**EXHIBIT 10.4**

 

**SECURITY AND PLEDGE AGREEMENT**

 

**SECURITY ANDPLEDGE AGREEMENT,** dated as of March 8, 2006,among **DynTek, Inc.**, a Delawarecorporation (the “Company), **DynTek Services, Inc.**,a Delaware corporation (the “Subsidiary”and, together with the Company, the “Debtors”), and **SACCPartners, L.P.** and **Lloyd I. Miller, III**(the “Purchasers”) who are parties to that certain Purchase Agreement (ashereinafter defined). Certain defined terms are set forth in Article 10hereof.

 

**Recitals**

 

**WHEREAS**,the Company, the Purchasers and Trust A-4 – Lloyd I. Miller areparties to a Note Purchase Agreement dated as of the date hereof (the “PurchaseAgreement”); and

 

**WHEREAS,**it is a condition to the Purchasers’ obligation to enter into the PurchaseAgreement and to extend credit to the Company thereunder that the Debtorsexecute and deliver this Security and Pledge Agreement as security for thepayment and performance of all obligations of the Debtors to the Purchasers andto guarantee all of the obligations of the Debtors under the Purchase Agreementand this Agreement:

 

**NOW,THEREFORE**, in consideration of the premises contained hereinand for other good and valuable consideration, the receipt and sufficiency ofwhich are hereby acknowledged, the parties hereto agree as follows:

 

**ARTICLE 1.**

 

**GRANT OF SECURITY**

 

**Section 1.1****                                   Grantof Security**. The Debtors hereby grant to the Purchasers a lien and continuingsecurity interest (“Security Interest”) in and to, and a right of set-offagainst, all of the following personal property and fixtures of the Debtors, whethernow owned by or owing to, or hereafter acquired by or arising in favor of, suchDebtor (including under any trade names, styles or derivations thereof), andwhether owned or consigned by or to, or leased from or to, such Debtor, andregardless of where located (all of which being hereinafter collectivelyreferred to as the “Collateral”):

 

(a)                                  allAccounts;

 

### (b)                                 all Chattel Paper;

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### (c)                                  all documents;

 

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### (d)                                 all General Intangibles (including Marks,Copyrights, Patents, payment intangibles, Proprietary Information and TradeSecrets);

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### (e)                                  all Goods (including Inventory, Equipment andFixtures);

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### (f)                                    all Instruments;

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### (g)                                 all Investment Property, including (i) allshares of the capital stock or membership interests of each subsidiary owned orheld by each Debtor, whether now owned or hereafter formed or acquired (thoseshares and membership interests being listed and described on Schedule Aattached hereto), and all substitutions and additions to such shares (herein,the “Pledged Securities”), (ii) all dividends, distributions, and sumsdistributable or payable from, upon or in respect of the Pledged Securities,and (iii) all other rights and privileges incident to the PledgedSecurities (all of the foregoing being hereinafter referred to collectively asthe “Stock Collateral”);

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### (h)                                 all Deposit Accounts of such Debtor, including allblocked accounts, concentration accounts, disbursement accounts, and all otherbank  accounts and all deposits therein;

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### (i)                                     all money, cash or cash equivalents of such Debtor;

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### (j)                                     all Supporting Obligations and Letter-of-CreditRights of such Debtor;

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### (k)                                  the commercial tort claims identified on Schedule Bhereto; and

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### (l)                                     to the extent not otherwise included, all Proceeds,tort claims, insurance claims and other rights to payments not otherwiseincluded in the foregoing and products of the foregoing and all accessions to,substitutions and replacements for, and rents and profits of, each of the foregoingand all other tangible and intangible personal property whatsoever of anyDebtor including all cash, products, offspring, rents, revenues, issues,profits, royalties, income, benefits, accessions, additions, substitutions andreplacements of and to any and all of the foregoing, including all Proceeds ofand to any of the property of any of the Debtors described in the precedingparagraphs of this Section 1.1 (including, without limitation, any lossproceeds or other Proceeds of insurance thereon (whether or not any NotePurchaser is loss payee thereof), and any indemnity, warranty or guarantee,payable by any reason of loss or damage to or otherwise with respect to any ofthe foregoing, and all causes of action, claims and warranties now or hereafterheld by any Debtor in respect of any of the items listed above);

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*provided,however,* that a Security Interest in the Purchased Assets (asthat term is defined by the Asset PurchaseAgreement and Liability AssumptionAgreement and the Asset Purchase Agreement, each dated as of August 8,2005 (the “NETF Agreements”), among the Debtors and New England TechnologyFinance, LLC, a Delaware limited liability company) is not granted under thisAgreement if the grant of a Lien in such Purchased Assets or in the mannercontemplated by this Agreement is prohibited by the terms of the NETF Agreements,but only to the extent that any such prohibition is not rendered ineffectivepursuant to the Uniform

 

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Commercial Code of theState of California or any other applicable law; *providedfurther, however,* that with respect to the Purchased Assetsdescribed in the preceding clause that are excluded from the Collateral byvirtue of the NETF Agreements, such Purchased Assets shall be excluded from theCollateral only to the extent and for so long as this Agreement conflicts withthe NETF Agreements and the NETF Agreements continues validly to prohibit thecreation of such security interest pursuant to this Agreement, and upon theexpiration of such prohibition, the Purchased Assets shall automatically beincluded in the Collateral, without further action on the part of anyDebtor or Purchaser.

 

**Section 1.2****                                   Securityfor Obligations**. This Agreement and the Security Interest shall secure thepayment and performance of the Obligations.

 

**ARTICLE 2**

 

**GENERAL REPRESENTATIONS, WARRANTIES AND COVENANTS**

 

EachDebtor represents, warrants and covenants, which representations, warrantiesand covenants shall survive execution and delivery of this Agreement, asfollows:

 

**Section 2.1****                                   NecessaryFilings**. All financing statements necessary or appropriate to perfectthe security interest granted by each Debtor to the Purchasers hereby inrespect of the Collateral, which can be perfected by the filing of a financingstatement, have been filed and the Security Interest granted to the Purchaserspursuant to this Agreement in and to such Collateral constitutes a perfectedSecurity Interest therein (to the extent that the same can be perfected byfiling) prior to the rights of all other persons or entities therein (otherthan any such rights pursuant to the Permitted Liens) and subject to no otherLiens (other than Permitted Liens) and is entitled to all the rights,priorities and benefits afforded by the Uniform Commercial Code of theState of California to perfected security interests.

 

**Section 2.2****                                   NoLiens**. Each Debtor is, and as to Collateral acquired by it from time totime after the date hereof such Debtor will be, the owner of all Collateralpledged by it hereunder free from any Lien, security interest, encumbrance orother right, title or interest of any person or entity (other than PermittedLiens), and each Debtor shall defend the Collateral against all claims anddemands of all persons or entities at any time claiming the same or anyinterest therein (other than in connection with Permitted Liens) adverse to thePurchasers.

 

**Section 2.3****                                   OtherFinancing Statements**. To the best knowledge of each Debtor, as of thedate hereof, there is no financing statement covering or purporting to coverany interest of any kind in the Collateral (other than (i) the financingstatements filed in respect of Permitted Liens and (ii) the financingstatements identified in Schedule C hereof for which terminationstatements will be filed pursuant to the deadlines set forth in the PurchaseAgreement), and so long as any Purchaser Obligations or commitments withrespect thereto are outstanding, no Debtor will execute or authorize to befiled in any public office any financing statement (or similar statement orinstrument of registration under the law of any jurisdiction) or statementsrelating to the Collateral, except financing statements filed or to be filed inrespect of and

 

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covering the securityinterests granted hereby by such Debtor or in connection with Permitted Liens.

 

**Section 2.4****                                   ChiefExecutive Office; Records**.

 

(a)                                  Asof the date hereof, the chief executive office of each Debtor is located at theaddress indicated on Schedule D hereto for such Debtor. No Debtorwill move its chief executive office except to such new location as such Debtormay establish in accordance with the last sentence of this Section 2.4.A complete set of books of account and records of each Debtor relating to the Accounts,Chattel Paper and Documents are, and will continue to be, kept at such chiefexecutive office, at one or more of the other record locations set forth on Schedule Dhereto for such Debtor or at such new locations as such Debtor may establishin accordance with the last sentence of this Section 2.4.

 

(b)                                 AllAccounts, Chattel Paper and Documents of each Debtor are, and will continue tobe, maintained at, and controlled and directed (including, without limitation,for general accounting purposes) from, the office locations described above orsuch new location established in accordance with the last sentence of this Section 2.4.No Debtor shall establish new locations for such offices until (a) itshall have given to the Purchasers not less than 30 days’ prior written noticeof its intention to do so, clearly describing such new location and providingsuch other information in connection therewith as the Purchasers may reasonablyrequest and (b) with respect to such new location, it shall have taken allaction reasonably satisfactory to the Purchasers, to maintain the securityinterest of the Purchasers in the Collateral intended to be granted hereby atall times fully perfected and in full force and effect.

 

**Section 2.5****                                   Locationof Inventory and Equipment**. As of the date hereof, all Inventory andEquipment held by each Debtor is located at one of the locations shown on Schedule Ehereto. Each Debtor agrees that all Inventory and Equipment now held orsubsequently acquired by it shall be kept at (or shall be in transport to) anyone of the locations shown on Schedule E hereto, or such newlocation as such Debtor may establish in accordance with the last sentenceof this Section 2.5. Each Debtor may establish a new location forInventory and Equipment in a jurisdiction in which such Debtor currently doesbusiness and with respect to which the Purchasers have a first perfectedsecurity interest in such Inventory and Equipment (subject to Permitted Liens).Each Debtor may establish a new location outside of a jurisdiction inwhich it currently does business and with respect to which the Purchasers havea first perfected security interest in such Inventory and Equipment only if (a) itshall have given to the Purchasers not less than 30 days’ prior written noticeof its intention so to do, clearly describing such new location and providingsuch other information in connection therewith as the Purchasers may reasonablyrequest and (b) with respect to such new location, it shall have taken allaction reasonably satisfactory to the Purchasers to maintain the securityinterest of the Purchasers in the Collateral intended to be granted hereby atall times fully perfected and in full force and effect.

 

**Section 2.6****                                   Recourse**.This Agreement is made with full recourse to each Debtor and pursuant to andupon all the warranties, representations, covenants and agreements on the part of

 

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each Debtor containedherein, in the Purchase Agreement and otherwise in writing in connectionherewith or therewith.

 

**Section 2.7****                                   TradeNames; Change of Name**. Each Debtor’s legal name, jurisdiction oforganization and organizational number (if any) are correctly set forth underColumn 1 on Schedule F of this Agreement. No Debtor hastransacted business at any time during the immediately preceding five-yearperiod, and does not currently transact business, under any other legal namesor trade names other than the prior legal names and trade names (if any) setforth on Schedule F attached hereto. No Debtor shall change itsjurisdiction of organization without the Purchasers’ prior written consent. NoDebtor shall change its legal name or transact business under any other tradename without first giving 30 days’ prior written notice of its intent todo so to the Purchasers. With respect to such new name or jurisdiction oforganization, such Debtor shall have taken all action reasonably requested by thePurchasers, to maintain the Security Interest at all times fully perfected andin full force and effect.

 

**ARTICLE 3**

 

**SPECIAL PROVISIONS CONCERNING**

**ACCOUNTS; INSTRUMENTS**

 

**Section 3.1****                                   AdditionalRepresentations and Warranties**. As of the time when each of its Accountsarises, each Debtor shall be deemed to have represented and warranted that suchAccount, and all records, papers and documents relating thereto are what theypurport to be in all material respects, and that such Account will, to the bestknowledge of each Debtor, evidence true and valid obligations of the accountdebtor named therein.

 

**Section 3.2****                                   Maintenanceof Records**. Each Debtor will keep and maintain at its own cost andexpense, records of its Accounts and each Debtor will make the same availableon such Debtor’s premises to the Purchasers for inspection, at such Debtor’sown cost and expense, at any and all commercially reasonable times upon commerciallyreasonable prior notice to such Debtor. Upon the occurrence and during thecontinuance of an Event of Default and at the commercially reasonable requestof the Purchasers, each Debtor shall, at its own cost and expense, deliver alltangible evidence of its Accounts, including, without limitation, all documentsevidencing the Accounts) and such books and records to the Purchasers or to itsrepresentatives (copies of which evidence and books and records may beretained by each Debtor). If the Purchasers so direct, upon the occurrence andduring the continuance of an Event of Default, each Debtor shall legend, in form andmanner satisfactory to the Purchasers, the Accounts, as well as books, recordsand documents of such Debtor evidencing or pertaining to such Receivables andContracts with an appropriate reference to the fact that such Receivables andContracts have been assigned to the Purchasers and that the Purchasers have asecurity interest therein.

 

**Section 3.3****                                   Directionto Account Debtors; Contracting Parties; Etc.**Upon the occurrence andduring the continuance of an Event of Default, and if the Purchasers so directeach Debtor, each Debtor agrees (a) to cause all payments on account ofthe Accounts, Deposit Accounts or General Intangibles to be made directly tothe Cash Collateral Account, (b) that the

 

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Purchasers may, at theiroption, directly notify the obligors with respect to any Accounts, DepositAccounts or General Intangibles to make payments with respect thereto asprovided in preceding clause (a) and (c) that the Purchasers may enforcecollection of any such Accounts, Deposit Accounts or General Intangibles and may adjust,settle or compromise the amount of payment thereof, in the same manner and tothe same extent as such Debtor. Without notice to or assent by each Debtor, thePurchasers may apply any or all amounts then in, or thereafter depositedin, the Cash Collateral Account which application shall be effected in themanner provided in Section 7.4 of this Agreement. The reasonable costs andexpenses (including reasonable attorneys’ fees) of collection, whether incurredby such Debtor or the Purchasers, shall be borne by such Debtor. The Purchasersshall deliver a copy of each notice referred to in the preceding clause (b) tosuch Debtor; provided, that the failure by the Purchasers to so notify suchDebtor shall not affect the effectiveness of such notice or the other rights ofthe Purchasers created by this Section 3.3.

 

**Section 3.4****                                   Modificationof Terms; etc**. No Debtor shall rescind or cancel any indebtednessevidenced by any Account, or modify any term thereof or make any adjustmentwith respect thereto, or extend or renew the same, or compromise or settle anymaterial dispute, claim, suit or legal proceeding relating thereto, or sell anyAccount, or interest therein, without the prior written consent of thePurchasers, except in accordance with such Debtor’s commercially reasonablebusiness practices.

 

**Section 3.5****                                   Collection**.Each Debtor shall endeavor in accordance with commercially reasonable businesspractices to cause to be collected from the account debtor named in each of itsAccounts, as and when due (including, without limitation, amounts which aredelinquent, such amounts to be collected in accordance with generally acceptedlawful collection procedures) any and all amounts owing under or on account ofsuch Accounts and apply forthwith upon receipt thereof all such amounts as areso collected to the outstanding balance of such Account. The reasonable costsand expenses (including, without limitation, attorneys’ fees) of collection, ifincurred by each Debtor or the Purchasers, shall be borne by such Debtor.

 

**Section 3.6****                                   Instruments**.If a Debtor owns or acquires any Instrument constituting Collateral, atPurchasers’ request upon the occurrence and during the continuation of an Eventof Default, such Debtor will promptly deliver such Instrument to the Purchasersappropriately endorsed to the order of the Purchasers as further securityhereunder. At the Purchasers’ request, such Debtor that owns or acquires anyother Instrument constituting Collateral will, within 5 business days, promptlydeliver such Instrument to the Purchasers appropriately endorsed to the orderof the Purchasers as further security hereunder.

 

**ARTICLE 4**

 

**SPECIAL PROVISIONS CONCERNING MARKS**

 

**Section 4.1****                                   AdditionalRepresentations and Warranties**. Each Debtor represents and warrantsthat, as of the date hereof, it is the true and lawful owner of all right,title and interest to or otherwise has the right to use the registered Markslisted in Schedule F hereto and that, as of the date hereof saidlisted Marks constitute all the marks and applications for marks

 

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registered in the UnitedStates Patent and Trademark Office that such Debtor presently owns or uses inconnection with its business. Each Debtor represents and warrants that it owns,is licensed to use or otherwise has the right to use all material Marks that ituses. Each Debtor further warrants that it has no knowledge of any third partyclaim that any aspect of such Debtor’s present or contemplated businessoperations infringes or will infringe any trademark, service mark or trade namein any respect which could reasonably be expected to have a material adverseeffect on the business, operations, property, assets, liabilities or condition(financial or otherwise) of such Debtor. Each Debtor represents and warrantsthat except as listed on Schedule F, as of the date hereof it isthe beneficial and record owner of all trademark registrations and applicationslisted in Schedule F hereto and that said registrations are validand subsisting, and that no Debtor is aware of any third-party claim that anyof said registrations in respect of any material Mark is invalid orunenforceable. Each Debtor hereby grants to the Purchasers an absolute power ofattorney to sign, upon the occurrence and during the continuance of an Event ofDefault, any document which may be required by the United States Patentand Trademark Office in order to effect an absolute assignment of all right,title and interest in each Mark, and record the same.

 

**Section 4.2****                                   Infringements**.Each Debtor agrees, promptly upon learning thereof, to notify the Purchasers inwriting of the name and address of, and to furnish such pertinent informationthat may be available with respect to, any party who such Debtor believesis infringing or diluting or otherwise violating in any material respect any ofsuch Debtor’s rights in and to any material Mark, or with respect to any partyclaiming that such Debtor’s use of any material Mark violates in any materialrespect any property right of that party. Each Debtor further agrees toprosecute any Person infringing any material Mark in accordance with commerciallyreasonable business practices.

 

**Section 4.3****                                   Preservationof Marks**. Each Debtor agrees to use its Marks as required in each ofthe applicable jurisdictions during the time in which this Agreement is ineffect, sufficiently to preserve such Marks (and any registrations thereto) astrademarks or service marks under the laws of the United States and any otherapplicable law; provided, that, prior to any Default, no Debtor shall beobligated to preserve any Mark in the event such Debtor determines, in its commerciallyreasonable business judgment, that the preservation of such Mark is no longerdesirable in the conduct of its business.

 

**Section 4.4****                                   Maintenanceof Registration**. Each Debtor shall, at its own expense, diligentlyprocess all documents required by the Trademark Act of 1946, 15 U.S.C. §§ 1051etseq. to maintain trademark registrations, including but notlimited to affidavits of use and applications for renewals of registration inthe United States Patent and Trademark Office for all of its registered Markspursuant to 15 U.S.C. §§ 1058(a), 1059 and 1065, and shall pay all feesand disbursements in connection therewith and shall not abandon any such filingof affidavit of use or any such application of renewal prior to the exhaustionof all administrative and judicial remedies without prior written consent ofthe Purchasers; provided, that, prior to any Default, no Debtor shall beobligated to maintain any Mark in the event that such Debtor determines, in itscommercially reasonable business judgment, that the maintenance of such Mark isno longer necessary or desirable in the conduct of its business.

 

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**Section 4.5****                                   FutureRegistered Marks**. If any Mark registration issues hereafter to a Debtoras a result of any application now or hereafter pending before the UnitedStates Patent and Trademark Office, within 60 days of receipt of suchcertificate, such Debtor shall deliver to the Purchasers a copy of suchcertificate, and an assignment for security in such Mark, to the Purchasers andat the expense of such Debtor, confirming the assignment for security in suchMark to the Purchasers hereunder, in such form as may be reasonablysatisfactory to the Purchasers.

 

**Section 4.6****                                   Remedies**.If an Event of Default shall occur and be continuing, the Purchasers may takeany or all of the following actions:  (a) declarethe entire right, title and interest of such Debtor in and to each of theMarks, together with all trademark rights and rights of protection to the same,vested in the Purchasers for the benefit of the Purchasers, in which event therights, title and interest shall immediately vest, in the Purchasers for thebenefit of the Purchasers, and the Purchasers shall be entitled to exercise thepower of attorney referred to in Section 4.1 hereof to execute, cause tobe acknowledged and notarized and record said absolute assignment with theapplicable agency; (b) take and use or sell the Marks and the goodwill ofsuch Debtor’s business symbolized by the Marks and the right to carry on the businessand use the assets of such Debtor in connection with which the Marks have beenused; and (c) direct such Debtor to refrain, in which event such Debtorshall refrain, from using the Marks in any manner whatsoever, directly orindirectly, and, if requested by the Purchasers, change such Debtor’s corporatename to eliminate therefrom any use of any Mark and execute such other andfurther documents that the Purchasers may request to further confirm thisand to transfer ownership of the Marks and registrations and any pendingtrademark application in the United States Patent and Trademark Office to thePurchasers.

 

**Section 4.7****                                   CollateralAssignment**. This Agreement is made for collateral security purposesonly. This Agreement and Purchasers’ Security Interest in the Marks shallcontinue in full force and effect as long as any Obligations shall be owed tothe Purchasers (or any of said Purchasers). Upon payment in full of theObligations and termination of the Purchase Agreement, this Agreement shallterminate and Purchasers shall promptly execute and deliver to each Debtor, atsuch Debtor’s expense, all termination statements and other instruments as may benecessary or proper to terminate Purchasers’ security interest in the Marks,subject to any disposition thereof which may have been made by Purchaserspursuant to this Agreement or the Purchase Agreement.

 

**ARTICLE 5**

 

**SPECIAL PROVISIONS CONCERNING**

**PATENTS, COPYRIGHTS AND TRADE SECRETS**

 

**Section 5.1****                                   AdditionalRepresentations and Warranties**. Each Debtor represents and warrantsthat, as of the date hereof, it is the true and lawful owner of all rights in (a) allmaterial Trade Secrets and Proprietary Information necessary to operate thebusiness of such Debtor, (b) the Patents listed in Schedule Hhereto for the Debtor and that said Patents constitute all the patents andapplications for patents that the Debtor owns on the date hereof and (c) theCopyrights listed in Schedule I hereto and that said Copyrightsconstitute all registrations of

 

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copyrights andapplications for copyright registrations that such Debtor owns on the datehereof. Each Debtor further warrants that it has no knowledge of any third partyclaim that any aspect of such Debtor’s present or contemplated businessoperations infringes or will infringe any patent or any copyright or suchDebtor has misappropriated any Trade Secret or Proprietary Information, in eachcase in any respect which could reasonably be expected to have a materialadverse effect on the business, operations, property, assets, liabilities orcondition (financial or otherwise) of such Debtor. Each Debtor hereby grants tothe Purchasers an absolute power of attorney to sign, upon the occurrence andduring the continuance of an Event of Default, any document which may berequired by the United States Patent and Trademark Office or the United StatesCopyright Office in order to effect an absolute assignment of all right, titleand interest in each Patent and Copyright, and to record the same.

 

**Section 5.2****                                   Infringements**.Each Debtor agrees, promptly upon learning thereof, to furnish the Purchasersin writing with all pertinent information available to such Debtor with respectto any infringement, contributing infringement or active inducement to infringein any material respect any material Patent or Copyright or to any claim thatthe practice of any material Patent or the use of any material Copyrightviolates in any material respect any property right of a third party, or withrespect to any misappropriation of any material Trade Secret Right or any claimthat practice of any material Trade Secret Right violates in any materialrespect any property right of a third party. Each Debtor further agrees, to theextent consistent with commercially reasonable business practices, to prosecuteany Person infringing any Patent or Copyright or any Person misappropriatingany Trade Secret Right.

 

**Section 5.3****                                Maintenanceof Patents**. At its own expense, each Debtor shall make timely paymentof all post-issuance fees required pursuant to 35 U.S.C. § 41 to maintainin force rights under each Patent, absent prior written consent of thePurchasers; provided, that no Debtor shall be obligated to maintain anyPatent in the event such Debtor determines, in its commercially reasonablebusiness judgment, that the maintenance of such Patent is no longer necessaryor desirable in the conduct of its business.

 

**Section 5.4****                                   Prosecutionof Patent Application**. At its own expense, each Debtor shall diligentlyprosecute all applications for Patents for such Debtor and shall not abandonany such application prior to exhaustion of all administrative and judicialremedies, absent written consent of the Purchasers; provided, that noDebtor shall be obligated to prosecute any application in the event such Debtordetermines, in its commercially reasonable business judgment, that theprosecuting of such application is no longer necessary or desirable in theconduct of its business.

 

**Section 5.5****                                   OtherPatents and Copyrights**. Within 60 days of the acquisition or issuanceof a Patent, registration of a Copyright, or acquisition of a registeredcopyright, each Debtor shall deliver to the Purchasers a copy of said Copyrightor certificate or registration of said Patents, as the case may be, withan assignment for security as to such Patent or Copyright, as the case may be,to the Purchasers and at the expense of such Debtor, confirming the assignmentfor security, in such form as may be reasonably satisfactory to thePurchasers.

 

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**Section 5.6****                                   Remedies**.If an Event of Default shall occur and be continuing, the Purchasers may takeany or all of the following actions:  (a) declarethe entire right, title, and interest of such Debtor in each of the Patents andCopyrights vested in the Purchasers for the benefit of the Purchasers, in whichevent such right, title, and interest shall immediately vest in the Purchasersfor the benefit of the Purchasers, in which case the Purchasers shall beentitled to exercise the power of attorney referred to in Section 5.1hereof to execute, cause to be acknowledged and notarized and to record saidabsolute assignment with the applicable agency; (b) take and practice orsell the Patents and Copyrights; and (c) direct such Debtor to refrain, inwhich event such Debtor shall refrain, from practicing the Patents and usingthe Copyrights directly or indirectly, and such Debtor shall execute such otherand further documents as the Purchasers may request further to confirmthis and to transfer ownership of the Patents and Copyrights to the Purchasersfor the benefit of the Purchasers.

 

**ARTICLE 6**

 

**SPECIAL PROVISIONS CONCERNINGSTOCK COLLATERAL**

 

**Section 6.1****                                   AdditionalRepresentations**. Each Debtor has the right to vote the PledgedSecurities and there are no restrictions upon the voting rights associatedwith, or the transfer of, any of the Pledged Securities, except as provided byfederal and state laws applicable to the sale of securities generally and theterms of this Agreement. The Pledged Securities have been validly issued and,except as described on Schedule A, are fully paid and non-assessable.Except as set forth on Schedule A, there are no outstandingcommitments or other obligations of the issuers of any of the PledgedSecurities to issue, and no options, warrants or other rights of any individualor entity to acquire, any share of any class or series of capitalstock of such issuers. The Pledged Securities listed and described on Schedule Aattached hereto constitute the percentage of the issued and outstanding capitalstock of each series and class of the issuers thereof as set forththereon owned by the relevant Debtor. Each Debtor agrees that in the event anysuch issuer shall issue any additional capital stock of any series or class (whetheror not entitled to vote) to such Debtor or otherwise on account of itsownership interest therein, subject to the limitations set forth in Section 2(a) above,such Debtor will forthwith pledge hereunder, or cause to be pledged hereunder,all such additional shares of such capital stock.

 

**Section 6.2****                                   Deliveryof Certificates**. The certificates for all shares or units of thePledged Securities evidenced by a certificate shall be delivered by therelevant Debtor to the Purchasers duly endorsed in blank for transfer oraccompanied by an appropriate assignment or assignments or an appropriateundated stock power or powers, in every case sufficient to transfer titlethereto. The Purchasers may, at any time after the occurrence of an Event ofDefault, cause to be transferred into its name or into the name of its nomineeor nominees any and all of the Pledged Securities. The Purchasers shall at alltimes have the right to exchange the certificates representing the PledgedSecurities for certificates of smaller or larger denominations.

 

**Section 6.3****                                   Remedies**.Unless and until an Event of Default hereunder has occurred and is continuingand thereafter until notified by the Purchasers hereof:

 

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(a)                                  EachDebtor shall be entitled to exercise all voting and/or consensual powers pertainingto the Collateral of such Debtor, or any part thereof, for all purposesnot inconsistent with the terms of this Agreement or any other documentevidencing or otherwise relating to any of the Obligations.

 

(b)                                 EachDebtor shall be entitled to receive and retain all dividends and distributionsin respect of the Collateral which are paid in cash of whatsoever nature; suchdividends and distributions representing stock or liquidating dividends or adistribution or return of capital upon or in respect of the Pledged Securitiesor any part thereof or resulting from a split-up, revision orreclassification of the Pledged Securities or any part thereof or receivedin addition to, in substitution of or in exchange for the Pledged Securities orany part thereof as a result of a merger, consolidation or otherwise,shall be paid, delivered or transferred, as appropriate, directly to thePurchasers immediately upon the receipt thereof by such Debtor and may, in thecase of cash, be applied by the Purchasers to the Obligations in such order andmanner as the Agent shall determine and otherwise in accordance with the termsof the Credit Agreement, whether or not the same may then be due orotherwise adequately secured and shall, in the case of all other property, togetherwith any cash received by the Agent and not applied as aforesaid, be held bythe Agent pursuant hereto as part of the Collateral pledged under andsubject to the terms of this Agreement.

 

(c)                                  Inorder to permit each Debtor to exercise such voting and/or consensual powerswhich it is entitled to exercise under subsection (a) above and toreceive such distributions which such Debtor is entitled to receive and retainunder subsection (b) above, the Agent will, if necessary, upon thewritten request of such Debtor, from time to time execute and deliver to such Debtorappropriate proxies and dividend orders.

 

**ARTICLE 7**

 

**PROVISIONS CONCERNING ALL COLLATERAL**

 

**Section 7.1****                                   Protectionof Purchasers’ Security**. Each Debtor will at all times keep itsInventory and Equipment insured in favor of the Purchasers, at such Debtor’sown expense to the extent and in the manner provided in the Purchase Agreement;all policies or certificates with respect to such insurance (a) shall beendorsed to the Purchasers’ commercially reasonable satisfaction for thebenefit of the Purchasers (including, without limitation, by naming thePurchasers as additional insured and loss payee) and (b) shall state thatsuch insurance policies shall not be canceled without 30 days’ prior written noticethereof by the insurer to the Purchasers; and certified copies of such policiesor certificates with respect thereto shall be deposited with the Purchasers. Ifa Debtor shall fail to insure its Inventory and Equipment in accordance withthe preceding sentence, or if Debtor shall fail to so endorse and deposit allpolicies or certificates with respect thereto, the Purchasers shall have theright (but shall be under no obligation), upon prior written notice to suchDebtor, to procure such insurance and each Debtor agrees to promptly reimbursethe Purchasers for all reasonable costs and expenses of procuring suchinsurance. The Purchasers shall, at the time any proceeds of such insurance are

 

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distributed to thePurchasers, apply such proceeds in accordance with Section 9.4 hereof. EachDebtor assumes all liability and responsibility in connection with theCollateral acquired by it and the liability of such Debtor to pay theObligations shall in no way be affected or diminished by reason of the factthat such Collateral may be lost, destroyed, stolen, damaged or for anyreason whatsoever unavailable to such Debtor.

 

**Section 7.2****                                   FurtherActions**. Each Debtor will, at its own expense, make, execute, endorse,acknowledge, file and/or deliver to the Purchasers from time to time suchlists, descriptions and designations of its Collateral, warehouse receipts,receipts in the nature of warehouse receipts, bills of lading, documents oftitle, vouchers, invoices, schedules, confirmatory assignments, conveyances,transfer endorsements, powers of attorney, certificates, reports and otherassurances or instruments and take such further steps relating to theCollateral and other property or rights covered by the security interest herebygranted, which the Purchasers deem reasonably appropriate or advisable toperfect, preserve or protect its security interest in the Collateral.

 

**Section 7.3****                                   FinancingStatements; Etc.**Each Debtor agrees to execute and deliver to the Purchaserssuch further agreements, assignments, instruments, and documents, and to do allsuch other things, as the Purchasers may reasonably deem necessary orappropriate to assure the Purchasers its lien and Security Interest hereunder,including, without limitation, (i) such financing statements or otherinstruments and documents as the Agent may from time to time reasonablyrequire to comply with the Uniform Commercial Code and any otherapplicable law, (ii) such agreements with respect to patents, trademarks,copyrights, and similar intellectual property rights as the Purchasers may fromtime to time reasonably require to comply with the filing requirements of theUnited States Patent and Trademark Office and the United States CopyrightOffice, and (iii) such control agreements with respect to DepositAccounts, Investment Property, Letter-of-Credit Rights, and electronic ChattelPaper, and to cause the relevant depository institutions, financialintermediaries, and issuers to execute and deliver such control agreements, asthe Purchasers may from time to time reasonably require. Each Debtorhereby agrees that a carbon, photographic or other reproduction of thisAgreement or any such financing statement is sufficient for filing as afinancing statement by the Purchasers without notice thereof to such Debtorwherever the Purchasers in their sole discretion desire to file the same. EachDebtor hereby authorizes the Purchasers to file any and all financingstatements covering the Collateral or any part thereof as the Purchasers may require,including financing statements describing the Collateral as “all assets” or “allpersonal property” or words of like meaning. In the event for any reason thelaw of any jurisdiction other than California becomes or is applicable to theCollateral or any part thereof, or to any of the Obligations, each Debtoragrees to execute and deliver all such agreements, assignments, instruments,and documents and to do all such other things as the Purchasers reasonably deemnecessary or appropriate to preserve, protect, and enforce the securityinterest of the Purchasers under the law of such other jurisdiction.

 

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**ARTICLE 8**

 

**GUARANTEE**

 

**Section 8.1****                                  ****The Guarantee**. To induce the Purchasers to enter intothe Purchase Agreement  and inconsideration of benefits expected to accrue to the Company by reason of thePurchase Agreement and for other good and valuable consideration, receipt ofwhich is hereby acknowledged, the Subsidiary hereby unconditionally andirrevocably guarantees jointly and severally to the Purchasers, the due andpunctual payment of all present and future Obligations, in each case as andwhen the same shall become due and payable, whether at stated maturity, byacceleration, or otherwise, according to the terms hereof and thereof(including interest which, but for the filing of a petition in bankruptcy,would otherwise accrue on any such indebtedness, obligation, or liability). Incase of failure by the Company or other obligor punctually to pay anyObligations guaranteed hereby, the Subsidiary hereby unconditionally agrees tomake such payment or to cause such payment to be made punctually as and whenthe same shall become due and payable, whether at stated maturity, by acceleration,or otherwise, and as if such payment were made by the Company or such obligor.

 

**Section 8.2.****                               ****Guarantee Unconditional****.**Theobligations of the Subsidiary under this Article 8 shall be unconditionaland absolute and, without limiting the generality of the foregoing, shall notbe released, discharged, or otherwise affected by:

 

(a)                                  anyextension, renewal, settlement, compromise, waiver, or release in respect ofany obligation of the Company or other obligor or of any other guarantor underthis Agreement or the Purchase Agreement or by operation of law or otherwise;

 

(b)                                 anymodification or amendment of or supplement to this Agreement or the PurchaseAgreement;

 

(c)                                  any changein the corporate existence, structure, or ownership of, or any insolvency,bankruptcy, reorganization, or other similar proceeding affecting, the Company orother obligor, any other guarantor, or any of their respective assets, or anyresulting release or discharge of any obligation of the Company or otherobligor or of any other guarantor contained in this Agreement or the PurchaseAgreement;

 

(d)                                 theexistence of any claim, set-off, or other rights which the Company or otherobligor or any other guarantor may have at any time against the Purchasersor any other person or entity, whether or not arising in connection herewith;

 

(e)                                  any failureto assert, or any assertion of, any claim or demand or any exercise of, orfailure to exercise, any rights or remedies against the Company or otherobligor, any other guarantor, or any other person or entity or property;

 

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(f)                                    anyapplication of any sums by whomsoever paid or howsoever realized to anyobligation of the Company or other obligor, regardless of what obligations ofthe Company or other obligor remain unpaid;

 

(g)                                 anyinvalidity or unenforceability relating to or against the Company or otherobligor or any other guarantor for any reason of this Agreement or of thePurchase Agreement or any provision of applicable law or regulation purportingto prohibit the payment by the Company or other obligor or any other guarantorof the principal of or interest on the Senior Notes or Obligations or any otheramount payable under the Purchase Agreement; or

 

(h)                                 any otheract or omission to act or delay of any kind by the Purchasers, or any other personor entity or any other circumstance whatsoever that might, but for theprovisions of this paragraph, constitute a legal or equitable discharge of theobligations of the Subsidiary under this Article 8.

 

**Section 8.3.****                               ****Discharge Only upon Payment in Full; Reinstatement in CertainCircumstances**. The Subsidiary’s obligations under thisArticle 8 shall remain in full force and effect until the PurchaseAgreement is terminated and the principal of and interest on the Senior Notesand all other amounts payable by the Company under the Purchase Agreement and thisSecurity Agreement shall have been paid in full. If at any time any payment ofthe principal of or interest on the Senior Notes or any Obligation or any otheramount payable by the Company or other obligor or the Subsidiary under the PurchaseAgreement or this Agreement is rescinded or must be otherwise restored orreturned upon the insolvency, bankruptcy, or reorganization of the Company orother obligor or of any guarantor, or otherwise, the Subsidiary’s obligationsunder this Article 8 with respect to such payment shall be reinstated atsuch time as though such payment had become due but had not been made at suchtime.

 

**Section 8.4****                                  ****Subrogation**. The Subsidiary agrees it will notexercise any rights which it may acquire by way of subrogation by anypayment made hereunder, or otherwise, until all the Obligations shall have beenpaid in full subsequent to the termination of all the Purchase Agreement. Ifany amount shall be paid to the Subsidiary on account of such subrogationrights at any time prior to the later of (x) the payment in full of theObligations and all other amounts payable by the Company hereunder and the PurchaseAgreement and (y) the termination of the Purchase Agreement, such amountshall be held in trust for the benefit of the Purchasers and shall forthwith bepaid to the Purchasers or be credited and applied upon the Obligations.

 

**Section 8.5****                                  ****Waivers****.**TheSubsidiary irrevocably waives acceptance hereof, presentment, demand, protest,and any notice not provided for herein, together with the rights, protectionsand defenses accorded by Sections 2787 through 2855 of the CaliforniaCivil Code which provide protections for and limitations on the obligations ofa guarantor such as, but not limited to, limitations that provide (i) incertain circumstances, that a notice be given to the guarantor of any defaultby the debtor or obligor which may result in liability to the guarantor, (ii) thatthe obligations of a guarantor cannot be greater in amount or more burdensomethan that of the obligor; (iii) that the guarantor will have the samedefenses to liability as the obligor, other than defenses arising from thepersonal disability of the obligor; (iv) that a guarantor will be

 

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exoneratedfrom liability, by any act of the creditor taken without the guarantor’sconsent, which alters the original obligations of the obligor or impairs orsuspends any remedies or rights of the creditor against the obligor or securityfor the guaranteed obligation; (v) that the creditor’s acceptance ofanything in partial satisfaction of the guaranteed obligation also reduces theobligation of the guarantor to the same extent; and (vi) that a guarantor may requirethe creditor to proceed against the obligor or security held by the creditor orto pursue other remedies within the power of the creditor which cannot bepursued by the guarantor before proceeding against the guarantor, as well asany requirement that at any time any action be taken by the Purchasers, or anyother person or entity against the Company or other obligor, another guarantor,or any other person or entity.

 

**Section 8.6****                                  ****Limit on Recovery****.**Notwithstandingany other provision hereof, the right of recovery against the Subsidiary underthis Article 8 shall not exceed $1.00 less than the lowest amount whichwould render such Subsidiary’s obligations under this Article 8 void orvoidable under applicable law, including, without limitation, fraudulentconveyance law.

 

**Section 8.7****                                  ****Stay of Acceleration****.**Ifacceleration of the time for payment of any amount payable by the Company orother obligor under this Agreement or the Purchase Agreement, is stayed uponthe insolvency, bankruptcy or reorganization of the Company or such obligor,all such amounts otherwise subject to acceleration under the terms of thisAgreement or the Purchase Agreement, shall nonetheless be payable by the Subsidiaryhereunder forthwith on demand by the Purchasers.

 

**Section 8.8****                                  ****Benefit to Subsidiary****.**The Companyand the Subsidiary are engaged in related businesses and integrated to such anextent that the financial strength and flexibility of the Company has a directimpact on the success of the Subsidiary. The Subsidiary will derive substantialdirect and indirect benefit from the extensions of credit hereunder.

 

**Section 8.9****                                   SubsidiaryCovenants.**The Subsidiary shall take such action as the Company isrequired by the Purchase Agreement or this Agreement to cause the Subsidiary totake, and shall refrain from taking such action as the Company is required by thePurchase Agreement or this Agreement to prohibit the Subsidiary from taking.

 

**ARTICLE 9**

 

**REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT**

 

**Section 9.1****                                   Remedies;Obtaining the Collateral Upon Default**. Each Debtor agrees that, if anEvent of Default shall have occurred and be continuing, then and in every suchcase, the Purchasers, in addition to any rights now or hereafter existing underapplicable law, shall have all rights as a secured creditor under the UCC inall relevant jurisdictions and may:

 

(a)                                  personally,or by agents or attorneys, immediately take possession of the Collateral or anypart thereof, from the Debtors or any other Person who then has possessionof any part thereof with or without notice or process of law, and for thatpurpose may enter upon such Debtor’s premises where any of the Collateralis located

 

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andremove the same and use in connection with such removal any and all services,supplies, aids and other facilities of such Debtor;

 

(b)                                 instructthe obligor or obligors on any agreement, instrument or other obligation(including, without limitation, the Accounts) constituting the Collateral tomake any payment required by the terms of such agreement, instrument or otherobligation directly to the Purchasers;

 

(c)                                  withdrawall monies, securities and instruments in the Cash Collateral Account and/or inany other cash collateral account for application to the Obligations inaccordance with Section 9.4 hereof;

 

(d)                                 sell,assign or otherwise liquidate any or all of the Collateral or any part thereofin accordance with Section 9.2 hereof, or direct such Debtor to sell,assign or otherwise liquidate any or all of the Collateral or any part thereof,and, in each case, take possession of the proceeds of any such sale orliquidation;

 

(e)                                  takepossession of the Collateral or any part thereof, by directing the Debtorsin writing to deliver the same to the Purchasers at any place or placesreasonably designated by the Purchasers, in which event such Debtor shall atits own expense:

 

(i)                                     forthwithcause the same to be moved to the place or places so designated by thePurchasers and there delivered to the Purchasers;

 

(ii)                                  storeand keep any Collateral so delivered to the Purchasers at such place or placespending further action by the Purchasers as provided in Section 9.2hereof; and

 

(iii)                               while the Collateralshall be so stored and kept, provide such guards and maintenance services asshall be necessary to protect the same and to preserve and maintain them ingood condition; and

 

(f)                                    licenseor sublicense, whether on an exclusive or nonexclusive basis, any Marks,Patents or Copyrights included in the Collateral for such term and on suchconditions and in such manner as the Purchasers shall in their commercially reasonablejudgment determine;

 

it being understood that eachDebtor’s obligation so to deliver the Collateral is of the essence of thisAgreement and that, accordingly, upon application to a court of equity havingjurisdiction, the Purchasers shall be entitled to a decree requiring specificperformance by each Debtor of said obligation. The Purchasers agree that thisAgreement may be enforced by holders of the majority in outstandingprincipal amount of Senior Notes, it being understood and agreed that suchrights and remedies may be exercised by the Purchasers for the benefit ofthe Purchasers upon the terms of this Agreement.

 

**Section 9.2****                                   Remedies:Disposition of the Collateral**. Any Collateral repossessed by thePurchasers under or pursuant to Section 9.1 hereof and any otherCollateral whether or not so

 

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repossessed by thePurchasers, may be sold, assigned, leased or otherwise disposed of underone or more contracts or as an entirety, and without the necessity of gatheringat the place of sale the property to be sold, and in general in such manner, atsuch time or times, at such place or places and on such terms as the Purchasersmay, in compliance with any mandatory requirements of applicable law, determineto be commercially reasonable. Any of the Collateral may be sold, leasedor otherwise disposed of, in the condition in which the same existed when takenby the Purchasers or after any overhaul or repair at the expense of each Debtorwhich the Purchasers shall determine to be commercially reasonable. Any suchdisposition which shall be a private sale or other private proceedings permittedby such requirements shall be made upon not less than 10 days’ written noticeto each Debtor specifying the time at which such disposition is to be made andthe intended sale price or other consideration therefor, and shall be subject,for the 10 days after the giving of such notice, to the right of each Debtor orany nominee of each Debtor to acquire the Collateral involved at a price or forsuch other consideration at least equal to the intended sale price or otherconsideration so specified, but in no event in an amount greater than theObligations then outstanding and provision for any contingent Obligationsreasonably acceptable to the Purchasers. Any such disposition which shall be apublic sale permitted by such requirements shall be made upon not less than 10days’ written notice to each Debtor specifying the time and place of such saleand, in the absence of applicable requirements of law, shall be by publicauction (which may, at the Purchasers’ option, be subject to reserve), afterpublication of notice of such auction not less than 10 days prior thereto intwo newspapers in general circulation in Los Angeles, California. To the extentpermitted by any such requirement of law, the Purchasers may bid for andbecome the purchaser of the Collateral or any item thereof, offered for sale inaccordance with this Section without accountability to the Debtors. If,under mandatory requirements of applicable law, the Purchasers shall berequired to make disposition of the Collateral within a period of time whichdoes not permit the giving of notice to the Debtors as hereinabove specified,the Purchasers need give the Debtors only such notice of disposition as shallbe reasonably practicable in view of such mandatory requirements of applicablelaw.

 

**Section 9.3****                                   Waiverof Claims**. Except as otherwise provided in this Agreement or prohibitedby applicable law, (a) THE DEBTORS HEREBY WAIVE, TO THE EXTENT PERMITTEDBY APPLICABLE LAW, NOTICE AND JUDICIAL HEARING IN CONNECTION WITH THE PURCHASERS’TAKING POSSESSION OR THE PURCHASERS’ DISPOSITION OF ANY OF THE COLLATERAL,INCLUDING, WITHOUT LIMITATION, ANY AND ALL PRIOR NOTICE AND HEARING FOR ANYPREJUDGMENT REMEDY OR REMEDIES AND ANY SUCH RIGHT WHICH SUCH DEBTOR WOULDOTHERWISE HAVE UNDER THE CONSTITUTION OR ANY STATUTE OF THE UNITED STATES OR OFANY STATE, (b) the Debtors hereby further waive, to the extent permittedby law:

 

(i)                                     all damagesoccasioned by such taking of possession except any damages which are determinedby a final, non-appealable court order to have been caused by the Purchasers’gross negligence or willful misconduct; and

 

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(ii)                                  allother requirements as to the time, place and terms of sale or otherrequirements with respect to the enforcement of the Purchasers’ rightshereunder; and

 

(iii)                               all rights ofredemption, appraisement, valuation, stay, extension or moratorium now orhereafter in force under any applicable law in order to prevent or delay theenforcement of this Agreement or the absolute sale of the Collateral or anyportion thereof, and each Debtor, for itself and all who may claim underit, insofar as it or they now or hereafter lawfully may, hereby waives thebenefit of all such laws.

 

Any sale of, or the grantof options to purchase, or any other realization upon, any Collateral shalloperate to divest all right, title, interest, claim and demand, either at lawor in equity, of the Debtors therein and thereto, and shall be a perpetual barboth at law and in equity against the Debtors and against any and all personsor entities claiming or attempting to claim the Collateral so sold, optioned orrealized upon, or any part thereof, from, through and under the Debtors.

 

**Section 9.4****                                   Applicationof Proceeds**.

 

(a)                                  All moniescollected by the Purchasers upon any sale or other disposition of theCollateral, together with all other moneys received by the Purchasershereunder, shall be applied to the payment of the Obligations.

 

(b)                                 Itis understood and agreed that each Debtor shall remain liable to the extent ofany deficiency between the amount of the proceeds of the Collateral hereunderand the aggregate amount of the Obligations.

 

**Section 9.5****                                   RemediesCumulative**. Each and every right, power and remedy hereby specificallygiven to the Purchasers shall be in addition to every other right, power andremedy specifically given under this Agreement, the Purchase Agreement or nowor hereafter existing at law, in equity or by statute and each and every right,power and remedy whether specifically herein given or otherwise existing may beexercised from time to time or simultaneously and as often and in such order asmay be deemed expedient by the Purchasers. All such rights, powers andremedies shall be cumulative and the exercise or the beginning of the exerciseof one shall not be deemed a waiver of the right to exercise any other orothers. No delay or omission of the Purchasers in the exercise of any suchright, power or remedy and no renewal or extension of any of the Obligationsshall impair any such right, power or remedy or shall be construed to be awaiver of any Default or Event of Default or an acquiescence therein. No noticeto or demand on the Debtors in any case shall entitle it to any other orfurther notice or demand in similar or other circumstances or constitute awaiver of any of the rights of the Purchasers to any other or further action inany circumstances without notice or demand. In the event that the Purchasersshall bring any suit to enforce any of its rights hereunder and shall beentitled to judgment, then in such suit the Purchasers may recoverreasonable expenses, including reasonable attorneys’ fees, and the amountsthereof shall be included in such judgment.

 

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**Section 9.6****                                   Discontinuanceof Proceedings**. In case the Purchasers shall have instituted anyproceeding to enforce any right, power or remedy under this Agreement byforeclosure, sale, entry or otherwise, and such proceeding shall have beendiscontinued or abandoned for any reason or shall have been determinedadversely to the Purchasers, then and in every such case the Debtors, thePurchasers and each holder of any of the Obligations shall be restored to theirformer positions and rights hereunder with respect to the Collateral subject tothe Security Interest created under this Agreement, and all rights, remediesand powers of the Purchasers shall continue as if no such proceeding had beeninstituted.

 

**Section 9.7****                                   Attorney-in-Fact.**Without limiting any rights or powers granted by this Agreement to thePurchasers, while no Event of Default has occurred and is continuing, upon theoccurrence and during the continuance of any Event of Default the Purchasersare hereby appointed the attorney-in-fact of the Debtors for the purpose ofcarrying out the provisions of this Agreement and taking any action andexecuting any instruments which may be reasonably required to accomplishthe purposes hereof, which appointment as attorney-in-fact is irrevocable andcoupled with an interest. Without limiting the generality of the foregoing, thePurchasers shall have the right and power to receive, endorse and collect allchecks made payable to the order of the Debtors representing any dividend,payment or other distribution in respect of the Collateral or any part thereofand give full discharge for the same.

 

**ARTICLE 10**

 

**DEFINITIONS**

 

Capitalizedterms used in this Agreement without definition have the respective meaningsascribed to such terms in the Purchase Agreement. All other capitalized termscontained in this Security Agreement, unless the context indicates otherwise,have the meanings provided for by the Uniform Commercial Code as in effectin the State of California to the extent the same are used or defined therein. Inaddition, the following terms shall have the meanings herein specified. Suchdefinitions shall be equally applicable to the singular and plural forms of theterms defined.

 

“Agreement”shall mean this Security Agreement as the same may be modified,supplemented or amended from time to time in accordance with its terms.

 

“CashCollateral Account” shall mean a non-interest bearing cash collateral accountmaintained with, and in the sole dominion and control of, the Purchasers forthe benefit of the Purchasers.

 

“Copyrights”shall mean any United States copyright owned (or subject to the rights ofownership) by each Debtor, including any registrations of any copyright, in theUnited States Copyright Office, as well as any application for a copyrightregistration now or hereafter made with the United States Copyright Office by suchDebtor.

 

“Default”shall mean any event which, with notice or lapse of time, or both, wouldconstitute an Event of Default.

 

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“Eventof Default” shall mean any Event of Default under, and as defined in, thePurchase Agreement and shall in any event, without limitation, include anypayment default on any of the Obligations after the expiration of anyapplicable grace period.

 

“Junior Notes”shall have the meaning set forth in the Note Purchase Agreement.

 

“Marks”shall mean any United States trademarks, service marks and trade names nowowned, subject to a right of ownership or hereafter acquired by each Debtor,including any registration of, or application for, any trademarks and servicemarks in the United States Patent and Trademark Office, and any trade dressincluding logos and/or designs used by either of the Debtors in the UnitedStates.

 

“Notes” shallmean collectively the Junior Notes and the Senior Notes.

 

“Obligations”shall mean (a) the full and prompt payment when due (whether at the statedmaturity, by acceleration or otherwise) of all obligations and liabilities ofthe Debtors now existing or hereafter incurred under, arising out of or inconnection with the Purchase Agreement as such relates to the Senior Notes orany of the Senior Notes issued thereunder and the due performance andcompliance by the Debtors with the terms of the Purchase Agreement as suchrelates to the Senior Notes and each such Senior Note; (b) any and allsums advanced by the Purchasers in accordance with the terms of this Agreementor the Purchase Agreement in order to preserve the Collateral or preserve theirsecurity interest in the Collateral; (c) in the event of any proceedingfor the collection or enforcement of any obligations or liabilities referred toin clause (a), after an Event of Default shall have occurred and be continuing,the reasonable expenses of re-taking, holding, preparing for sale or lease, sellingor otherwise disposing of or realizing on the Collateral, or of any exercise bythe Purchasers of their rights hereunder, together with reasonable attorneys’fees and court costs; (d) all amounts paid by any Indemnitee as to whichsuch Indemnitee has the right to reimbursement under this Agreement; and (e) allother Purchaser Obligations.

 

“Patents”shall mean any United States patent owned, subject to a right of ownership byor hereafter acquired by the Debtors and any divisions, continuations, reissues,reexaminations, extensions or renewals thereof, as well as any application fora United States patent now or hereafter made by either of the Debtors orsubject to a right of ownership in such Debtor.

 

“PermittedLiens” shall mean any Liens set forth on Schedule I hereto.

 

“Proceeds”shall have the meaning provided in the Uniform Commercial Code as ineffect in the State of California on the date hereof or under other relevantlaw and, in any event, shall include, but not be limited to, (a) any andall proceeds of any insurance, indemnity, warranty or guaranty payable to thePurchasers or the Debtors from time to time with respect to any of theCollateral, (b) any and all payments (in any form whatsoever) made ordue and payable to the Debtors from time to time in connection with anyrequisition, confiscation, condemnation, seizure or forfeiture of all or any part ofthe Collateral by any governmental authority (or any person acting under colorof governmental authority) and (c) any and all other amounts from time totime paid or payable under or in connection with any of the Collateral.

 

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“ProprietaryInformation” means all information and know-how worldwide, including, withoutlimitation, technical data, manufacturing data, research and development data,manufacturing data, research and development data, data relating tocompositions, processes and formulations, manufacturing and production know-howand experience, management know-how, training programs, manufacturing,engineering and other drawings, specifications, performance criteria, operatinginstructions, maintenance manuals, technology, technical information, software,engineering and computer data and databases, design and engineering specifications,catalogs, promotional literature and financial, business and marketing plans,inventions and invention disclosures.

 

“Senior Notes”shall have the meaning set forth in the Purchase Agreement.

 

“TerminationDate” shall have the meaning provided in Section 11.8 of this Agreement.

 

“TradeSecrets” means any secretly held existing engineering and other data,information, production procedures and other know-how relating to the design,manufacture, assembly, installation, use, operation, marketing, sale and servicingof any products or business of the Debtors worldwide whether written or notwritten.

 

**ARTICLE 11**

 

**MISCELLANEOUS**

 

**Section 11.1****                            Notices**.Except as otherwise specified herein, all notices, requests, demands or othercommunications to or upon the respective parties hereto shall be deemed to havebeen duly given or made when personally delivered to the party to which suchnotice, request, demand or other communication is required or permitted to begiven or made under this Agreement, addressed as follows:

 

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| (a)    |   | if to the  Debtors:                                                                                                      |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                     |
|   |   | DynTek, Inc.                                                                                                        |
|   |   | 19700 Fairchild  Road, Suite 230                                                                                    |
|   |   | Irvine,  California 92612                                                                                                |
|   |   | Attention: Chief  Financial Officer                                                                                      |
|   |   |                                                                                                                     |
|   |   | with a copy to,                                                                                                          |
|   |   |                                                                                                                     |
|   |   | Stradling Yocca  Carlson & Rauth                                                                                |
|   |   | 660 Newport  Center Drive, Suite 1600                                                                               |
|   |   | Newport Beach,  California 92660                                                                                         |
|   |   | Attention:  Christopher D. Ivey, Esq.                                                                               |
|   |   |                                                                                                                     |
| (b)    |   | if to any  Purchaser, at such address as such Purchaser shall have specified in the  Purchase Agreement, with a copy to: |
|   |   |                                                                                                                     |
|   |   | Paul, Hastings,  Janofsky & Walker, LLP                                                                         |
|   |   | 695 Town Center  Drive                                                                                                   |
|   |   | Costa Mesa, CA  92626                                                                                                    |
|   |   | Attention: Peter  J. Tennyson, Esq.                                                                                 |
|   |   |                                                                                                                     |
|   |   | as well as:                                                                                                              |
|   |   |                                                                                                                     |
|   |   | Andrews Kurth LLP                                                                                                        |
|   |   | 450 Lexington Ave., 15th Floor                                                                                           |
|   |   | New York, New York 10017                                                                                                 |
|   |   | Attention: Paul N. Silverstein, Esq.                                                                           |

 

or at such other addressas shall have been furnished in writing by any person or entity described aboveto the party required to give notice hereunder.

 

**Section 11.2****                            Waiver;Amendment**. None of the terms and conditions of this Agreement may bechanged, waived, modified or varied in any manner whatsoever unless in writingduly signed by each Debtor and the holders of at least a majority of theoutstanding principal amount of the Senior Notes.

 

**Section 11.3****                            ObligationsAbsolute**. The obligations of the Debtors hereunder shall remain in fullforce and effect without regard to, and shall not be impaired by, (a) anybankruptcy, insolvency, reorganization, arrangement, readjustment, composition,liquidation or the like of the Debtors except as required by applicable law; (b) anyexercise or non-exercise of any right, remedy, power or privilege under or inrespect of this Agreement, the Purchase Agreement, the Notes issued thereunderor any waiver of any right, remedy, power or privilege under any otheragreement; or (c) any amendment to or modification of this Agreement, thePurchase Agreement, the Notes issued thereunder or any security for any of theObligations, other than amendments or modifications of this Agreement.

 

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**Section 11.4****                            Successorsand Assigns**. This Agreement shall be binding upon the Debtors and theirsuccessors and assigns and shall inure to the benefit of the Purchasers andtheir respective successors and assigns. All agreements, statements,representations and warranties made by the Debtors herein or in any certificateor other instrument delivered by the Debtors or on its behalf under thisAgreement shall be considered to have been relied upon by the Purchasers andshall survive the execution and delivery of this Agreement, the PurchaseAgreement or the Notes issued thereunder regardless of any investigation madeby the Purchasers or on their behalf.

 

**Section 11.5****                            HeadingsDescriptive**. The headings of the several sections of this Agreement areinserted for convenience only and shall not in any way affect the meaning orconstruction of any provision of this Agreement.

 

**Section 11.6****                            GoverningLaw**. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIESHEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OFTHE STATE OF CALIFORNIA WITHOUT REGARD FOR CONFLICTS OF LAWS OF CHOICE OF LAWSPRINCIPLES.

 

**Section 11.7****                            Debtor’sDuties**. It is expressly agreed, anything herein contained to thecontrary notwithstanding, that the Debtors shall remain liable to perform allof the obligations, if any, assumed by it with respect to the Collateral andthe Purchasers shall not have any obligations or liabilities with respect toany Collateral by reason of or arising out of this Agreement, nor shall thePurchasers be required or obligated in any manner to perform or fulfillany of the obligations of the Debtors under or with respect to any Collateral.

 

**Section 11.8****                            Termination;Release**. After the Termination Date, this Agreement shall terminate(provided that all indemnities set forth in the Purchase Agreement shallsurvive such termination) and the Purchasers, at the request and expense of theDebtors, will promptly execute and deliver to the Debtors a proper instrumentor instruments (including Uniform Commercial Code termination statementson form UCC-3) acknowledging the satisfaction and termination of thisAgreement, and will duly assign, transfer and deliver to the Debtors (withoutrecourse and without any representation or warranty) such of the Collateral as may bein the possession of the Purchasers and has not theretofore been sold orotherwise applied or released pursuant to this Agreement. As used in thisAgreement, “Termination Date” shall mean the date upon which all Obligationsthen due and payable have been paid in full in cash, all commitments withrespect thereto have terminated and no Senior Note is outstanding.

 

**Section 11.9****                            Counterparts**.This Agreement may be executed in any number of counterparts and by thedifferent parties hereto on separate counterparts, each of which when soexecuted and delivered shall be an original, but all of which shall togetherconstitute one and the same instrument. A set of counterparts executed by allthe parties hereto shall be lodged with the Debtors and the Purchasers.

 

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J-23

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**INWITNESS WHEREOF**, the parties hereto have caused thisAgreement to be executed and delivered by their duly authorized officers as ofthe date first above written.

 
|   | **DEBTORS:** |
|--------|--------------|
|   | ** **   |
|   |         | **DYNTEK, INC.** |
|   |         | ** ** |
|   |         |   |
|   |         | By: | /s/ Casper Zublin, Jr. |   |
|   |         | Name: | Casper Zublin, Jr. |   |
|   |         | Title: | Chief Executive Officer |   |
|   |         |   |
|   |         | **DYNTEK  SERVICES, INC.** |
|   |         | ** ** |
|   |         | ** ** |
|   |         | By: | /s/ Robert I.  Webber |   |
|   |         | Name: | Robert I. Webber |   |
|   |         | Title: | Chief Financial Officer |   |
|        |              |  |  |  |  |  |  |  |  |

 

 
| **PURCHASERS:**                  |                           |   |   |
|----------------------------------|--------------------------------|--------|--------|
|                             |                           |
| **SACC  PARTNERS, L.P.**         |                           |
|                             |                           |
|                             |                           |
| By:                              | /s/ Bryant Riley               |   |
| Name:                            | Bryant Riley                   |   |
| Title:                           | General Partner                |   |
|                             |                           |
|                             |                           |
| **LLOYD  I. MILLER, III**   |                           |
|                             |                           |
|                             |                           |
| By:                              | /s/ Lloyd I.  Miller, III |   |
| Name: Lloyd I.  Miller, III |                           |
|                                  |                                |        |        |  |  |  |  |

 

J-24

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