.

10.8 Compensation for Services.  The Persons winding up the affairs of the
     -------------------------
     Company shall be entitled to reasonable compensation from the Company for
     their services.

                                  ARTICLE 11
                                INDEMNIFICATION

11.1 Indemnification. The Company shall indemnify and hold harmless each of the
     ---------------
     Members, and each of their respective Managers, officers, directors,
     shareholders, partners, members, trustees, beneficiaries, employees,
     agents, heirs, assigns, successors-in-interest and Affiliates, together
     with all officers, employees, or agents of the Company, including President
     (collectively, "Indemnified Persons") from and against any and all losses,
     damages, liabilities and expenses, (including costs and reasonable
     attorneys' fees),

                                                                         Page 27
<PAGE>

     judgments, fines, settlements and other amounts (collectively
     "Liabilities") reasonably incurred by any such Indemnified Person in
     connection with the defense or disposition of any action, suit or other
     proceeding, whether civil, criminal, administrative or investigative and
     whether threatened, pending or completed (collectively a "Proceeding"), in
     which any such Indemnified Person may be involved or with which any such
     Indemnified Person may be threatened, with respect to or arising out of any
     act performed by the Indemnified Person or any omission or failure to act
     if the performance of the act or the omission or failure was done in good
     faith and within the scope of the authority conferred upon the Indemnified
     Person by this Agreement or by the Act, except for acts of willful
     misconduct, gross negligence or reckless disregard of duty, or acts which
     constitute a material breach of this Agreement, or acts from which such
     Indemnified Person derived an improper personal benefit. The Company's
     indemnification obligations hereunder shall apply not only with respect to
     any Proceeding brought by the Company or a Member but also with respect to
     any Proceeding brought by a third party.

11.2 Contract Right; Expenses. The right to indemnification conferred in this
     ------------------------
     Article 11 shall be a contract right and shall include the right to require
     the Company to advance the expenses incurred by the Indemnified Person in
     defending any such Proceeding in advance of its final disposition;
     provided, however, that, if the Act so requires, the payment of such
     --------  -------
     expenses in advance of the final disposition of a Proceeding shall be made
     only upon receipt by the Company of an undertaking, by or on behalf of the
     indemnified Person, to repay all amounts so advanced if it shall ultimately
     be determined that such Person is not entitled to be indemnified under this
     Article 11 or otherwise.

11.3 Insurance. The Company may purchase and maintain insurance on behalf of any
     ---------
     Person who is or was an agent of the Company against any liability asserted
     against that Person and incurred by that Person in any such capacity or
     arising out of that Person's status as an agent, whether or not the Company
     would have the power to indemnify that Person against liability under the
     provisions of Section 11.1 or under applicable law. IPDC shall procure
     commercial general liability insurance in the minimum amount of Five
     Million Dollars ($5,000,000.00) per occurrence, workers' compensation
     insurance, and officers and directors coverage and Inland and SWC shall be
     named as additional insured parties.

                                  ARTICLE 12
                                   BUY/SELL

12.1 Put/Call Offering Notice. At any time after the second anniversary of the
     ------------------------
     Effective Date, a Member (the "Initiating Member"), may give written notice
     (the "Offering Notice") to the other Member (the "Responding Member") of
     its intent to implement the provisions of this Article 12 and to purchase
     all, but not less than all, of the Responding Member's Membership Interest.
     In such event, the provisions set forth in this Article 12 shall apply. The
     Initiating

                                                                         Page 28
<PAGE>

     Member shall specify in its Offering Notice the price ("Company Price") the
     Initiating Member would be willing in its sole discretion to pay for all of
     the assets of the Company free of any monetary liens or encumbrances as of
     the date the Offering Notice is given ("Date of Value").

12.2 Exercise of Put/Call. Upon receipt of the Offering Notice, the Responding
     --------------------
     Member shall then be obligated to either (subject to any required lender
     approval): (i) sell to the Initiating Member its Membership Interest at a
     price (the "Sales Price") equal to the amount the Responding Member would
     have been entitled to receive pursuant to Section 6.4, (taking into account
     the terms of Section 10.5) (as determined by the Company's Accountant at
     the expense of the Initiating Member), if the Company had sold the Company
     assets in a hypothetical sale to a third party for the Company Price on the
     Date of Value and liquidated the Company in accordance with Section 10.5
     with the proceeds remaining after the application of Paragraph 10.5
     distributed in accordance with Paragraph 6.4 of this Agreement; or (ii) to
     purchase the Membership Interest of the Initiating Member at a price (the
     "Purchase Price") equal to the amount the Initiating Member would have been
     entitled to receive pursuant to Section 6.4, (taking into account the terms
     of Section 10.5) (as determined by the Accountant at the expense of
     Initiating Member), if the Company had sold the Company assets in a
     hypothetical sale to a third party for the Company Price on the Date of
     Value and liquidated the Company in accordance with Section 10.5 with the
     proceeds remaining after the application of Section 10.5 distributed in
     accordance with Section 6.4 of this Agreement.

     (a)  If the Responding Member elects to purchase under (ii) above, then the
          Responding Member shall purchase the Initiating Member's entire
          Membership Interest and shall pay the Purchase Price as determined in
          (ii) above, and shall deposit, within ten (10) days after the election
          to purchase is made, ten percent (10%) of the Purchase Price into
          escrow at Chicago Title Company, 560 East Hospitality Lane, San
          Bernardino, CA 92608, or such other Title Company approved by both
          Members ("Escrow Holder")

     (b)  If the Responding Member elects to sell under (i) above, the
          Initiating Member shall purchase all of the Responding Member's
          Membership Interests at the Sales Price determined in (i) above, and
          shall deposit ten percent (10%) of the Sales Price into escrow within
          ten (10) days after such election.

12.3 Notice. The Responding Member shall notify the Initiating Member of its
     ------
     election under (i) and (ii) above within sixty (60) days after the Date of
     Value (the "Election Notice"). In the event the Responding Member fails to
     give the Election Notice within the required time period, the Initiating
     Member shall be obligated to purchase the Responding Member's Membership
     Interest according to the terms of Section 12.2(b). For purposes of this
     Article 12 the term "Purchasing Member" shall mean the Member who is
     obligated to

                                                                         Page 29
<PAGE>

     purchase the other Member's Membership Interest (whether such Member is the
     Initiating Member or the Responding Member) and the term "Non-Purchasing
     Member" shall mean the Member who is obligated to sell its Membership
     Interest to the Purchasing Member.

12.4 Designee. In the event that any Member purchases another Member's
     --------
     Membership Interest pursuant to this Article 12, such Purchasing Member
     shall be entitled to designate any third party to be the Transferee of such
     Membership Interest and such Transferee shall be a Member without further
     consent of the other Members.

12.5 Closing.
     -------

     (a)  The Members shall meet and exchange documents and pay any amounts due,
          and otherwise do all things reasonably necessary to conclude the
          transaction set forth herein at the closing of such purchase (the
          "Closing"). The Closing shall occur at Escrow Holder on the date that
          is sixty (60) days after the date of the Election Notice unless that
          day is a Saturday, Sunday, or national or state holiday and, in that
          event, on the next business day. At the Closing, the Non-Purchasing
          Member shall deliver to the Purchasing Member a duly executed
          assignment of its Membership Interest and shall also, upon the
          reasonable request of the Purchasing Member, concurrently therewith
          (or at any time and from time to time thereafter) execute and deliver
          such other documents and records as the Purchasing Member reasonably
          determines is necessary or desirable to conclude the Closing and to
          transfer the Non-Purchasing Member's Membership Interest. The
          Purchasing Member shall deliver the Purchase Price or Sales Price, as
          applicable, to the Non-Purchasing Member for the full amount of
          consideration for such Membership Interest in accordance with Section
          12.5(b) below, and each Member shall deliver any documents reasonably
          necessary to conclude the Closing. The Non-Purchasing Member shall
          Transfer its Membership Interest free of all liens or encumbrances.

     (b)  The Purchase Price or Sales Price shall be paid in all cash, by
          certified or bank cashier's checks, made payable to the Non-Purchasing
          Member, or by a wire transfer of immediately available funds.

     (c)  If the Purchasing Member fails to close as aforesaid, in addition to
          any other remedies available at law or in equity, the Non-Purchasing
          Member shall have the right, exercisable by written notice to the
          Purchasing Member given within thirty (30) days of the date set for
          the Closing, to purchase under this Section 12 the Membership Interest
          of that defaulting Member. If the Non-Purchasing Member exercises such
          option, the Company Price used for the purposes of this Section
          12.5(b) shall be ninety percent (90%) of the Company Price.

                                                                         Page 30
<PAGE>

12.6      Company Accountant. The Company's Accountant shall determine the
          ------------------
          proper application of Section 6.4 (taking into account the terms of
          Section 10.5) to arrive at the Purchase Price or Sales Price as
          applicable. Each of the Members shall cooperate fully with the
          Accountant to assist in such determination. The Accountant shall make
          its determination of the Purchase Price or Sales Price within ten (10)
          days after submission to the Accountant and the results thereof shall
          be binding on the Members. The Initiating Member shall bear the costs
          and fees of the Company's Accountant in making its determinations
          under this Article 12..

12.7      Timing of Put/Call and Default Buy-Out. If any Member shall have given
          --------------------------------------
          the other Member notice of the first Member's exercise of its rights
          under Section 12.1, then the other Member shall have the right to give
          a subsequent notice under Section 12.1, until that first transaction
          is completed or terminates.

                                  Article 13
                                 MISCELLANEOUS

13.1      Amendments. All amendments to this Agreement must be in writing and
          ----------
          executed by all of the Members.

13.2      Offset Privilege. Any monetary obligation owing from the Company to
          ----------------
          any Member may be offset by the Company against any monetary
          obligation then owing from that Member to the Company.

13.3      Arbitration. Notwithstanding anything to the contrary set forth in
          -----------
          this Agreement, in the event of any dispute between the Members with
          respect to this Agreement, then the Members shall promptly and in good
          faith attempt to resolve such dispute by mutual agreement. In the
          event the Members are unable to resolve such dispute by mutual
          agreement, the matter shall be settled exclusively by a binding
          arbitration ("Arbitration"), conducted by a single arbitrator (the
          "Arbitrator") chosen by the parties to the litigation as described
          below. Any party may initiate the Arbitration by written notice to the
          other and to the Arbitration Tribunal. The date on which the notice is
          given is called the "Arbitration Initiation Date". The fees and
          expenses of the Arbitration Tribunal and the Arbitrator shall be
          shared equally by the parties and advanced by them from time to time
          as required; provided, however, that at the conclusion of the
          Arbitration, the Arbitrator may award costs and expenses (including
          the costs of the Arbitration previously advanced and the fees and
          expenses of attorneys, accountants and other experts) to the
          prevailing party. Except as expressly modified herein, the Arbitration
          shall be conducted in accordance with the provisions of Section 1280
          et seq. of the California Code of Civil Procedure or their successor
          sections ("CCP"), and shall constitute the exclusive remedy for the
          determination of any Claim, including whether the Claim is subject to
          arbitration; provided the following time periods in the CCP shall be
          shortened as follows: Sections 1284, 1288.4, 1290.2 and 1290.6 -
          halved, Section 1288 - 4 years to 30 days, and 100 days to 15 days;
          Section 1288.2 - 100 days to 30 days. The Arbitration

                                                                         Page 31
<PAGE>

          shall be conducted under the procedures of the Arbitration Tribunal,
          except as modified herein. The Arbitration Tribunal shall be the Los
          Angeles Office of JAMS/ENDISPUTE ("JAMS"), unless the parties to the
          dispute cannot agree on a JAMS arbitrator, in which case the
          Arbitration Tribunal shall be the Los Angeles Office of the American
          Arbitration Association ("AAA"). The Arbitrator shall be a retired
          judge or other arbitrator employed by JAMS selected by mutual
          agreement of the parties to the dispute, and if they cannot so agree
          within thirty (30) days after the Arbitration Initiation Date, then
          the Arbitrator shall be selected from the Large and Complex Case
          Project ("LCCP") panel of the AAA, by mutual agreement of the parties
          to the dispute. If the parties to the dispute cannot agree on the
          Arbitrator within sixty (60) days after the Arbitration Initiation
          Date, the Arbitrator shall be selected by the AAA, from its LCCP
          panel, through such procedures as the AAA regularly follows. In all
          events, the Arbitrator must have had not less than fifteen (15) years
          experience as a practitioner or arbitrator of complex business
          transactions. If, for any reason, the AAA does not so act, any party
          to the dispute may apply to the Superior Court in and for Los Angeles
          County, California, for the appointment of a single arbitrator. No
          pre-arbitration discovery shall be permitted, except that the
          Arbitrator shall have the power in his or her discretion, upon either
          party's motion but not on his or her own initiative, to order the
          parties to engage in pre-arbitration mediation for a period not
          exceeding thirty (30) days before a mediator mutually acceptable to
          the parties. The Arbitrator shall try any and all issues of law or
          fact and be prepared to make the award within ninety (90) days after
          the close of evidence in the Arbitration. When prepared to make the
          award, the Arbitrator shall first so inform the parties, who shall
          have ten (10) days to attempt to resolve the matter by a binding
          agreement between them. If the parties do not resolve the matter, the
          Arbitrator shall make the award on the eleventh day following his
          notice of being prepared to make the award. The Arbitrator's award
          shall dispose of all of the claims that are the subject of the
          Arbitration and shall follow California law, unless the Claim concerns
          the Act, in which event Delaware law shall be applied, and the award
          shall include written statements of fact and conclusions of law. The
          Arbitrator shall be empowered to (i) enter equitable as well as legal
          relief, (ii) provide all temporary and/or provisional remedies, and
          (iii) enter binding equitable orders. The award rendered by the
          Arbitrator shall be final and not subject to judicial review, and
          judgment thereon may be entered in any court of competent
          jurisdiction. The prevailing party, as determined by the Arbitrator,
          shall be entitled to recover from the other party all reasonable fees,
          costs and expenses of enforcing any right of the prevailing party,
          including, without limitation, actual attorneys' fees and expenses,
          and the other costs of such arbitration. The Arbitrator shall award to
          the prevailing party: (i) the reasonable attorneys' fees which the
          prevailing party has paid or is obligated to pay; and (ii) the
          reasonable costs and expenses which the prevailing party has paid or
          is obligated to pay. The "prevailing party," for purposes of this
          Agreement, shall be the party who, in light of the issues litigated
          and the Arbitrator's decision on these issues, was more successful in
          the action. The

                                                                         Page 32
<PAGE>

          party who is more successful need not be determined to be the party
          who receives the judgment in the action.

13.4      Notices. Any notice to be given to the Company or any Member in
          -------
          connection with this Agreement must be in writing and will be deemed
          to have been given and received when delivered to the address
          specified by the party to receive the notice by courier or other means
          of personal service, when received if sent by facsimile, or three (3)
          days after deposit of the notice by first class mail, postage prepaid,
          or certified mail, return receipt requested. Any such notice must be
          given to the Company at its principal place of business, and to any
          Member at the address specified in Appendix C. Any party may, at any
          time by giving five (5) days' prior written notice to the other
          parties, designate any other address as the new address to which
          notice must be given.

13.5      Attorney's Fees. In the event that any dispute between the Company
          ---------------
          and/or the Members should result in litigation or arbitration, the
          prevailing party in that dispute shall be entitled to recover from the
          other party all reasonable fees, costs and expenses of enforcing any
          right of the prevailing party, including without limitation,
          reasonable attorneys' fees and expenses, subject, however to the
          provisions of Section 13.3.

13.6      Jurisdiction. Subject to Section 13.3, each Member consents to the
          ------------
          exclusive jurisdiction of the state and federal courts sitting in
          Orange, Los Angeles, or San Bernardino, California in any action on a
          claim arising out of, under or in connection with this Agreement or
          the transactions contemplated by this Agreement. Each Member further
          agrees that personal jurisdiction over it may be effected by service
          of process by registered or certified mail addressed as provided in
          Section 13.4 and that when so made shall be as if served upon it
          personally.

13.7      Complete Agreement. This Agreement and the Related IPWC Agreements
          ------------------
          constitute the complete and exclusive statement of agreement among the
          Members with respect to their respective subject matters and supersede
          all prior written and oral agreements or statements by and among the
          Members including that certain Agreement Regarding Formation of
          Companies between SWC and Inland dated September 22, 1999 (the
          "Formation Agreement"). The Formation Agreement is merged herein and
          is of no further force or effect. No representation, statement,
          condition or warranty not contained in this Agreement or the
          Certificate of Formation shall be binding on the Members or have any
          force or effect whatsoever. To the extent that any provision of the
          Certificate of Formation conflicts with any provision of this
          Agreement, the Certificate of Formation shall control.

13.8      Binding Effect. Subject to the provisions of this Agreement relating
          --------------
          to Transfers, this Agreement shall be binding upon and inure to the
          benefit of the Members and their respective successors and assigns.

                                                                         Page 33
<PAGE>

13.9     Section Headings. All Section headings are inserted only for
         ----------------
         convenience of reference and are not to be considered in the
         interpretation or construction of any provision of this Agreement.

13.10    Interpretation. The Members acknowledge and agree that each has been
         --------------
         given the opportunity to review this Agreement with legal counsel
         independently, and/or has the requisite experience and sophistication
         to understand, interpret, and agree to the particular language of the
         provisions hereof. The Members have equal bargaining power, and intend
         the plain meaning of the provisions herein. All words in this Agreement
         (including any Exhibit attached to and made a part of this Agreement),
         other than those specifically defined, shall have the meanings assigned
         to them in American English dictionaries of common usage; there are no
         secret meanings or code words. The term "including", whenever used in
         this Agreement, shall be deemed to be followed by the words "without
         limitation." Words used in the singular number shall include the
         plural, and vice versa, and any gender shall be deemed to include each
         other gender. Any captions and headings in this Agreement are for
         convenience of reference only, and they shall not be deemed to define
         or limit the provisions of this Agreement. In the event of an ambiguity
         in or dispute regarding the interpretation of same, the interpretation
         of this Agreement shall not be resolved by any rule of interpretation
         providing for interpretation against the Member who causes the
         uncertainty to exist or against the draftsman. This Agreement shall be
         interpreted in accordance with the Act, if applicable, and otherwise in
         accordance with the internal laws of the State of California without
         regard to any choice of law provisions of California law.

13.11    Severability. If any provision of this Agreement or the application of
         ------------
         that provision to any person or circumstance shall be held invalid, the
         remainder of this Agreement or the application of that provision to
         persons or circumstances other than those to which it is held invalid
         shall not be affected.

13.12    Multiple Counterparts. This Agreement may be executed in two or more
         ---------------------
         counterparts, each of which shall be deemed an original, but all of
         which shall constitute one and the same instrument.

13.13    Securities Representations and Warranties. Concurrently with the
         -----------------------------------------
         formation of the Company, each Member makes the securities
         representations and warranties set forth on Appendix D attached hereto.
         All representations and warranties contained in Appendix D shall
         survive the execution of this Agreement, the formation of the Company,
         and the liquidation of the Company.

                                  ARTICLE 14
                               DEFAULT REMEDIES

14.1     Events of Default. The occurrence of any of the following events (or
         any other events set forth herein which are deemed to cause a Member to
         be in default of this Agreement) by or with respect to a Member or the
         Manager

                                                                         Page 39
<PAGE>

          appointed by a Member (the "Defaulting Member") shall be defaults
          under this Agreement, and if not cured within the applicable notice
          and cure period provided below, if any, to such default shall
          constitute an "Event of Default" hereunder:

          (a)  Failure to Perform. Except as provided in Section 14.1(b) below,
               ------------------
               the failure of a Member or Manager appointed by a Member (or any
               Affiliate thereof) to comply with or perform any of its (or such
               Affiliate's) material obligations under this Agreement and a
               continuation of such failure or breach for more than thirty (30)
               days after notice to the Defaulting Member that such Member or
               Manager (or such Affiliate) has failed to perform any such
               obligations under this Agreement; provided, however, if such
               failure is of a nature that can be cured but cannot reasonably be
               cured within such thirty (30) day period, such period shall be
               extended for up to an additional one hundred twenty (120) days so
               long as the Defaulting Member (or such Affiliate) in good faith
               commences all reasonable curative efforts within such thirty (30)
               day period and diligently and expeditiously continues its
               curative efforts to completion. "Material" shall mean having a
               significant financial impact on the Company through operations or
               otherwise.

          (b)  Failure to Make Capital Contribution. The failure of a Member to
               ------------------------------------
               pay a Capital Contribution within thirty (30) days after receipt
               of a Call Notice pursuant to Section 3.3.

          (c)  Defaults of Individuals. If a Member or its officers, directors,
               -----------------------
               shareholders, members, or senior employees thereof shall be
               convicted of a criminal felony or convicted of an act of fraud or
               other abuse subject to material civil penalty, in each case which
               causes the Company to suffer material and adverse effects to its
               business reputation or purpose.

14.2      Remedies. Upon the occurrence of any Event of Default, the Company
          --------
          and the other Member (who is not the Defaulting Member) shall have the
          following rights and remedies except where such rights and remedies
          are expressly limited by the terms and conditions of this Agreement:

          (a)  Dissolution. The non-Defaulting Member may elect to dissolve the
               -----------
               Company in accordance with Article 10.

          (b)  Optional Buy-Out. The non-Defaulting Member may elect to buy-out
               ----------------
               the Defaulting Member's Membership Interest in accordance with
               Section 8.3.

          (c)  Other Rights and Remedies. All other rights and remedies
               -------------------------
               available to the Members and the Company at law or in equity,
               unless expressly limited in this Agreement.

                                                                         Page 35
<PAGE>

14.3      Cumulative Remedies. Except as otherwise stated expressly in this
          -------------------
          Agreement, no remedy conferred upon the Company or any Member in this
          Agreement is intended to be exclusive of any other remedy herein or by
          law provided or permitted, but rather each shall be cumulative and
          shall be in addition to every other remedy given hereunder or now or
          hereafter existing at law, in equity or by statute.

14.4      Litigation Without Termination. Subject to the arbitration provisions
          ------------------------------
          set forth above in Section 13.3, any Member shall be entitled to
          maintain, on its own behalf or on behalf of the Company, any action or
          proceeding against any other Member or the Company (including, without
          limitation, any action for damages, specific performance or
          declaratory relief) for or by reason of breach by such party of this
          Agreement, notwithstanding the fact that any or all of the parties to
          such proceeding may then be Members in the Company, and without
          dissolving the Company.

14.5      No Waiver. No waiver by a Member or the Company of any breach of or
          ---------
          default under this Agreement shall be deemed to be a waiver of any
          other breach or default of any kind or nature, and no acceptance of
          payment or performance by a Member or the Company after any such
          breach or default shall be deemed to be a waiver of any breach or
          default of this Agreement, whether or not such Member or the Company
          knows of such breach or default at the time it accepts such payment or
          performance. No failure or delay on the part of a Member or the
          Company to act at any time such other may continue to be so in
          default, and no such failure or delay shall operate as a waiver of any
          default.

          / /

          / /

          / /

          / /

          / /

          / /

          / /

          / /

          / /

          / /

          / /

          / /

                                                                         Page 36
<PAGE>

          IN WITNESS WHEREOF, all of the Members of Inland Pacific Development
          Company, LLC have executed this Agreement, effective as of the
          Effective Date.

                                      INLAND PACIFIC DEVELOPMENT COMPANY, LLC,
                                      a Delaware limited liability company

                                      By: INLAND PACIFIC PARTNERS, LLC,
                                          a Delaware limited liability company
                                          Its Member

                                      By: /s/ RICHARD A. LEWIS
                                          --------------------------
                                          Richard A. Lewis, Manager

                                      By: /s/ WILLIAM MCINTYRE
                                          --------------------------
                                          William McIntyre, Manager

                                      By: /s/ MICHAEL J. BIDART
                                          ---------------------------
                                          Michael J. Bidart, Manager

                                      By: /s/ ROBB QUINCEY
                                          ---------------------------
                                          Robb Quincey, Manager

                                      By: SOUTHWEST WATER COMPANY,
                                          a California corporation,
                                          Its Member

                                                By: /s/ ANTON C. GAR
                                                    -----------------
                                                     Name:  Anton C.
                                                     President

List of Appendices/Schedules
----------------------------

Appendix A - Tax and Related Matters
Appendix B - Quincey Employment Agreement
Appendix C - Member Notice Addresses
Appendix D - Investment Representations
Schedule 1.25 - Management Committee
Schedule 1.29 - Percentage Interests
Schedule 1.41 - Tax Matters Member
Schedule 5.2(b) - Initial Company Budget

                                                                         Page 37
<PAGE>

                                  APPENDIX A
                            TAX AND RELATED MATTERS
                              ("Tax Supplement")

                                   Article 1
                               CAPITAL ACCOUNTS

1.1       Book Capital Accounts. A capital account (the "Book Capital Account")
          ---------------------
          for each Member shall be maintained at all times during the Term in
          accordance with this Section 1.1 and the capital accounting rules set
          forth in Section 1.704-1(b)(2)(iv) of the Treasury Regulations, as the
          same may be amended from time to time ("Regulations") (excluding
          however, Section 1.704-1(b)(2)(iv)(f) of the Regulations [permitting
          an optional revaluation of Company property in certain circumstances]
          except with respect to Company property as to which an election to
          revalue the same shall have been made pursuant to subsection (d)
          below) except as otherwise specifically provided herein. The Company
          shall make all adjustments required by said Section 1.704-1(b)(2)(iv).
          In the event that at any time during the term of the Company it shall
          be determined that the Book Capital Accounts shall not have been
          maintained as required by this Section 1.1, then said accounts shall
          be retroactively adjusted so that the same shall conform to this
          Section 1.1. The Company shall make all adjustments required by said
          Section 1.704-1(b)(2)(iv). In the event that the Company acquires an
          interest in another limited liability company or partnership by way of
          contribution or owns an interest in any other limited liability
          company or partnership at the time of a revaluation of Company
          property, the allocation of the Company's distributive share of the
          income, gain, loss or deduction of any such subsidiary limited
          liability company or partnership shall, to the extent possible, be
          made for purposes of this Company as if the subsidiary limited
          liability company or partnership's assets were owned directly by the
          Company and the property of the subsidiary limited liability company
          or partnership was revalued. In addition, the provisions of Section
          1.704-2(k) shall be applied in connection with Nonrecourse Deductions
          and Member Risk Nonrecourse Deductions when the Company is a partner
          in another partnership or a member in another limited liability
          company.

          (a)  Maintenance of Book Capital Accounts. Each Member's Capital
               ------------------------------------
               Account shall be maintained on the Company's books and records in
               accordance with the following provisions:

               (i)  To each Member's Book Capital Account there shall be added
                    (a) such Member's Capital Contributions, (b) such Member's
                    allocable share of Net Income and any items in the nature of
                    income or gain that are specially allocated to such Member
                    pursuant to Section 2.4 of this Tax Supplement or other
                    provisions of this Agreement, and (c) the amount of any

                                      A-1
<PAGE>

                      Company liabilities assumed by such Member or which are
                      secured by any property distributed to such Member.

               (ii)   From each Member's Book Capital Account there shall be
                      subtracted (a) the amount of (1) cash and (2) the Fair
                      Market Value of any Company property (other than cash)
                      distributed to such Member (other than any payment of
                      principal and/or interest to such Member pursuant to the
                      terms of a Member Loan made by the Member to the Company)
                      pursuant to any provision of this Agreement, (b) such
                      Member's allocable share of Net Losses and any other items
                      in the nature of expenses or losses that are specially
                      allocated to such Member pursuant to Section 2.4 of this
                      Tax Supplement, or other provisions of this Agreement, and
                      (c) liabilities of such Member assumed by the Company or
                      which are secured by any property contributed by such
                      Member to the Company.

               (iii)  In determining the amount of any liability for purposes of
                      subsections (i) and (ii) above, there shall be taken into
                      account Code Section 752(c) and any other applicable
                      provisions of the Code and Regulations.

          (b)  Book Basis. As used herein, "Book Basis" of an item of Company
               ----------
               property means the adjusted basis of such item as reflected in
               the books of the Company, determined and maintained in accordance
               with the capital accounting rules contained in Section 1.704-
               1(b)(2)(iv) of the Regulations (excluding, however,
               Section 1.704-1(b)(2)(iv)(f) thereof [permitting an optional
revaluation of
               Company property in certain circumstances] except with respect to
               Company property as to which an election to revalue the same
               shall have been made pursuant to subsection (d) below).

          (c)   Initial Book Capital Accounts. The initial Book Capital Account
                -----------------------------
                balances of the Members as of the date hereof shall, based upon
                the Capital Contributions made by the Members under Sections
                3.1(a) and 3.2, be as follows:

                SWC                            $120,000
                Inland                         $120,000

          (d)   Optional Revaluations of Company Property. The Management
                -----------------------------------------
                Committee may cause the Company to make the election to revalue
                Company property permitted under Section 1.704-1(b)(2)(iv)(f) of
                the Regulations. Should such election be made, the Book Capital
                Account of each Member shall be adjusted in accordance with
                Section 1.704-1(b)(2)(iv)(g) of the Regulations.

                                      A-2
<PAGE>

          (e)    Book Items. Consistent with the provisions of Section 1.704-
                 ----------
                 1(b)(2)(iv)(g)(3) of the Regulations, "Book Depreciation"
                 (which means the depreciation, depletion or amortization [as
                 the case may be], deduction or allowance that shall be
                 allowable to the Company with respect to an item of Company
                 property, determined in the manner hereinafter set forth) for
                 each item of Company property shall be the amount that bears
                 the same relationship to the "Adjusted Book Basis" (which means
                 with respect to an item of Company property, the Book Basis of
                 such item as the same may be adjusted from time to time by Book
                 Depreciation allowed with respect to such item of Company
                 property) of such item of Company property as the depreciation,
                 depletion or amortization, as the case may be, allowable for
                 federal income tax purposes with respect to such item of
                 Company property for such year bears to the "adjusted basis"
                 (within the meaning of Section 1011(a) of the Code of such item
                 of Company property). If an item of Company property shall have
                 an "adjusted basis" (as defined in the preceding sentence)
                 equal to zero, Book Depreciation shall be determined under a
                 reasonable method, which method shall be selected by the
                 Management Committee. Also consistent with the provisions of
                 Section 1.704-1(b)(2)(iv)(g)(1) of the Regulations, Book Gain
                 or Book Loss (which means the gain or loss with respect to an
                 item of Company property with a Book Basis on the Company's
                 books that differs from the adjusted tax basis of such
                 property) shall be allocated to the Members' Book Capital
                 Accounts in lieu of gain or loss with respect to such property
                 as determined for federal income tax purposes.

          (f)    Book Adjustments on Distributions. With respect to all
                 ---------------------------------
                 distributions of Company property to Members, the Company shall
                 comply with the provisions contained in Section 1.704-
                 1(b)(2)(iv)(e) of the Regulations (relating to adjustments to
                 the Members' Book Capital Accounts in connection with such
                 distributions) and all allocations and adjustments made in
                 connection therewith shall be in accordance with Article 2 of
                 this Tax Supplement.

                                   ARTICLE 2
                       ALLOCATION OF PROFITS AND LOSSES

For purposes of maintaining Book Capital Accounts and in determining the rights
of the Members among themselves, the Company's items of income, gain, loss and
deduction for any taxable year (or portion thereof) shall be allocated to the
Members as provided hereinbelow.

2.1       Preliminary Definitions. When used herein, the following terms shall
          -----------------------
         have the respective meanings assigned to them in this Article 2:

                                      A-3
<PAGE>

     (a)  Adjusted Capital Account. "Adjusted Capital Account" shall mean the
          ------------------------
          Book Capital Account maintained for each Member as of the end of each
          taxable year of the Company (a) increased by any amounts which such
          Member is deemed obligated to restore under Regulation Section 1.704-
          2(g)(1) and Section 1.704-2(i)(5), and (b) decreased by such Member's
          share of the items described in Regulations Sections 1.704-
          1(b)(2)(ii)(d)(4), (5) and (6).

     (b)  Economic Risk of Loss. "Economic Risk of Loss" shall have the meaning
          ----------------------
          set forth in Regulation Section 1.704-2(b)(4).

     (c)  Minimum Gain Attributable to Member Risk Non-recourse Debt. "Minimum
          ----------------------------------------------------------
          Gain Attributable to Member Risk Non-recourse Debt" shall mean the
          amount determined in accordance with the principles of Regulation
          Section 1.704-2(i).

     (d)  Net Income/Net Loss. "Net Income" or "Net Loss", as the case may be,
          -------------------
          shall mean, for any taxable period, the difference between the
          Company's items of income and gain and the Company's items of loss and
          deduction for such taxable period. The determination of Net Income or
          Net Loss shall be made generally in accordance with Section 703(a) of
          the Code; however, (i) all items of income, gain, loss or deduction
          required to be stated separately pursuant to Section 703(a)(1) of the
          Code will be included in the determination; (ii) any income and gain
          that is exempt from tax, and all expenditures described in Section
          705(a)(2)(B) of the Code (or treated as expenditures so described
          pursuant to Regulations Section 1.704-1(b)(2)(iv)(i) shall be included
          in such determination; (iii) Book Gain, Book Loss and Book
          Depreciation will be included in such determination in lieu of tax
          gain or loss or depreciation; and (iv) the items allocated under
          Section 2.4 of this Tax Supplement shall be excluded from such
          determination.

     (e)  Nonrecourse Deductions. "Nonrecourse Deductions" shall have the
          -----------------------
          meaning set forth in Regulation Section 1.704-2(b)(1).

     (f)  Nonrecourse Liability. "Nonrecourse Liability" shall have the meaning
          ----------------------
          set forth in Regulation Section 1.704-2(b)(3).

     (g)  Member Risk Nonrecourse Debt. "Member Risk Nonrecourse Debt" shall
          have the meaning set forth in Regulation Section 1.704-2(b)(4) for
          "partner nonrecourse debt."

     (h)  Member's Share of Minimum Gain. "Member's Share of Minimum Gain" shall
          --------------------------------
          be calculated as set forth in Regulation Section 1.704-2(g)(1).

                                      A-4
<PAGE>

     (i)  Member's Share of Minimum Gain Attributable to Member Risk Nonrecourse
          ----------------------------------------------------------------------
          Debt. "Member's Share of Minimum Gain Attributable to Member Risk
          ----
          Nonrecourse Debt" shall be calculated as set forth in Regulation
          Section 1.704-2(i)(5).

     (j)  Company Minimum Gain. "Company Minimum Gain" shall mean that amount
          ---------------------
          determined in accordance with the principles of Regulation Section
          1.704-2(d).

     (k)  Member Risk Nonrecourse Deductions. "Member Risk Nonrecourse
          ----------------------------------
          Deductions" shall mean any and all items of loss, deduction or
          expenditure described in Section 705(a)(2)(B) of the Code (or treated
          as an expenditure so described pursuant to Regulation Section 1.704-
          1(b)(2)(iv)(i)) that, in accordance with the principles of Regulation
          Section 1.704-2(i), are attributable to Member Risk Nonrecourse Debt.

2.2  Net Loss. After giving effect to the allocations set forth in Section 2.4
     --------
     of this Tax Supplement hereof, and the special allocations for Start-Up
     Losses and Start-Up Income (as defined below), all items of income, gain,
     loss and deduction taken into account in computing Net Loss for a
     particular taxable period shall be allocated in the same manner as such Net
     Loss is allocated hereunder, to wit:

     (a)  First. To the Members to offset any Net Income allocated pursuant to
          -----
          Sections 2.3(c) and (b) of this Tax Supplement, in that order, pro
          rata among the Members in proportion to their respective shares of the
          Net Income being offset. To the extent any allocation of Net Income is
          offset pursuant to this Section 2.2 of this Tax Supplement, such Net
          Income shall be disregarded in making subsequent allocations pursuant
          to Section 2.3 of this Tax Supplement.

     (b)  Second. To the Members in proportion to their respective Percentage
          ------
          Interests; provided, notwithstanding subsection (a) above, net losses
          attributable to the expenditure of the Start-Up Capital Contributions
          during the Start-Up Period (the "Start-Up Losses") shall be allocated
          55% to SWC and 45% to Inland, in accordance with Section 6.5 of the
          Agreement, after first offsetting any Start-Up Income allocated
          pursuant to Section 2.3 of this Tax Supplement.

2.3  Net Income. After giving effect to the allocations set forth in Section 2.4
     ----------
     of this Tax Supplement, and the special allocation of Start-Up Losses and
     Start-Up Income as defined herein, all items of income, gain, loss and
     deduction taken into account in computing Net Income shall be allocated in
     the same manner as such Net Income is allocated hereunder, to wit:

                                      A-5
<PAGE>

     (a)  First. To the Members to offset any Net Loss allocated pursuant to
          -----
          Section 2.2(b) of this Tax Supplement pro rata among the Members in
          proportion to their respective amount of Net Loss being offset.

     (b)  Second. To the Members, pro rata, in the same proportion and to the
          ------
          extent of each such Member's accrued Preferred Return during the term
          of the Company.

     (c)  Third. To the Members in accordance with their Percentage Interests;
          -----
          provided, notwithstanding subsections (a) and (b) above, net income
          attributable to the IPWC Contracts and IPWC Development Fees earned
          during the Start-Up Period shall be allocated 55% to SWC and 45% to
          Inland, in accordance with Section 6.5 of the Agreement, after first
          offsetting any Start-Up Losses allocated pursuant to Section 2.2 of
          this Tax Supplement.

2.4  Overriding Allocation Provisions. Notwithstanding any other provision of
     --------------------------------
     this Article 2, the following allocations shall be made:

     (a)  Qualified Income Offset. Except as provided in Section 2.4(b) of this
          -----------------------
          Tax Supplement, in the event any Member unexpectedly receives any
          adjustments, allocations or distributions described in Regulation
          Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) or 1.704-
          1(b)(2)(ii)(d)(6), items of Company income and gain shall be specially
          allocated to such Member in an amount and manner sufficient to
          eliminate, to the extent required by the Regulations, the Adjusted
          Capital Account deficit created by such adjustments, allocations or
          distributions as quickly as possible; provided, however, that an
          allocation pursuant to this Section 2.4(a) shall be made only if and
          to the extent that such Member would have an Adjusted Capital Account
          deficit after all other allocations provided for in this Article 2
          have been tentatively made as if this Section 2.4(a) were not in this
          Tax Supplement.

     (b)  Minimum Gain Chargeback. Notwithstanding the other provisions of this
          -----------------------
          Article 2, except as provided otherwise in Regulation Section 1.704-
          2(f) if there is a net decrease in Company Minimum Gain for any
          Company taxable period, each Member shall be allocated items of
          Company income and gain for such period (and, if necessary, subsequent
          periods) in an amount equal to such Member's share of the net decrease
          in Company Minimum Gain for such taxable period.

     (c)  Nonrecourse Deductions. Nonrecourse Deductions for any taxable period
          -----------------------
          shall be allocated in accordance with the Members' respective
          Percentage Interests in effect during such taxable period.

                                      A-6
<PAGE>

     (d)  Code Section 754 Adjustments. To the extent an adjustment to the
          ----------------------------
          adjusted tax basis of any Company asset pursuant to Section 734(b) or
          743(b) of the Code is required, pursuant to Regulations Section 1.704-
          1(b)(2)(iv)(m), to be taken into account in determining Book Capital
          Accounts, the amount of such adjustment to the Book Capital Accounts
          shall be treated as an item of gain (if the adjustment increases the
          basis of the asset) or loss (if the adjustment decreases such basis),
          and such item of gain or loss shall be specially allocated to the
          Members in a manner consistent with the manner in which their Book
          Capital Accounts are required to be adjusted pursuant to such Section
          of the Regulations.

     (e)  Member Risk Nonrecourse Deductions. Member Risk Nonrecourse Deductions
          ----------------------------------
          for any taxable period shall be allocated to the Member that bears the
          Economic Risk of Loss for such Member Risk Nonrecourse Debt. If more
          than one Member bears such Economic Risk of Loss, such Member Risk
          Nonrecourse Deductions shall be allocated between or among such
          Members in accordance with the ratios in which such Members share such
          Economic Risk of Loss.

     (f)  Member Risk Minimum Gain Chargeback. Notwithstanding the other
          -----------------------------------
          provisions of this Article 2, except as provided otherwise in
          Regulation Section 1.704-2(i) if there is a net decrease in Minimum
          Gain Attributable to Member Risk Nonrecourse Debt for any Company
          taxable period, each Member with a Member's Share of Minimum Gain
          Attributable to Member Risk Nonrecourse Debt at the beginning of such
          taxable period shall be allocated items of Company income and gain for
          such period (and, if necessary, subsequent periods) in an amount equal
          to such Member's share of the net decrease in the Minimum Gain
          Attributable to Member Risk Nonrecourse Debt. The items to be so
          allocated shall be determined in a manner consistent with the
          principles of Regulation Section 1.704-2(f)(5).

     (g)  Curative Allocations. The allocations set forth in Sections 2.4(a)
          --------------------
          through (f) of this Tax Supplement (the "Regulatory Allocations") are
          intended to comply with certain requirements of Regulations Sections
          1.704-1(b) and 1.704-2(i). The Regulatory Allocations may not be
          consistent with the manner in which the Members intend to distribute
          the cash of the Company or allocate Company income or loss.
          Accordingly, the Management Committee is hereby authorized and
          directed to cause the allocation of Net Income, Net Loss and other
          items of income, gains, loss and deductions to the Members so as to
          prevent the Regulatory Allocations from distorting the manner in which
          Company distributions will be divided among the Members. In general,
          the Members anticipate that this will be accomplished by specially
          allocating other Net Profits, Net Losses and other items of income,
          gain, loss and deduction to the Members so that, to the extent

                                      A-7
<PAGE>

          possible, the net amount of such allocations of other Net Income, Net
          Loss, and other items and the Regulatory Allocations to the Members
          shall be equal to the net amount that would have been allocated among
          the Members if the Regulatory Allocations had not occurred.

     (h)  Liquidation Allocations. It is intended that the amount to be
          -----------------------
          distributed to a Member pursuant to Section 10.3 of the Agreement
          shall equal the amount such Member would receive if liquidation
          proceeds were instead distributed in accordance with Section 6.4 of
          the Agreement. This intended distribution amount for a member is
          referred to as such Member's "Targeted Distribution Amount".
          Notwithstanding anything to the contrary in this Tax Supplement, if
          upon a termination and liquidation of the Company, any Member's ending
          Book Capital Account balance immediately prior to the distributions to
          be made pursuant to Section 10.3 of the Agreement is less than the
          "Targeted Distribution Amount," then such Member shall be specially
          allocated items of gross income or gain for Book Capital Account
          purposes for such year (or for prior years to the extent amended tax
          returns can be filed for the Company), and items of loss or deduction
          for Book Capital Account purposes for such year (or for prior years to
          the extent amended tax returns can be filed for the Company), shall be
          allocated away from such Member to the other Members, until such
          Member's actual Book Capital Account balance equals the Targeted
          Distribution Amount for such Member. The special allocation provisions
          provided by this Section 2.4(h) shall be applied in such a manner so
          as to cause the difference between any Member's Targeted Distribution
          Amount and the balance in its Book Capital Account (determined after
          this allocation, but immediately prior to the distributions pursuant
          to Section 10.3 of the Agreement) to be the smallest dollar amount
          possible.

2.5  Allocation of Nonrecourse Liabilities. Nonrecourse Liabilities of the
     -------------------------------------
     Company in excess of the sum of the amount of Company Minimum Gain and any
     tax gain allocable to the Members under Section 704(c) of the Code shall be
     allocated in accordance with their respective Percentage Interests.

2.6  Protective Allocations. In the event that any amount claimed by the Company
     ----------------------
     to constitute a deductible expense in any taxable year is recharacterized
     for federal income tax purposes as a distribution made to a Member in its
     capacity as a member of the Company and not a Section 707(c) Payment or a
     payment to a Member not acting in his capacity as a member under Code
     Section 707(a), then, in the taxable year of such recharacterization, the
     Member who is deemed to have received such distribution shall first be
     allocated an amount of Company gross income equal to such payment, its
     Capital Account shall be reduced to reflect the distribution, and for
     purposes of this Article 2 (other than the allocations in Section 2.4 of
     this Tax

                                      A-8
<PAGE>

     Supplement) Net Income and Net Loss shall be determined after making the
     allocation required by this Section 2.6.

                                   ARTICLE 3
                      DETERMINATIONS OF FAIR MARKET VALUE
                           FOR BOOK AND TAX PURPOSES

The determination of the Fair Market Value of Company property for book and tax
purposes shall be made by the Company Accountant and approved by the Management
Committee.

                                   ARTICLE 4
                          DEFICIT FUNDING OBLIGATION

No Member shall be obligated to eliminate any deficit balance in its final Book
Capital Account on the liquidation of the Company.

                                   ARTICLE 5
                                 MISCELLANEOUS

5.1  Allocations to Periods. For purposes of determining the income, gain, loss
     ----------------------
     and deductions allocable to any period, such items shall be determined on
     the interim closing the books method.

5.2  Definitions. Terms utilized herein but not defined herein shall have the
     -----------
     same meanings specified therefor in the Agreement.

5.3  Federal Income Tax Allocations. The following provisions are applicable for
     ------------------------------
     federal and state income tax purposes:

     (a)  Tax Allocations Follow Book Allocations. Except as otherwise provided
          ---------------------------------------
          herein, and to the extent permitted by Section 1.704-1(b)(4)(i) of the
          Regulations, for federal and state income tax purposes each Company
          item of income, gain, loss and deduction shall be allocated to the
          Members in the same manner as its corresponding item of "book" income,
          gain, loss or deduction has been allocated under Article 2 of this Tax
          Supplement.

     (b)  Section 704(c) Allocations. Notwithstanding any provisions hereof to
          --------------------------
          the contrary, income, gain, loss and deductions with respect to
          Section 704(c) Property shall, solely for tax purposes, be allocated
          between the Members so as to take account of any variation between the
          adjusted tax basis of such property to the Company for federal income
          tax purposes and its initial Book Basis. As used herein, "Section
          704(c) Property" means (1) each item of Company property which is
          contributed to the Company and to which Section 704(c) of the Code or
          Section 1.704-1(b)(2)(iv)(d) of the Regulations applies, and (2) each
          item of Company property which, as contemplated by Section 1.704-

                                      A-9
<PAGE>

          1(b)(4)(i) and other analogous provisions of the Regulations, is
          governed by the principles of Section 704(c) of the Code (or
          principles analogous to the principles contained in Section 704(c) of
          the Code) by virtue of (a) an increase or decrease in the Book Capital
          Accounts of the Members to reflect a revaluation of Company property
          on the company's books as provided by Section 1.704-1(b)(2)(iv)(f) of
          the Regulations, (b) the fact that it constitutes a receivable,
          account payable, or other accrued but unpaid item which, under
          principles analogous to those applying to an item of Company property
          having an adjusted tax basis that differs from its Book Basis, is
          treated as an item of property described in Section 1.704-
          1(b)(2)(iv)(g)(2) of the Regulations, (c) the constructive liquidation
          and reconstitution of the Company under Section 708(b)(1)(B) of the
          Code (see, e.g., Section 1.704-1(b)(2)(iv)(1) of the Regulations) as
                     ----
          the same may from time to time be construed, to the extent that, and
          for so long as, such item of Company property continues to be governed
          by the principles of Section 704(c) of the Code (or principles
          analogous to the principles contained in Section 704(c) of the Code).
          Similar principles should be followed in allocating tax items for
          state income tax purposes.

     (c)  Ordinary Income Recapture. If, in the event of a gain on any sale,
          -------------------------
          exchange or other disposition of Company property, all or a portion of
          such gain is characterized as ordinary income ("Recapture") by virtue
          of the recapture rules of Section 1250, Section 1245 or otherwise,
          then the Recapture shall be allocated to the Members as follows (i.e.,
          the portion of the gain allocated to a Member which constitutes
          Recapture shall be determined as follows): to the extent possible,
          there shall be allocated to each Member that portion of such Recapture
          which is equal to the fraction, the numerator of which is the
          depreciation deductions (or other items of deduction that generated
          such Recapture) allowable with respect to the Company property being
          sold theretofore allocated to such Member or its predecessor in
          interest for federal income tax purposes, and the denominator of which
          is the total depreciation deductions (or other items of deduction that
          generated such Recapture) allowable with respect to the Company
          property being sold theretofore allocated to any Member or its
          predecessor in interest for federal income tax purposes (including, in
          the case of property which is contributed to the Company, depreciation
          deductions taken or claimed by the contributing Member prior to such
          contribution); provided, however, that under no circumstances shall
          there be allocated to any Member, Recapture in excess of the gain
          allocated to such Member (and such excess shall be allocated instead
          to the other Members).

5.4  Tax Elections. All elections required or permitted to be made by the
     -------------
     Company under the Code and state revenue laws shall be made jointly by the
     Members.

                                     A-10
<PAGE>

5.5  Tax Matters Member.
     ------------------

     (a)  Identity, Etc.. Inland is designated the tax matters member ("TMM")
          --------------
          for the Company as defined in Section 6231(a)(7) of the Code. The
          Manager may resign as TMM for one (1) or more specified Company
          taxable years upon thirty (30) days prior notice to the Members. In
          the event of any change in TMM, the Member serving as TMM for a given
          taxable year shall continue as TMM with respect to all matters
          concerning such year. The TMM and the Members shall use their
          reasonable efforts to comply with the responsibilities outlined in
          this Section 5.5 and in Sections 6222 through 6232 of the Code and in
          doing so shall incur no liability to any Members. Notwithstanding
          TMM's obligation to use its reasonable efforts in the fulfillment of
          its responsibilities, TMM shall not be required to incur any expenses
          for the preparation for or pursuance of administrative or judicial
          proceedings unless the Members agree on a method for sharing such
          expenses.

     (b)  Inconsistent Treatment. If any Member intends to file a notice of
          ----------------------
          inconsistent treatment under Section 6222(b) of the Code, then such
          Member shall give reasonable notice under the circumstances to the
          Members of such intent and the manner in which the Member's intended
          treatment of an item is (or may be) inconsistent with the treatment of
          that item by the Company.

     (c)  Extension of Limitations. The TMM shall not enter into any extension
          ------------------------
          of the period of limitations for making assessments on behalf of
          Members without first obtaining the written consent of the Members,
          which consent may not be unreasonably withheld.

     (d)  Administrative Adjustment. No Member shall file, pursuant to Section
          --------------------------
          6227 of the Code, a request for an administrative adjustment of items
          for any Company taxable year without first notifying the Management
          Committee. If the Management Committee agrees with the requested
          adjustment, then the TMM shall file the request for administrative
          adjustment on behalf of the Company. If unanimous consent is not
          obtained within thirty (30) days from such notice, or within the
          period required to timely file the request for administrative
          adjustment, if shorter, any Member, including the TMM, may file a
          request for administrative adjustment on its own behalf.

     (e)  Judicial Proceedings. Any Member intending to file a petition under
          --------------------
          Section 6226, 6228, or other section of the Code with respect to any
          item or other matters involving the Company shall notify the Members
          of such intention and the nature of the contemplated proceeding. In
          the case in which the TMM is the Member intending to file such
          petition on behalf of the Company, such notice shall be given within a

                                     A-11
<PAGE>

          reasonable period of time to allow the Members to participate in the
          choosing of the forum in which such petition will be filed. If any
          Member intends to seek review of any court decision rendered as a
          result of a proceeding instituted under the preceding part of this
          Section, then such Member shall notify the Members of such intended
          action.

     (f)  Settlements. The TMM shall not bind the Members to a settlement
          -----------
          agreement without obtaining the written concurrence of the Members.
          For purposes of this paragraph, the term "settlement agreement" shall
          include a settlement agreement at either the administrative or
          judicial level. Any Member who enters into a settlement agreement with
          respect to any partnership items, as defined by Section 6231(a)(3) of
          the Code, shall notify the Members of such settlement agreement and
          its terms within ninety (90) days from the date of settlement.

     (g)  Survival. The provisions of this Section 5.5 shall survive the
          --------
          termination of the Company or the termination of any Member's interest
          in the Company and shall remain binding on the Members for a period of
          time necessary to resolve with the Internal Revenue Service of the
          United States of America or the Department of Treasury any and all
          matters regarding the federal income taxation of the Company.

                                     A-12
<PAGE>

                                  APPENDIX B

                         QUINCEY EMPLOYMENT AGREEMENT
                         ----------------------------

                                      B-1
<PAGE>

                                  APPENDIX C
                                  ----------

                            MEMBER NOTICE ADDRESSES
                            -----------------------

              Inland:                   Mr. Robb Quincey
                                        Inland Pacific Partners, LLC
                                        8300 Utica Avenue, Third Floor
                                        Rancho Cucamonga, CA  91730
                                        Fax No.: 909/635-2048

              SWC:                      Mr. Tony Garnier
                                        Southwest Water Company
                                        225 Barranca Avenue, Suite 200
                                        West Covina, CA   91791-1605
                                        Fax No.:  626/915-1558
<PAGE>

                                  APPENDIX D
                                  ----------

                          INVESTMENT REPRESENTATIONS
                          --------------------------

Each Member acknowledges and agrees as follows with respect to investment
representations:

          (a)  Each Member understands:

               (i)    That the Membership Interests in the Company evidenced by
                      this Agreement have not been registered under the
                      Securities Act of 1933, 15 U.S.C. (SS) 15b et seq., the
                                                                 -- ---
                      California Corporate Securities Law of 1968 or any other
                      state securities laws (collectively, the "Securities
                      Acts") because the Company is issuing Membership Interests
                      in the Company in reliance upon the exemptions from the
                      registration requirements of the Securities Acts providing
                      for issuance of securities not involving a public
                      offering.

               (ii)   That the Company has relied upon the representation made
                      by each Member that such Member's Membership Interest in
                      the Company is to be held by such Member for investment;
                      and

               (iii)  That exemption from registration under the Securities Acts
                      would not be available if any Membership Interest in the
                      Company was acquired by a Member with a view to
                      distribution. Each Member agrees that the Company is under
                      no obligation to register the Membership Interests in the
                      Company or to assist the Members in complying with any
                      exemption from registration under the Securities Acts if
                      the Member should at a later date desire to dispose of
                      such Member's Membership Interest in the Company.

          (b)  Each Member hereby represents to the Company that such Member is
               acquiring such Member's Membership Interest in the Company for
               such Member's own account, for investment and not with a view to
               the resale or distribution.

          (c)  Each Member recognizes that no public market exists with respect
               to the Membership Interests and no representation has been made
               that such a public market will exist at a future date.

          (d)  Each Member hereby represents that such Member has not received
               any advertisement or general solicitation with respect to the
               sale of the Membership Interests.

                                      D-1
<PAGE>

          (e)  Each Member acknowledges that such Member has a preexisting
               personal or business relationship with the Company or its
               officers, directors, or principal Membership Interest holders,
               or, by reason of such Member's business or financial experience
               or the business or financial experience of such Member's
               financial advisors (who are not affiliated with the Company),
               could be reasonably assumed to have the capacity to protect such
               Member's own interest in connection with the purchase of the
               Membership Interests. Each Member further acknowledges that such
               Member is familiar with the financial condition and prospects of
               the Company's business, and has discussed with the other Members
               the current activities of the Company. Each Member believes that
               the Membership Interests are securities of a kind such Member
               wishes to purchase and hold for investment, and that the nature
               and amount of the Membership Interests are consistent with such
               Member's investment program.

          (f)  Before acquiring any Membership Interest in the Company, each
               Member has investigated the Company and its business and the
               Company has made available to each Member all information
               necessary for the Member to make an informed decision to acquire
               a Membership Interest in the Company. Each Member considers
               itself to be a person or entity possessing experience and
               sophistication as an investor adequate for the evaluation of the
               merits and risks of the Member's investment in the Company.

          (g)  Each Member understands the meaning and consequences of the
               representations and warranties made by such Member set forth in
               this Appendix and that the Company has relied upon such
               representations and warranties. Each Member hereby indemnifies,
               defends, protects and holds wholly free and harmless the Company
               and the other Members from and against any and all claims,
               losses, damages, expenses or liabilities arising out of the
               breach and/or inaccuracy of any such representation and warranty.
               The indemnification contained in this paragraph shall survive the
               execution of this Agreement, the formation of the Company, and
               the liquidation of the Company.

                                      D-2
<PAGE>

                                 SCHEDULE 1.25
                                 -------------

                         Initial Management Committee
                         ----------------------------

Inland Representatives
----------------------

Bill McIntyre (Senior Manager)
Robb Quincey

Inland Alternates
-----------------

Richard A. Lewis (Senior Manager)
Steve Reenders
Michael J. Bidart
John M. Goodman

SWC Representatives
-------------------

Anthony Garnier

SWC Alternate(s)
----------------

Maurice Gallarda
<PAGE>

                                  SCHEDULE 1.29
                                  -------------

                              Percentage Interests
                              --------------------

Inland                                                           75%
SWC                                                              25%

                             Start-Up Percentages
                             --------------------
Inland                                                           45%
SWC                                                              55%
<PAGE>

                                 SCHEDULE 1.41
                                 -------------

                              Tax Matters Member
                              ------------------

Inland Pacific Partners, LLC
<PAGE>

                                SCHEDULE 5.2(a)
                                ---------------

                            Initial Company Budget
                            ----------------------<PAGE>

                                                                     EXHIBIT 4.2

                           RIGHTS AGREEMENT AMENDMENT
                           --------------------------

          This Amendment, dated as of February 7, 2000, to the Rights Agreement
dated as of March 3, 1995 (the "Rights Agreement"), is between Ortel
Corporation, a Delaware corporation (the "Company"), and American Stock Transfer
and Trust Company, a New York corporation (the "Rights Agent").

          Pursuant to this Amendment, the Company has appointed American Stock
Transfer and Trust Company, and American Stock Transfer and Trust Company
accepts such appointment, to serve as the Rights Agent pursuant to the terms of
the Rights Agreement, as hereby amended.  American Stock Transfer and Trust
Company has thus assumed the obligations, and is thus referred to herein as, the
"Rights Agent."

          Pursuant to Section 26 of the Rights Agreement, the Company and the
Rights Agent may from time to time supplement or amend the Rights Agreement in
accordance with the provisions of Section 26 thereof and the Company desires and
directs the Rights Agent to so amend the Rights Agreement.  All acts and things
necessary to make this Amendment a valid agreement according to its terms have
been done and performed, and the execution and delivery of this Amendment by the
Company and the Rights Agent have been in all respects authorized by the Company
and the Rights Agent.

          In consideration of the foregoing premises and mutual agreements set
forth in the Rights Agreement and this Amendment, the parties hereto agree as
follows:

1. The first two sentences of Section 1.1 of the Rights Agreement are hereby
      replaced with the following:
      1.1  "Acquiring Person" shall mean any Person (as such term is hereinafter
      defined) who or which, together with all Affiliates and Associates (as
      such terms are hereinafter defined) of such Person, shall be the
      Beneficial Owner (as such term is hereinafter defined) of 15% or more of
      the Common Shares of the Company then outstanding but shall not include
      the Company, any Subsidiary of the Company or any employee benefit plan of
      the Company or of any Subsidiary of the Company or any entity holding
      shares of capital stock of the Company for or pursuant to the terms of any
      such plan, in its capacity as an agent or trustee for any such plan.
      Notwithstanding the foregoing, (i) Sumitomo Osaka Cement Co., Ltd., its
      Affiliates or Associates (individually and collectively, "Sumitomo") shall
      not be an "Acquiring Person" unless and until Sumitomo shall acquire, at
      any time on or after the date hereof, Beneficial Ownership of any Common
      Shares of the Company in addition to the Common Shares of the Company
      Beneficially Owned by Sumitomo immediately prior to the date hereof and
      (ii) Lucent Technologies Inc. ("Lucent"), its Affiliates or Associates,
      including without limitation Solara Acquisition Inc. ("Merger Sub"), shall
      not become an "Acquiring Person" as a result of (1) the approval,
      execution or delivery of any of (A) that certain Agreement and Plan of
      Merger dated February 7, 2000 among Lucent, Merger Sub and the Company
      (the "Merger Agreement"), (B) that certain Stock Option Agreement dated

                                       1
<PAGE>

     February 7, 2000 among Lucent and the Company (the "Stock Option
     Agreement") and (C) that certain Voting Agreement dated February 7, 2000
     among Lucent, Merger Sub and Sumitomo (the "Voting Agreement") or (2) the
     consummation of the transactions contemplated by the Merger Agreement, the
     Stock Option Agreement or the Voting Agreement, including without
     limitation the Merger (as defined in the Merger Agreement); provided,
                                                                 --------
     however, that Lucent will become an "Acquiring Person" in the event that
     -------
     Lucent becomes the Beneficial Owner of an aggregate of 15% or more of the
     Common Shares of the Company then outstanding other than pursuant to the
     terms of the Merger Agreement, the Stock Option Agreement or the Voting
     Agreement.

2.   Section 3.1 of the Rights Agreement is hereby amended by adding as the
     final sentence thereof the following:

     Notwithstanding anything in the Agreement to the contrary, no Distribution
     Date shall be deemed to have occurred solely as a result of (i) the
     approval, execution or delivery of the Merger Agreement, the Stock Option
     Agreement or the Voting Agreement or (ii) the consummation of the
     transactions contemplated by the Merger Agreement, the Stock Option
     Agreement or the Voting Agreement, including without limitation the Merger
     (as defined in the Merger Agreement).

3.   Section 13.1 of the Rights Agreement is hereby amended by adding as the
     final sentence thereof the following:

     Notwithstanding anything in the Agreement to the contrary, a transaction of
     the kind referred to in this Section 13.1 shall not be deemed to have
     occurred solely as a result of (i) the approval, execution or delivery of
     the Merger Agreement, the Stock Option Agreement or the Voting Agreement or
     (ii) the consummation of the transactions contemplated by the Merger
     Agreement, the Stock Option Agreement or the Voting Agreement, including
     without limitation the Merger (as defined in the Merger Agreement).

4.   Pursuant to Section 13.2, the Rights Agreement and the rights of holders of
     Rights thereunder shall be terminated in accordance with Section 7.1 of the
     Rights Agreement.

5.   The seventh sentence of Section 21 of the Rights Agreement is hereby
     deleted in its entirety and replaced as follows:

     Any successor Rights Agent, whether appointed by the Company or by such a
     court, shall be a corporation organized and doing business under the laws
     of the United States or of the State of California or the State of New York
     (or any other state of the United States so long as such corporation is
     authorized to do business as a banking institution in the State of
     California or the State of New York in good standing, having a principal
     office in the State of California or State of New York), which is
     authorized under such laws to exercise stock transfer or corporate trust
     powers and is subject to supervision or

                                       2
<PAGE>

     examination by Federal or state authority and which has at the time of its
     appointment as Rights Agent a combined capital and surplus of at least $10
     million.

6.   The Company hereby appoints American Stock Transfer and Trust Company, and
     American Stock Transfer and Trust Company hereby accepts such appointment,
     to serve as the Rights Agents pursuant to the terms of the Rights
     Agreement, as hereby amended.

7.   Except as expressly amended hereby, the Rights Agreement remains in full
     force and effect in accordance with its terms.

8.   This Amendment shall be governed by and construed in accordance with the
     laws of the State of Delaware.

9.   This Amendment may be executed in any number of counterparts and each of
     such counterparts shall for all purposes be deemed an original, and all
     such counterparts shall together constitute but one and the same
     instrument.

10.   Except as expressly set forth herein, this Amendment shall not by
     implication or otherwise alter, modify, amend or in any way affect any of
     the terms, conditions, obligations, covenants or agreements contained in
     the Rights Agreement, all of which are ratified and affirmed in all
     respects and shall continue in full force and effect.

11.  Capitalized terms used herein but not defined shall have the meanings given
     to them in the Rights Agreement.

          IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
the Rights Agreement to be duly executed as of the day and year first above
written.

                                         ORTEL CORPORATION

                                         By:  /s/ Nadav Bar-Chaim
                                            ------------------------------------
                                            Name:  Nadav Bar-Chaim
                                            Title:  Secretary

                                         AMERICAN STOCK TRANSFER  AND TRUST
                                         COMPANY, as Rights Agent

                                         By:  /s/ Herb Lemmer
                                            ------------------------------------
                                            Name:  Herb Lemmer
                                            Title:  Vice President

                                       3

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