Document:

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                              EMPLOYMENT AGREEMENT

         EMPLOYMENT AGREEMENT (this "Agreement") made as of the 7th day of
September, 2000 by and between DENNIS S. ROSATELLI, with an address at 73 Lake
View Drive, Old Tappan, New Jersey 07675 (hereinafter referred to as "Employee")
and DUALSTAR COMMUNICATIONS, INC., a Delaware corporation having its principal
place of business at One Park Avenue, New York, New York 10016 (hereinafter
referred to as the "Company").

         1. Employment. The Company hereby employs Employee and Employee agrees
to work for the Company with the title specified on Schedule A below during the
Term (as defined below) of and upon the terms and conditions set forth in this
Agreement.

         2. Compensation/Benefits. (a) Base Salary. During the Term of this
Agreement, the Company agrees to pay Employee the base annual salary specified
on Schedule A below ("Base Salary"). Such Base Salary shall be reviewed no less
frequently than annually during the term of this Agreement and may be increased
but not decreased by the Company's board of directors in its sole and absolute
discretion, after taking into consideration a variety of factors, including,
without limitation, the performance of the Employee and the Company and the base
salary (and raises) paid by comparable companies to employees having comparable
responsibilities. In the event of any increase, the increased amount shall
become the Base Salary. Such Base Salary shall be payable in accordance with the
Company's normal business practices or in such other amounts and at such other
times as the parties may mutually agree.

         (b) Bonuses. During each year of the Term of this Agreement, the
Company agrees to submit for approval to the Board of Directors, in its sole and
absolute discretion, an incentive payment plan ("IPP"), which shall establish
performance targets for the Company and/or its business units, and bonus
payments based upon the achievement of such performance targets. The Company
agrees that the Employee shall participate in such IPP at a target bonus of 40%
of Base Salary, based upon 100% achievement of the performance targets
established in the IPP. The target bonus percentage shall be reviewed no less
frequently than annually during the term of this Agreement and may be increased
but not decreased by the Company's board of directors in its sole and absolute
discretion. In establishing performance targets and target bonus percentages for
the Employee, the Company will consider a variety of factors, including, without
limitation, performance targets set for, and bonus payments paid to, employees
having comparable responsibilities at comparable companies.

         (c) Benefits/Vacation. During the Term of this Agreement, the Company
also shall provide Employee with such other benefits, including medical,
disability, pension and severance plans, as are made generally available to
executive employees of the Company from time to time. Employee shall be entitled
to three weeks as vacation and such personal and sick benefit days during each
year of the Term in accordance with standard Company policies.

         (d) Life Insurance. Subject to Employee's submitting to any required
physical examinations, the Company shall purchase and maintain in effect a term
insurance policy with a face amount of one times Employee's Base Salary or other
greater amount as may be specified in the Company's executive benefit policies
or plans on the life of Employee and shall permit

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Employee to designate the beneficiary thereof.

         (e) Stock Options. The Company shall recommend to the Compensation
Committee of the DualStar Technologies Corporation Board of Directors to issue
to Employee stock options (the "Options") to purchase up to 250,000 shares of
the Company's common stock at an exercise price of $4.50 per share, subject to
approval by the Board of Directors. The Options will be granted pursuant to the
DualStar Technologies Corporation 1994 Stock Option Plan and shall vest as
follows:

               (i)  one-third of the Options will vest upon the first
                    anniversary of the date hereof;

               (ii) two-thirds of the Options will vest ratably on a monthly
                    basis on the last day of each of the 24 calendar months
                    following the first anniversary of the date hereof.

All unvested Options shall vest in their entirety upon a Change of Control
(defined below) of the Company. The Options shall be evidenced by a written
Stock Option Agreement, in the form of Schedule B attached hereto

         3. Services. Employee agrees to devote substantially all of his working
time, attention and energies to the business of the Company and its Affiliates
under the general direction of the President and Chief Executive Officer.
Nothing herein shall be interpreted to preclude Employee from participating as
an officer or director of, or advisor to, any charitable or other tax exempt or
civic organization.

         4. Term. The term of this Agreement (the "Term" or the "Term of this
Agreement") shall commence on the date stated in the first paragraph of this
Agreement and employment shall commence on October 2, 2000, and the term of this
agreement shall continue through the Date of Termination, as hereinafter
defined.

         5. Early Termination. (a) In General. The Employee's employment
hereunder shall terminate and, other than the obligations listed in Paragraph
5(b), the Company's obligations hereunder shall cease, including the obligation
to pay compensation for any period after the date of termination on the Date of
Termination. The Date of Termination shall be (i) in the case of the death of
the Employee, the date of death; (ii) in the case of a termination by Employee,
the last date to be worked as specified in a written notice delivered by
Employee to the Company, which shall be not less than two weeks following the
date that such notice is given; (iii) in the case of a termination by the
Company other than for Cause (as defined below), the date set forth in a written
notice delivered by the Company to Employee, which date shall be not less than
two weeks following upon written notice following the date that such notice is
given; or (iv) in the case of a termination by the Company for Cause (as defined
below), the date upon which written notice of such termination is delivered to
Employee.

         "Cause" shall mean a finding by the Company's board of directors that
the Employee has acted with willful misconduct or gross negligence in connection
with the performance of his

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duties hereunder, which conduct has materially injured the Company, or has been
convicted of, or entered a plea of nolo contendere to, a felony. Upon the Date
of Termination, the Term of this Agreement shall expire. Notwithstanding the
foregoing, the Employee shall not be deemed to have been terminated for Cause
arising out of an act of willful misconduct or gross negligence without (a) no
less than ten (10) days prior written notice to the Employee setting for the
reasons for the Company's intention to terminate for Cause, (b) an opportunity
for the Employee to be heard (together with comments of counsel) before the
Board of Directors of the Company, and (c) delivery to the Employee of a notice
of termination from the Board of Directors of the Company stating its opinion
that the Employee has acted with willful misconduct or gross negligence and
specifying the particulars thereof.

         (b) Payments Upon Termination. (i) Upon termination of this Agreement
for any reason, Employee shall be entitled to all compensation and benefits
earned but not yet paid up to and including the termination date, including Base
Salary, pro rata bonus, if any, in the year of termination (payable in
accordance with Company policy), and any other incentive compensation. Unless
otherwise specified in this Agreement, unused vacation shall be treated in
accordance with Company policy.

         (ii) In the event of Employee's (A) termination of employment or this
Agreement by the Company other than for Cause, or (B) termination of employment
by Employee for "Good Reason" (as defined below), in addition to the Company's
obligations set forth in subparagraph (i) above, Employee shall be entitled to
severance in an amount equal to one full year of Base Salary (the "Severance
Amount"), all unvested Options then held by Employee shall immediately vest and
Employee shall retain all rights to the Options, but shall have a period of nine
(9) months following the Date of Termination in which to exercise such Options,
in accordance with the option agreement governing such options (the "Option
Agreement"), and Employee shall continue to receive employee benefits for a
period of six months following the Date of Termination and the Employee's
eligible dependents will continue to participate in all of Company's health and
welfare plans (or Company-provided equivalent benefits) in which such dependents
participated prior to the Date of Termination, subject to the Employee
continuing to make any required contributions for such participation. Following
such 6-month period, Employee shall be entitled to all benefits ordinarily
accorded terminated employees of the Company. The Company's obligation to make
the foregoing employee benefits available to Employee and his eligible
dependents shall cease upon Employee becoming eligible for comparable benefits
from a subsequent employer. Effective upon the Date of Termination pursuant to
clause (A) or (B) above, in consideration of the payment of the Severance Amount
and as a condition to the payment thereof, Employee acknowledges that payment of
the Severance Amount and the provision of the other benefits contemplated hereby
shall constitute complete satisfaction of all obligations owed by the Company to
the Employee and shall further constitute Employee's sole remedy against the
Company.

         (iii) In the event of a termination by Employee other than for Good
Reason, in addition to the Company's obligations set forth in subparagraph (i)
above, Employee shall retain that portion of the Options which have vested prior
to the Date of Termination, but shall have a period of ninety (90) days from the
Date of Termination in which to exercise such Options. In the event of a
termination by the Company for Cause, the provisions of Section 5(f) below shall
govern.

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         (iv) In the event of a termination of employment by reason of
Employee's death or disability, in addition to the Company's obligations set
forth in subparagraph (i) above, all unvested Options then held by Employee (or
his estate, if applicable) shall immediately vest and Employee (or his estate)
shall retain all rights to the Options, but shall have a period of eighteen (18)
months from the Date of Termination in which to exercise such Options.

         (c) Method of Payment. The Company shall pay the Severance Amount in a
lump sum not later than ten (10) days after the date the Company selects as
Employee's last day of active employment (the "Effective Date"), provided,
however, that at Employee's option, the Severance Amount shall be payable to
Employee in the form of equal periodic payments ("Deferred Payment") according
to the Company's regular payroll schedule or at any other intervals elected by
Employee for a period commencing on the first regular payroll pay date beginning
after the Effective Date (the "Deferred Payment Period"). In order to receive
Deferred Payment during a Deferred Payment Period, Employee must elect such
Deferred Payment in writing and specify the Deferred Payment Period, which may
not exceed the number of months of Base Monthly Salary payable to Employee as
the Severance Amount. In the event of Employee's death during the Deferred
Payment Period, any unpaid Deferred Payment shall be paid in a lump sum to such
beneficiary or beneficiaries designated by Employee in writing or, failing such
designation, to Employee's spouse if Employee is married or to Employee's estate
if Employee is unmarried. In no event shall Employee be required to mitigate his
damages arising out of any termination of this Agreement by the Company or by
Employee and the amount of payment to be made hereunder shall not be reduced by
any compensation earned by the Employee as a result of employment with another
employer, by retirement benefits, or other types of benefits received or income
earned.

         (d) Good Reason. For purposes of this Agreement, Good Reason shall
mean, with respect to Employee, (i) the assignment to Employee of any duties
materially inconsistent with, or substantially reduced as compared to, those set
forth in Section 1 or Schedule A, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and that is remedied
by the Company promptly after receipt of notice thereof given by Employee; (ii)
any material reduction in Employee's Base Salary, opportunity to earn annual
bonuses or other compensation or employee benefits, other than as a result of an
isolated and inadvertent action not taken in bad faith and that is remedied by
the Company promptly after receipt of notice thereof given by Employee; (iii)
the Company's requiring Employee to relocate his principal place of business to
a place that is not within the states of New York, New Jersey or Connecticut, or
(iv) any purported termination of this Agreement by the Company otherwise than
as expressly permitted by this Agreement. The Company has advised Employee that
DualStar Technologies Corporation, the parent of the Company ("DST"),
anticipates consummating a series of transactions (the "Restructuring"), the
effect of which will be to divest DST of its mechanical and electrical lines of
business. Following the consummation of such transactions, the
telecommunications business conducted by the Company will be the primary
business of the Company and DST. It is also anticipated that the Company, or its
successor, will have at least one class of its securities registered under the
Securities Exchange Act of 1934, as amended. Employee will be recommended to
serve as the Executive Vice President and Chief Financial

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Financial Officer of Company, or its successor. In addition to the foregoing,
Good Reason shall also mean, with respect to Employee, the failure of Employee
to be employed by the Company or its successor as Executive Vice President and
Chief Financial Officer following the Restructuring, under at least the terms
and conditions herein.

         (e) Disability. If Employee shall become unable efficiently to perform
the essential functions of his job, even with reasonable accommodation, as a
result of a disability or illness, as such terms are defined by the Americans
with Disabilities Act, he shall be entitled to his regular compensation until
the total period of disability or illness (whether or not continuous and whether
or not the same disability or illness) shall exceed 60 days during any calendar
year in the Term hereunder. This Agreement may thereafter be terminated by the
Company and, subject to the terms of paragraph (b) above, the Company's
obligations hereunder shall cease, including the obligation to pay compensation
for any period after the Date of Termination. Any amounts payable as
compensation during the period of disability or illness, shall be reduced by any
amounts paid during such period under any disability plan or similar insurance
maintained by the Company for Employee's benefit.

         (f) Cause. Upon a termination for Cause, Employee shall receive Base
Salary through the Date of Termination, and all other entitlement to benefits or
bonuses shall cease immediately, and all stock options not yet fully vested and
exercised shall be forfeited. Employee shall retain that portion of the Options
that have vested prior to the Date of Termination for Cause, but shall have a
period of 90 days from the Date of Termination in which to exercise such
Options.

         (g) Change of Control. As used herein, For purposes hereof, a "Change
of Control" of the Company shall be deemed to have occurred if, after the date
hereof, (i) any person or two or more persons acting in concert, other than the
Company, any employee benefit plan sponsored by the Company, Excelon Capital
Partners, Inc., Cerberus Capital Management, L.P., Blackacre Capital Management
LLC, Technology Investors Groups, LLC or any of their Affiliates, acquires
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Securities Exchange Act of 1934, as amended (the "'34 Act") directly or
indirectly of fifty percent (50%) or more of the total voting power represented
by the Company's then outstanding voting securities (calculated as provided in
paragraph (d) of Rule 13d-3 under the '34 Act in the case of rights to acquire
voting securities); or (ii) any person or two or more persons acting in concert,
other than the Company, any employee benefit plan sponsored by the Company,
Excelon Capital Partners, Cerberus Capital Management, L.P, Blackacre Capital
Management LLC, Technology Investors Group, LLC or any of their Affiliates,
shall purchase shares of the Company pursuant to a tender offer or exchange
offer to acquire any voting securities of the Company (or securities convertible
into such voting securities) for cash, securities or any other consideration,
provided that after the consummation of the offer, the person or persons in
question has beneficial ownership directly or indirectly of fifty percent (50%)
or more of the total voting power represented by the Company's then outstanding
voting securities (all as calculated under clause (i) above)); or (iii) the
shareholders of the Company shall approve (A) any consolidation or merger of the
Company in which the Company is not the continuing or surviving corporation
(other than a merger of the Company in which holder of the Common Shares of the
Company immediately prior to the merger have the same proportionate ownership

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of common stock of the surviving corporation immediately after the merger as
immediately before), or pursuant to which Common Shares of the Company would be
converted into cash, securities or other property, or (B) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all or substantially all of the assets of the Company, other
than a sale, lease, exchange or other transfer of all or substantially all
assets of the Company to Excelon Capital Partners, Inc., Cerberus Capital
Management, L.P., Blackacre Capital Management, LLC, Technology Investors Group,
LLC or any of their affiliates; or (iv) a change in control of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the '34 Act, whether or not the Company is then
subject to such reporting requirement; or (v) there shall have been a change in
the composition of the Board of Directors of the Company at any time during any
consecutive twenty-four (24) month period such that "continuing directors" cease
for any reason to constitute at least a 70% majority of the Board. For purposes
of this clause, "continuing directors" means those members of the Board who
either were directors at the beginning of such twenty-four month period or were
elected by or on the nomination or recommendation of at least a 70% majority of
the then-existing "continuing directors." So long as there has not been a
"change of control" within the meaning of clause (v), the Board of Directors may
adopt by a 70% majority of the "continuing directors" a resolution to the effect
that an event described in clauses (i) or (ii) shall not constitute a "change of
control."

         6. Employer's Authority. Employee agrees to observe and comply with the
rules and regulations of the Company as adopted by the Company's board of
directors respecting the performance of his duties and to carry out and perform
orders, directions and policies communicated to him from time to time,
consistent with his position as Executive Vice President and Chief Financial
Officer.

         7. Automobile Allowance. During the Term of this Agreement, Employee
shall be entitled to an automobile allowance as specified on Schedule A below,
payable monthly in arrears.

         8. Expenses. During the Term of this Agreement, the Company shall
reimburse Employee for the reasonable business expenses incurred by Employee in
the course of performing his duties for the Company hereunder in accordance with
the procedures then in place for such reimbursement.

         9. Non-Disclosure and Non-Competition. Employee has executed a
Nondisclosure Agreement of the Company attached hereto as Exhibit 1. In
addition, during the Term and for a further period of one year thereafter,
Employee shall not participate, without the written consent of the Company, in
the management or control of, or act as an employee or officer of, any business
operation which engages in any activity which is primarily engaged in or
competes significantly with the material telecommunications businesses conducted
by the Company or any of its Affiliates (the "Companies"). Such covenant shall
apply within all territories in which the Companies are actively engaged in
business or are actively soliciting business. The parties agree that if any
portion of this Paragraph 9 shall be deemed by any court or agency to be
unreasonable and/or unenforceable, then it shall be modified to the extent
necessary to make it enforceable by such court or agency.

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         10. Survival. The last sentence of Paragraph 5(b)(ii), Paragraph 9,
Paragraph 15 and Paragraph 17, of this Agreement shall survive termination of
employment hereunder and of this Agreement.

         11. Execution, Delivery and Performance. To the best of Employee's
knowledge, the execution, delivery and performance by Employee of this Agreement
or any other agreement, instrument or document contemplated herein or hereby
will not result in a breach of or conflict with any terms of any other
agreement, instrument or document to which Employee is a party or by which
Employee or his property is bound. No consent or approval of any person or
entity, other than those that have been obtained by Employee, is required for
Employee to execute, deliver and perform its obligations under this Agreement or
any agreement, instrument or document contemplated herein or hereby.

         12. Notices. Any notice permitted or required hereunder shall be deemed
sufficient when hand-delivered or mailed by certified mail, postage prepaid, and
addressed if to the Company at the address indicated above and if to the
Employee at the address indicated below (or to such other address as may be
provided by written notice received at least five (5) business days prior to the
hand delivery or mailing of any such notice).

         13. Miscellaneous. (a) This Agreement (i) constitutes the entire
agreement between the parties concerning the subjects hereof and supersedes any
and all prior agreements or understandings, (ii) may not be assigned by Employee
without the prior written consent of the Company, and (iii) may be assigned by
the Company to any Affiliate of the Company or to the successors or assigns of
the Company, provided such successors or assigns carry on substantially the
Company's telecommunications business as conducted at the time of assignment and
shall be binding upon, and inure to the benefit of, any such Affiliate,
successor or assign.

         (b) Headings herein are for convenience of reference only and shall not
define, limit or interpret the contents hereof.

         (c) As used herein, the term "Affiliate" shall mean any entity
controlled by or under common control with another person.

         14. Amendment. This Agreement may be amended, modified or supplemented
by the mutual consent of the parties in writing, but no oral amendment,
modification or supplement shall be effective.

         15. Specific Enforcement. The parties acknowledge that the Company
would be irreparably damaged and there would be no adequate remedy at law for
the Employee's breach of Paragraph 9 of this Agreement, and accordingly, the
terms thereof shall be specifically enforced. Employee hereby consents to the
entry of any temporary restraining order or preliminary injunction, in addition
to any other remedies available at law or in equity, to enforce the provisions
hereof, provided sufficient facts are shown to warrant such relief. In the event
that any action is brought to enforce Paragraph 9 hereof, the prevailing party
shall be entitled to recover its costs and attorneys fees in addition to any
other relief granted.

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         16. Severability. The provisions of this Agreement are severable. The
invalidity of any provision shall not affect the validity of any other
provision.

         17. Governing Law; Arbitration. This Agreement shall be construed and
regulated in all respects under the laws of the State of New York without regard
to its conflict of laws principles. Any dispute, controversy or questions
arising under, out of, or relating to this Agreement of Employee's employment
with the Company or termination thereof, shall be referred for arbitration in
the State of New York to a single neutral arbitrator selected by the Employee
and Company and this shall be the exclusive and sole means of resolving any such
dispute. The arbitration proceeding shall be governed by the Employment Rules of
the American Arbitration Association then in effect or such rules last in effect
(in the event such Association is no longer in existence) but shall not be
conducted under the auspices of the Association, and the decision of the
arbitrator shall be governed by the rule of law. If the parties are unable to
agree upon a neutral arbitrator within thirty (30) days after each party has
given the other written notice of the desire to submit a dispute, controversy or
question for decision as aforesaid, then either party may apply to the CPR of
New York City for the appointment of a neutral arbitrator or, if the CPR is not
then in existence or does not desire to act in the matter, either party may
apply to the Presiding Judge of the appropriate court for the appointment of a
neutral arbitrator to hear the parties and settle the dispute, controversy or
question. Such right to submit a dispute, controversy or question arising
hereunder to arbitration and the decision of the neutral arbitrator shall be
final, conclusive and binding on all parties and interested persons and no
action at law or in equity shall be instituted or, if instituted, further
prosecuted by either party other than to enforce the award of the neutral
arbitrator. The arbitrator shall take submissions and hear testimony, if
necessary, and shall render a written decision as promptly as possible, The
arbitrator may require any form of discovery (e.g., depositions) in making his
decision. In connection with any arbitration, the prevailing party shall be
entitled to recover its costs and reasonable attorneys' fees in addition to
other relief granted.

         IN WITNESS WHEREOF, this Agreement is entered into as of the date and
year first above written.

DUALSTAR COMMUNICATIONS, INC.               EMPLOYEE:

By:
   -----------------------------            ----------------------------
   Name:  Jill Thoerle                      Name:  Dennis S. Rosatelli
   Title: President and CEO

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                                   Schedule A

          Name:            Dennis s. Rosatelli

          Title:           Executive Vice President and Chief Financial Officer

          Base Salary:     $240,000.00

          Car Allowance:   $600.00

          Home Address:    73 Lake View Drive
                           Old Tappan, New Jersey  07675

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                                                                      Schedule B

                             STOCK OPTION AGREEMENT

          THIS AGREEMENT, made as of the 7th day of September, 2000, (the "Grant
Date") between DualStar Technologies Corporation, a Delaware corporation (the
"Company"), with an address at One Park Avenue, New York, New York 10016 and
Dennis S. Rosatelli (the "Optionee"), an employee of the Company with an address
at 73 Lake View Drive, Old Tappan, New Jersey 07675.

         WHEREAS, the Company has adopted the 1994 Stock Option Plan, as amended
(the "Plan"), in order to provide additional incentive to certain directors,
officers and key employees of the Company; and

         WHEREAS, the Board and/or the Committee responsible for administration
of the Plan has determined to grant to the Optionee the Stock Option as provided
herein;

         NOW, THEREFORE, the parties hereto agree as follows:

         1.   Grant of Option.

              1.1   The Company hereby grants to the Optionee the right and
                    option (the "Option") to purchase all or any part of an
                    aggregate of 250,000 whole shares of Common Stock, $0.01 par
                    value, of the Company ("Stock"), subject to, and in
                    accordance with, the terms and conditions set forth in this
                    Agreement and the Plan. Dividends, subscription rights and
                    other rights generally afforded stockholders declared or
                    granted with respect to Stock prior to the exercise of the
                    Option are not included in the Option.

              1.2   This Agreement shall be construed in accordance and
                    consistent with, and subject to, the provisions of the Plan
                    (the provisions of which are incorporated herein by
                    reference) and, except as otherwise expressly set forth
                    herein, the capitalized terms used in this Agreement shall
                    have the same definitions as set forth in the Plan.

              1.3   This Option is not intended to be and shall not be treated
                    as an incentive stock option under Section 422 of the Code.

         2. Purchase Price. The price at which the Optionee shall be entitled to
purchase shares of Stock upon the exercise of the Option shall be $ 4.50 per
share, subject to approval by the Board of Directors.

         3. Duration of Option. The Option shall be exercisable to the extent
and in the manner provided herein for a period of ten (10) years from the Grant
Date (the "Exercise Term"); provided, however, that the Option may be earlier
terminated as provided in Section 6 hereof.

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         4. Exercisability of Option. The Option shall vest and be exercisable
by Optionee and Optionee shall be entitled to purchase, in whole at any time or
in part (in whole numbers only) from time to time as follows:

               (ii) one-third of the Options shall vest at the first anniversary
                    of the date hereof; and

               (ii) two-thirds of the Options shall vest ratably on a monthly
                    basis on the last day of each of the 24 calendar months
                    following the first anniversary of the date hereof.

         5. Exercise, Payment for, and Delivery of Stock.

                  5.1 Subject to the terms and conditions of this Agreement and
the Plan, the Option may be exercised by delivery of written notice to the
Company, at its principal executive office, received at the Company not later
than 5:00 p.m. N.Y. time on or prior to the day the Option is to expire. Such
notice shall state that the Optionee is electing to exercise the Option and the
number of shares of Stock in respect of which the Option is being exercised and
shall be signed by the person or persons exercising the Option. If requested by
the Board and/or the Committee, such person or persons shall (i) deliver this
Agreement to the Secretary of the Company who shall endorse thereon a notation
of such exercise, and (ii) provide satisfactory proof as to the right of such
person or persons to exercise the Option.

                  5.2 Subject to the terms and conditions of the Plan, the
notice of exercise described in Section 5.1 shall be accompanied by the full
purchase price for the shares of Stock in respect of which the Option is being
exercised and by the Withholding Taxes, if any, in cash (U.S. dollars), by
certified or bank check.

                  5.3 Upon receipt of notice of exercise and full payment for
the shares of Stock in respect of which the Option is being exercised and of the
Withholding Taxes, the Company shall, subject to the Plan, promptly take such
action as may be necessary to effect the issuance to the Optionee of the number
of shares of Stock as to which such exercise was effective, including issuing
and delivering such shares of Stock and entering the Optionee's name as a
stockholder of record on the books of the Company.

                  5.4 The Optionee shall not be deemed to be the holder of, or
to have any of the rights of a holder with respect to any shares of Stock
subject to the Option until the Optionee shall have given the Company the
written notice of exercise described in Section 5.1 and the Optionee shall have
paid the full purchase price for the number of shares of Stock in respect of
which the Option was exercised.

         6. Termination Provisions. Subject to this Agreement and the Plan, the
right to exercise this Option is subject to the following additional restriction
and limitations:

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         6.1  Termination of Employment.

                  6.1.1 Retirement; Disability; Death of Optionee. If the
employment of the Optionee is terminated by reason of Retirement or Disability,
or if Optionee shall die, or if Optionee shall become ineligible to continue to
participate in the Plan for any reason (other than as set forth below), any
unvested portion of the Option shall become vested and fully exercisable, and
Optionee may at any time within 18 months after such termination of employment
or event of ineligibility (but in no event after the expiration of the Exercise
Term) exercise the Option. In the event of Optionee's death, the Option shall be
exercisable, to the extent provided in the Plan and this Agreement, by the
legatee or legatees under Optionee's will, or by his/her personal
representatives or distributees and such person or persons shall be substituted
for the Optionee each time the Optionee is referred to herein. In all other
respects, this Option shall terminate upon such death.

                  6.1.2 Termination by Company Other than for Cause. If the
employment of the Optionee is terminated by the Company other than for Cause,
the Option shall be exercisable, for a period of nine (9) months following such
termination.

                  6.1.3 Termination for Cause or Voluntary Termination by
Optionee. Notwithstanding anything to the contrary contained herein, if the
employment of the Optionee is terminated for Cause or Optionee voluntarily
terminates his employment with the Company, the Option shall be exercisable, for
a period of ninety-one (91) days following such termination, but only for the
number of shares as to which this Option might have been exercised on the date
of termination. The portion of the Option, which is not exercisable at the time
of such termination, shall lapse and be forfeited.

                  6.1.4 Change of Control. If the Optionee's employment is
terminated by the Company or by the Optionee following a change of Control, the
provisions of Section 7 apply.

                           7.  Change of Control.  Notwithstanding anything
contained in the Plan or this Agreement to the contrary, in the event of a
Change of Control, all of the Options outstanding on the date of such Change of
Control shall become immediately and fully exercisable. For purposes hereof, a
"Change of Control" of the Company shall be deemed to have occurred if, after
the date hereof, (i) any person or two or more persons acting in concert, other
than the Company, any employee benefit plan sponsored by the Company, Exelon
Capital Partners, Inc.,Cerberus Capital Management, L.P., Blackacre Capital
Management LLC, Technology Investors Groups, LLC or any of their Affiliates,
acquires beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Securities Exchange Act of 1934, as amended (the "'34 Act") directly
or indirectly of fifty percent (50%) or more of the total voting power
represented by the Company's then outstanding voting securities (calculated as
provided in paragraph (d) of Rule 13d-3 under the '34 Act in the case of rights
to acquire voting securities); or (ii) any person or two or more persons acting
in concert, other than the Company, any employee benefit plan sponsored by the
Company, Exelon Capital Partners, Inc., Cerberus Capital Management, L.P,
Blackacre Capital Management LLC, Technology Investors Group, LLC or any of
their Affiliates, shall purchase shares of the Company pursuant to a tender
offer or exchange offer to acquire any voting securities of the Company (or
securities convertible into

                                       12
<PAGE>

such voting securities) for cash, securities or any other consideration,
provided that after the consummation of the offer, the person or persons in
question has beneficial ownership directly or indirectly of fifty percent (50%)
or more of the total voting power represented by the Company's then outstanding
voting securities (all as calculated under clause (i) above)); or (iii) the
shareholders of the Company shall approve (A) any consolidation or merger of the
Company in which the Company is not the continuing or surviving corporation
(other than a merger of the Company in which holder of the Common Shares of the
Company immediately prior to the merger have the same proportionate ownership of
common stock of the surviving corporation immediately after the merger as
immediately before), or pursuant to which Common Shares of the Company would be
converted into cash, securities or other property, or (B) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all or substantially all of the assets of the Company, other
than a sale, lease, exchange or other transfer of all or substantially all
assets of the Company to Excelon Capital Partners, Inc., Cerberus Capital
Management, L.P., Blackacre Capital Management, LLC, Technology Investors Group,
LLC or any of their affiliates; or (iv) a change in control of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the '34 Act, whether or not the Company is then
subject to such reporting requirement; or (v) there shall have been a change in
the composition of the Board of Directors of the Company at any time during any
consecutive twenty-four (24) month period such that "continuing directors" cease
for any reason to constitute at least a 70% majority of the Board. For purposes
of this clause, "continuing directors" means those members of the Board who
either were directors at the beginning of such twenty-four month period or were
elected by or on the nomination or recommendation of at least a 70% majority of
the then-existing "continuing directors." So long as there has not been a
"change of control" within the meaning of clause (v), the Board of Directors may
adopt by a 70% majority of the "continuing directors" a resolution to the effect
that an event described in clauses (i) or (ii) shall not constitute a "change of
control."

         7. Nontransferability. This Option may not be transferred by the
Optionee other than by will or the laws of descent and distribution and may be
exercised during the Optionee's lifetime only by the Optionee or the Optionee's
guardian or legal representative, subject to Section 6 hereof.

         8. Certain Changes. Upon the occurrence of certain events as set forth
in Section 4 of the Plan, the Board or Committee shall determine the appropriate
adjustments to the number of shares subject to the Option and the purchase price
for such shares. The adjustments by the Board or Committee shall be made in
accordance with the Plan and shall be final and binding for all purposes.

         9. Withholding Taxes. If applicable, no later than the date as of which
an amount first becomes includible in the gross income of the Optionee for
Federal income tax purposes with respect to the receipt of shares, securities,
cash or property under the Plan, the Optionee shall pay to the Company, or make
arrangements satisfactory to the Company regarding the payment of, any Federal,
state, or local or foreign taxes of any kind required by law to be withheld with
respect to such amount ("Withholding Taxes"). The obligations of the Company

                                       13
<PAGE>

under the Plan shall be conditional on such payment or arrangements, and the
Company shall, to the extent permitted by law, have the right to deduct any such
taxes from any payment otherwise due to the Optionee.

         10. No Right to Continued Employment. Nothing in this Agreement or the
Plan shall be interpreted or construed to confer upon the Optionee any right
with respect to continuance of employment by the Company, nor shall this
Agreement or the Plan interfere in any way with the right of the Company to
terminate the Optionee's employment at any time.

         11. Covenant Not to Compete. In consideration of grant of the Option,
during the term of employment and for 12 months after the termination of
Optionee's employment, the Optionee shall not directly or indirectly manage,
operate, control or be employed by or participate in the ownership, management,
operation or control of any business which is of the type and character
primarily engaged in and competitive with that of the Company. The Optionee
shall not, during the term of employment, have any other paid employment other
than with a subsidiary or affiliate of the Company, except with the prior
approval of the Board.

         12. Optionee Bound by the Plan. The Optionee hereby acknowledges
receipt of a copy of the Plan and agrees to be bound by all terms and provisions
thereof, including any amendments thereto.

         13. Modification of Agreement. This Agreement may be modified, amended,
suspended or terminated, and any terms or conditions may be waived, but only by
a written instrument executed by the parties hereto.

         14. Severability. Should any provision of this Agreement be held by a
court of competent jurisdiction to be unenforceable or invalid for any reason,
the remaining provisions of this Agreement shall not be affected by such holding
and shall continue in full force in accordance with their terms.

         15. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of New
York, without giving effect to the conflicts of laws principles thereof.

         16. Successors in Interest. This Agreement shall inure to the benefit
of and be binding upon any successor to the Company. This Agreement shall inure
to the benefit of the Optionee's legal representatives. All obligations imposed
upon the Optionee and all rights granted to the Company under this Agreement
shall be final, binding and conclusive upon the Optionee's heirs, executors,
administrators and successors.

         17. Complete Agreement. This Agreement including the Plan contains the
entire agreement and understanding between the parties relating to the subject
matter hereof, and supersedes any prior understandings, agreements or
representations by or between the parties, written or oral, relating to the
subject matter hereof.

         18. Notices. Any notice required or permitted hereunder shall be given
in writing and

                                       14
<PAGE>

shall be personally delivered or mailed by first class registered or certified
mail, postage prepaid, return-receipt-requested, or transmitted by facsimile or
by reputable overnight courier, at:

         if to the Company:         DualStar Technologies Corporation
                                    One Park Avenue
                                    New York, New York  10016
                                    Attn: Chief Financial Officer
                                    Fax: (212) 696-5615

         if to the Optionee:        Dennis S. Rosatelli
                                    73 Lake View Drive
                                    Old Tappan, New Jersey  07675
                                    Fax: 212-616-6269

or at such other addresses as such party may designate by five business days
advance written notice to the other party.

         Each notice or communication that shall have been transmitted in the
manner described above shall be deemed sufficiently given, served, sent or
received for all purposes at such time as it is sent to the addressee (with
return receipt, delivery receipt or the answer back being deemed conclusive, but
not exclusive, evidence of such sending) or at such time as delivery is refused
by the addressee upon presentation.

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

         20. Conflict. If there is any conflict between this Stock Option
Agreement and Optionee's Employment Agreement with DualStar Communications,
Inc., the terms and conditions of this agreement shall govern.

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

                                      DualStar Technologies Corporation
Attest:

                                      By:___________________________________
_________________________                   Name:
Secretary                                   Title:

                                      ______________________________________
                                      Optionee:

                                       15
<PAGE>

                                                                       Exhibit 1

                             NONDISCLOSURE AGREEMENT
                             -----------------------

         AGREEMENT made as of the 7th day of September, 2000, by and between the
undersigned individual residing at the address indicated following his signature
below (hereinafter referred to as "Employee") and DualStar Communications, Inc.,
a Delaware corporation, having a place of business in New York, New York
(hereinafter referred to as the "Company").

         WHEREAS, Employee is being employed by the Company and may come into
possession of material of a confidential, sensitive or proprietary nature
concerning the business, plans and trade secrets of the Company and its
Affiliates (as defined below) and of third parties; and

         WHEREAS, the continued confidential treatment of such information is
vital to the success of the Company's business,

         NOW THEREFORE, the parties agree as follows:

         1. Employee acknowledges that his work as an employee of the Company
will bring him into close contact with the Confidential Information (as defined
below) of the Company and of third parties. Employee acknowledges that such
Confidential Information is reposed in his in trust.

         2. Employee hereby agrees that he shall, both during and after his
employment with the Company, maintain such Confidential Information in
confidence and neither disclose to others (nor cause to be disclosed) nor use
personally or professionally (nor cause to be used) such Confidential
Information without the prior written permission of the Company. Employee will
also take reasonable precautions to prevent the inadvertent exposure of
Confidential Information to unauthorized persons or entities. The restrictions
contained in this Agreement shall expire two (2) years after termination of
Employee's employment with the Company, regardless of the reason for the
termination.

         3. Employee acknowledges that he may, during his employment, add to the
Company's Confidential Information in accordance with Paragraph 8 below and he
agrees that any such additions shall fall within the strictures of this
Agreement in accordance with Paragraph 8 below.

         4. Employee agrees that upon any termination of his employment with the
Company or any Affiliate thereof, or upon request if sooner, he shall forthwith
return to the Company all reports, correspondence, notes, financial statements,
computer printouts and other documents and recorded material of every nature
(including all copies thereof) which may be in his possession or under his
control dealing with Confidential Information.

         5. Employee acknowledges that the covenants in this Agreement have
existed since the commencement of his involvement with the Company. These
covenants are expressions of his duty as an employee not to use the Confidential
Information to the detriment of the Company. In addition, Employee acknowledges
that he shall benefit from entry into this Agreement as the Company shall be
willing to continue to provide access to Confidential Information to Employee.

         6. Employee acknowledges that the Company would be irreparably damaged
and there would be no adequate remedy at law for Employee's breach of this
Agreement, and accordingly, the terms of this Agreement shall be specifically
enforced. Employee hereby consents to the entry of any

                                       16
<PAGE>

temporary restraining order or preliminary or ex parte injunction, in addition
to any other remedies available at law or in equity, to enforce the provisions
hereof.

         7. This Agreement is not an agreement of employment and nothing herein
shall be construed to obligate the Company to employ Employee for any definite
duration or upon any specific terms. It is understood that the Company has
agreed to employ Employee pursuant to a separate Employment Agreement with the
Company of even date herewith.

         8. As used herein, "Confidential Information" shall mean all
confidential information and trade secrets of the Company or any of its
Affiliates (as such term is defined in the aforesaid Employment Agreement),
whether now existing or hereafter acquired or developed, including, without
limitation, financial statements, business plans, working methods, investments,
materials, processes, programs, designs, drawings, names of and relationships
with current or potential vendors and lenders and other third parties,
contractual arrangements, profit formulas, experimental investigations, studies,
current or potential customer names and requirements, current or potential
professional associations or contacts, information submitted to the Company or
its Affiliates by third parties on a confidential basis and similar other
non-public or otherwise confidential, sensitive or proprietary information.
"Confidential Information" shall not include (i) information that has become
generally known within the communications industry without breach of any
obligation of confidentiality of Employee or any third party, (ii) information
obtained by Employee from third persons without breach of any obligations owed
to the Company or any of its Affiliates or (iii) information provided by the
Company or any of its Affiliates to third persons without confidentiality
restrictions. A person, affiliation or contact is "potential" for purposes of
this paragraph only if such person has been identified in writing as a potential
affiliation or contact or with whom the Company or any of its Affiliates have
communicated within a rolling six-month period.

         9. This Agreement shall survive the termination of the employment of
Employee and shall not be amended except by a writing signed by the parties
hereto. This Agreement shall be binding upon Employee and his heirs, legal
representatives, successors and assigns.

         10. This Agreement shall be governed and construed in accordance with
the laws of the State of New York.

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

                                      DUALSTAR COMMUNICATIONS, INC.

                                      By:
                                         ----------------------------------
                                         Jill Thoerle
                                         President Chief Executive Officer

                                      -------------------------------------
                                      Name:    Dennis S. Rosatelli
                                      Address: 73 Lake View Drive
                                               Old Tappan, New Jersey 07675

                                       17<PAGE>   1
                                                                    EXHIBIT 10.1

                             CONTRACT OF EMPLOYMENT

This Contract of Employment (this "Agreement") is entered into on May 12,
2000.

(A)   eLoyalty (UK) Limited ("the Company"); and

(B)   Vaughan Thomas (the "Employee").

                              TERMS AND CONDITIONS

The parties hereby agree as follows:

1.    ENGAGEMENT. The Company will employ the Employee as a Senior Vice
      President of the Company and the Employee will serve the Company in such
      capacity subject to and in accordance with the terms of this Agreement
      ("Employment"). For purposes of this Agreement, references to the "Group"
      means the Company, any subsidiary, any holding company and any subsidiary
      of any holding company from time to time, and references to "company",
      "subsidiary" and "holding company" will have the same meanings as their
      respective definitions in the Companies Act 1985 as amended by the
      Companies Act 1989.

2.    EMPLOYMENT DUTIES.

      2.1    For purposes of this Agreement, the Employee will take instructions
             from any of the following: (a) the Chairman of the Company, (b) the
             President of the Company, or (c) the collective board of directors
             of the Company (collectively, "Senior Management").

      2.2    The Employee will perform such duties as may be assigned to the
             Employee in relation to the administration and execution of the
             Company's practices, business affairs and operations from time to
             time by or on behalf of Senior Management.

      2.3    During the course of the Employment, the Employee will:

             (a)  devote the whole of the Employee's working time, attention and
                  skill to the duties of the Employment;

             (b)  faithfully and diligently perform such duties and exercise
                  such powers as may from time to time be reasonably assigned to
                  or vested in the Employee;

             (c)  accept such offices in any member of the Group as may be
                  reasonably required by Senior Management;

             (d)  comply with all rules and regulations from time to time issued
                  by the Company to its employees;

<PAGE>   2

             (e)  obey all reasonable and lawful directions given to the
                  Employee by or under the authority of Senior Management;

             (f)  use the Employee's best endeavours to promote the interest and
                  reputation of the Group; and

             (g)  not do anything which is harmful to or which will bring the
                  Company or any member of the Group into disrepute or
                  discredit.

      2.4    The Employee will at all times keep Senior Management promptly and
             fully informed (in writing if so requested) of the Employee's
             conduct of the business, finances or affairs of the Company. The
             Employee will provide such explanations and supply all information
             in the Employee's possession as Senior Management may require in
             connection with such conduct of the business, finance or affairs of
             the Company.

      2.5    Normal office hours are 9.00 am to 5.30 pm Monday to Friday
             inclusive, with an hour for lunch. In addition, the Employee may,
             and likely will, be required to work, without additional
             remuneration, additional hours if the requirements of the
             Employee's job so dictate.

      2.6    Senior Management may at any time:

             (a)  within reasonable limits vary any powers and duties assigned
                  to the Employee and require the Employee to cease performing
                  or exercising any of such powers and duties;

             (b)  appoint a further employee having responsibilities similar to
                  the Employee to act jointly with the Employee and in that
                  event the Employee will perform the Employee's duties and
                  exercise the Employee's powers in a manner which will be
                  consistent with such appointment;

             (c)  require the Employee to perform services not only for the
                  Company but also for any other member in the Group, including,
                  if so required, acting as a director of any member of the
                  Group; and

             (d)  require the Employee, due to the nature of the Employee's
                  duties, to travel abroad, sometimes for substantial periods of
                  time, in order to perform the Employee's duties under this
                  Agreement.

      2.7    The Employee will be required (a) to work at the principal office
             of the Company or at such other location as Senior Management may
             from time to time reasonably require and (b) to travel and work
             outside the United Kingdom as directed by Senior Management from
             time to time. If the Employee is required to relocate the
             Employee's permanent residence, the Company will give the Employee
             reasonable notice of such requirement and will pay or reimburse all
             reasonable relocation expenses, provided, however, that if the
             Employee timely notifies the Company

                                       2
<PAGE>   3

             of its decision not to relocate his permanent residence as
             requested by the Company, the Company shall have the right, in its
             sole discretion, to either continue Employee's employment at his
             then-current location or terminate Employee's employment in
             accordance with the termination provisions set forth in Section 4.1
             hereunder.

      2.8    Except as otherwise permitted by the second sentence of this
             subclause 2.8, the Employee will not during the term of this
             Agreement (unless the Company otherwise agrees in writing),
             directly or indirectly, (a) undertake, be engaged in or concerned
             in any other business, trade, profession or other occupation
             (whether as an employee, consultant, agent, director or otherwise)
             nor have any financial interest in any other business, trade,
             profession or other occupation or (b) hold any ownership or
             financial interest in a competitor, client or vendor of the Company
             that could cause divided loyalty, or even give the appearance of
             divided loyalty, or that could cause speculation or
             misunderstanding regarding such interest. Notwithstanding the
             foregoing, nothing contained herein shall be construed as
             restricting Employee from engaging in any activities with respect
             to the ownership, lease and/or sale of Employee's real property, in
             participating in those charities which do not have conflicting
             interests as the Company, and in holding any non-employee
             directorships in other companies which has been pre-approved by
             Senior Management. If the competitor, client or vendor (or other
             business) is a public company, then neither the Employee nor a
             member of the Employee's immediate family may hold more than one
             percent (1%) of the outstanding stock of that company.

      2.9    If the Employee has given or received notice of termination of the
             Employment, the Employee may not make any public statements in
             relation to the Company or any member of the Group. After the
             effective date of termination, the Employee may not (a) represent
             the Employee as being employed by or connected with the Company or
             (b) use the style of "eLoyalty" or any name including the words
             "eLoyalty Corporation" or any name which is similar or likely to be
             confused therewith.

3.    TERM OF EMPLOYMENT.

      3.1    The Employment will commence on the Commencement Date set out in
             Exhibit A hereto (the "Commencement Date") and continue until
             terminated pursuant to clause 4.

      3.2    No employment with a previous employer counts as part of a
             continuous employment for purposes of calculating the Employee's
             statutory entitlements.

                                       3
<PAGE>   4

4.    TERMINATION.

      4.1    Except if terminated for Good Cause (as defined in Section 4.3
             below), the Company may terminate Employee's employment for any
             reason upon giving Employee one-year notice of such termination and
             the Company will continue Employee's normal salary and benefits
             until the end of such one-year notice period unless a Good Cause
             event occurs, in which case the Company's obligations hereunder
             shall cease immediately. If during such one-year notice period,
             Employee begins employment with another employer providing
             equivalent or greater renumeration, the Company's obligations to
             continue Employee's salary and benefits during the one-year notice
             period shall also cease immediately. If the Company terminates
             Employee's employment for any reason other than for Good Cause, the
             Company shall pay Employee its bonus as follows:

             (a)  if terminated prior to the second anniversary of the
                  Commencement Date, then the targeted bonus which would have
                  been earned by Employee during the one-year notice period if
                  Employee has remained employed with the Company; or

             (b)  if terminated after the second anniversary of the Commencement
                  Date, then the average of the targeted bonus earned by
                  Employee during the two years immediately prior to the
                  effective date of termination.

             If the Company terminates the Employee's employment for any reason
             other than for Good Cause (as defined below) during the first
             twenty-four (24) months of Employee's employment hereunder, and
             further subject to the terms of the Company's applicable stock
             option plan and the Company's stock option agreements executed by
             the Employee, fifty percent (50%) of all options to purchase the
             Company's shares granted by the Company to the Employee prior such
             termination shall immediately vest upon termination.

             The terms of the promissory note executed by the Employee and
             attached hereto as EXHIBIT C shall govern the parties' obligations
             with respect to the loan of One Million Two Hundred Thousand United
             States Dollars (US$1.2million) granted to the Employee by the
             Company (including in the event of termination of Employee's
             employment hereunder).

      4.2    The Company's normal retirement age is 60 years, and the Employment
             will automatically terminate at the end of the month in which the
             Employee reaches this age.

      4.3    Notwithstanding anything contained in Section 4.1, the Company may
             summarily terminate the Employment immediately (followed by written
             confirmation within five (5) business days) without any payment of
             salary, bonus, benefits or damages (other than payment accrued to
             Employee to the date of termination) if the Employee (each a "Good
             Cause" event):

                                       4
<PAGE>   5

             (a)  is guilty of any serious misconduct or material or persistent
                  breach of any of the terms or conditions of this Agreement, in
                  a material or persistent manner wilfully neglects or refuses
                  to carry out any of the Employee's duties or to comply with
                  any lawful and reasonable written instruction given to the
                  Employee by Senior Management;

             (b)  has a bankruptcy order made against the Employee or compounds
                  with or enters into any voluntary arrangements with the
                  Employee's creditors; or

             (c)  is convicted of any criminal offence (whether or not in
                  connection with the Employment) other than an offence under
                  the Road Traffic Acts for which a penalty of imprisonment is
                  not imposed.

      4.4    The exercise by the Company of its right of termination under this
             clause 4 will be without prejudice to any other rights or remedies
             which the Company or any member of the Group may have or be
             entitled to exercise against the Employee.

      4.5    All credit, charge and expense cards and all books, papers,
             drawings, designs, documents, records and computer hardware and
             software kept or made by or in the possession or control of the
             Employee relating to the businesses of the Company or any member of
             the Group and all other property of the Company or any member of
             the Group are and remain the property of the Company or such
             member, and the Employee will at the termination date immediately
             deliver to the Company all such items in the Employee's possession,
             custody or control.

      4.6    The Company may at its sole and absolute discretion make a payment
             of any salary or compensation otherwise owed to the Employee in
             lieu of any required period of notice (subject to deduction of such
             PAYE tax and class 1 national insurance contributions as the Inland
             Revenue may require).

      4.7    Notwithstanding any other provisions of this Agreement, the Company
             has no obligation to vest in or assign to the Employee any powers
             or duties or provide any work for the Employee and the Company may
             at any time prior to the effective date of termination and from
             time to time suspend the Employee from the performance of the
             Employee's duties or exclude the Employee from any premises of the
             Company and any member of the Group for a maximum period of three
             months. This Agreement will continue to have full force and effect
             if the Company exercises any of its rights under this subclause
             4.7; in particular, the Employee's full salary and benefits
             (including any bonus or commission) will not cease to be payable by
             reason only of such suspension or exclusion of the Employee, unless
             and until the Employment is terminated under any provisions of this
             Agreement, or the Company is otherwise entitled to cease paying or
             providing such salary and benefits.

      4.8    Employee may terminate his Employment upon giving the Company
             one-year prior written notice. Upon receiving such notice, the
             Company may, in its sole discretion, make Employee's termination
             effective immediately or anytime before the one-year notice period
             ends by paying to Employee any salary or

                                       5
<PAGE>   6

             compensation otherwise owed to the Employee during such one-year
             notice period.

5.    SALARY. As compensation for the Employee's services, the Company will pay
      the Employee a base salary of the amount listed in Exhibit A hereto. That
      base salary is payable at monthly intervals in arrears on the last
      business day of each calendar month. The Employee's base salary will be
      subject to annual review on or around the first day of the Company's
      fiscal year and may, at the discretion of Senior Management, be increased
      from that listed in Exhibit A hereto based on the Employee's
      responsibilities, capabilities and performance during the preceding fiscal
      year.

6.    BONUS. The Company may elect to pay Employee bonuses in accordance with
      the bonus plan confirmed in writing to Employee by Senior Management,
      which plan may be amended by the Company in its sole discretion at any
      time upon notice to Employee. Employee's targeted bonus as of the
      Commencement Date is as set forth in Exhibit A hereto.

7.    PENSION AND BENEFITS.

      7.1    The Company will make annual contributions to an employee
             retirement plan account established by the Employee (i) in
             accordance with the Company's pension plan policies, or (ii) as
             reasonably agreed upon by the Company and Employee (provided such
             agreement does not violate any applicable laws), in the amount of
             6% of the Employee base salary, subject to any statutory
             contribution limits.

      7.2    The Employee is entitled to thirty (30) working days paid holiday
             per calendar year plus statutory bank holidays in England and
             Wales. Such holiday will accrue in proportion to the period worked.
             Only five accrued but unused days of paid holiday at the end of the
             Company's fiscal year will carry over to the next fiscal year.

      7.3    The Employee will be entitled to participate fully in the Company
             benefits programs as amended from time to time. A summary of the
             Company's benefit programs as of the date of this Agreement is
             attached as EXHIBIT B hereto.

8.    SICKNESS. Subject to a production of a medical certificate satisfactory to
      the Company, salary will not cease to be payable by reason only of the
      Employee's incapacity for work due to sickness or accident for a period of
      up to six calendar months or at the Company's discretion, any longer
      period. Payments made by the Company under this clause 8 will include the
      amount of any statutory sick pay or social security sickness benefit to
      which the Employee may be entitled.

9.    BUSINESS EXPENSES. The Company will, in accordance with and subject to the
      Company's expense reimbursement policy, reimburse the Employee for all
      proper and reasonable business expenses necessarily incurred by the
      Employee in performing the Employee's duties. These will include (but will
      not be limited to) transportation, hotel and/or apartment accommodation
      for travel away from the Employee's permanent residence, telephone and
      other business expenses. The Employee will provide the Company with

                                       6
<PAGE>   7

      supporting documentation sufficient to satisfy reporting requirements of
      the Inland Revenue, any other tax jurisdiction in which such expenses will
      be included in any filing, and the Company. The Company's determination as
      to the reasonableness or necessity of any expense will be final.

10.   CONFIDENTIALITY AND INFORMATION.

      10.1   For purposes of this Agreement and subject to subclause 10.2 below,
             "Confidential Information" includes but is not limited to:

             (a)  any trade secrets or discovery, invention or improvement in
                  relation to goods and/or services made by the Employee alone
                  or with others and which directly or indirectly relates to the
                  business of the Company or any member of the Group;

             (b)  information which arises out of work performed by the Employee
                  for the Company or any member of the Group; and

             (c)  any other information or material concerning the business or
                  affairs of the Company or the Group including but not limited
                  to business strategies and plans, proposals, deliverables,
                  prospects and customer lists, methodologies, training
                  materials and computer software (including without limitation
                  software products and related documentation).

      10.2   Confidential Information does not include information that is in
             the public domain otherwise than through impermissible disclosure
             by the Employee.

      10.3   Without prejudice to any other duty owed to the Company under which
             the Employee must keep secret information received or obtained by
             the Employee in confidence, the Employee will:

             (a)  during the course of the Employment keep secret and not use
                  for any purposes, reveal, disclose or publish to any person
                  (other than as required for performance of the Employee's
                  duties under this Agreement) any Confidential Information;

             (b)  at all times after the effective date of termination of
                  Employment keep secret and not use for any purposes, reveal,
                  disclose or publish to any person any Confidential Information
                  or any other information concerning the business or affairs of
                  the Company; and

             (c)  do all such acts and things and take all such steps as the
                  Company may reasonably require to prevent the unauthorized
                  use, publication or disclosure of any Confidential Information
                  by any other person.

      10.4   The Employee will at all times promptly provide the Company with
             such correspondence, documents, papers, computer hardware and
             software, information and records as may be reasonably required by
             Senior Management and

                                       7
<PAGE>   8

             all explanations (in writing if so requested) as may be required in
             connection with matters relating to the Employment hereunder or to
             the business or affairs of the Company or its clients.

      10.5   Without prejudice to clause 4.4, the Employee will, whenever
             requested by Senior Management and in any event at the effective
             date of termination, promptly deliver up to the Company all
             correspondence and all other documents, papers, computer hardware
             and software, information and records whatsoever containing
             Confidential Information which are in the Employee's possession,
             custody or control, including those which may have been prepared by
             the Employee in the course of the Employment which are in the
             Employee's possession, custody or control. The Employee may not
             retain any copies thereof.

11.   DEDUCTIONS. The Company will be entitled at any time during the Employment
      or in any event on termination of the Employment, howsoever arising, to
      deduct from the Employee's salary any monies then due from the Employee to
      the Company.

12.   RESTRAINT ON COMPETITION AND SOLICITING CUSTOMERS.

      12.1   The Employee agrees that in addition to the other terms of this
             Agreement and without prejudice to any other restrictions imposed
             on the Employee by law, the Employee will not for a period of one
             year following the effective date of termination, whether directly
             or indirectly, either for the Employee's own account or on behalf
             of or for any other person, firm or organisation or in any capacity
             whatsoever:

             (a)  engage in the practice of providing consulting or related
                  services in the field of Customer Relationship Management or
                  any substantially similar field for any person who has been a
                  client of the Company or any member of the Group with whom the
                  Employee has dealt in the course of the Employment, or
                  prospective client for whom the Employee has participated in
                  the submission of a proposal, in either case, during the one
                  year period preceding the effective date of termination; or

             (b)  (i) solicit, procure or induce, or endeavour to procure or
                  induce, any employee of the Company or any member of the Group
                  to leave his or her employment with such company or (ii)
                  participate in or have a financial, management or other
                  interest in any business enterprise that engages in, or plans
                  to engage in, direct competition with the Company within any
                  member state of European Union in which the Company has a
                  presence or a proposed presence, the proposal of which the
                  Employee has worked on within the six months preceding the
                  effective date of termination, except that subclause
                  12.1(b)(ii) will only apply if the Employee voluntarily
                  resigns or if the Employment is terminated by the Company for
                  Good Cause under subclause 4.3 above.

      12.2   While the restrictions imposed in this clause 12 are considered by
             the parties to be reasonable in all the circumstances, it is agreed
             that if any one or more of such

                                       8
<PAGE>   9

             restrictions will either, when taken by itself or themselves
             together, be adjudged to go beyond what is reasonable in all the
             circumstances for the protection of the Company's legitimate
             interests but would be adjudged to be reasonable if any particular
             restriction or restrictions were deleted or if any part or parts of
             the wording thereof were deleted, restricted or limited in a
             particular manner, then such restrictions will apply with such
             deletions, restrictions or limitations as the case may be.

13.   REMEDIES. The Employee recognises and agrees that a breach of any or all
      of the provisions of clauses 10 or 12 will constitute immediate and
      irreparable harm to the Company's business advantage, including but not
      limited to the Company's valuable business relations, for which damages
      cannot be readily calculated and for which damages are an inadequate
      remedy. The Employee therefore agrees that the Company will be entitled to
      seek an injunction or any other equitable remedy against the Employee in
      the event of a breach of any or all of the provisions of clauses 10 or 12
      by the Employee.

14.   INTELLECTUAL PROPERTY. During the Employment, the Employee will disclose
      to the Company all ideas, inventions and business plans which the Employee
      develops during the course of the Employment which relate directly or
      indirectly to the Company's business, including but not limited to any
      computer programs, processes, products or procedures which may, upon
      application, be protected by patent or copyright. Ownership of any such
      invention will be determined in accordance with Section 39 of The Patents
      Act 1977. Any such idea or business plans will be the property of the
      Company. The Employee will, at the Company's request and cost, (i) provide
      the Company with such assurances as are appropriate or necessary to secure
      a patent or copyright in respect of any such ideas, inventions or business
      plans and (ii) execute and do all instruments and things necessary to vest
      all right, title and interest in and to any such ideas, inventions and
      business plans in the Company or its nominee absolutely as legal and
      beneficial owner. Further, in consideration of the Company entering into
      this Agreement, the Employee hereby assigns to the Company by way of
      assignment of future copyright, the copyright, designer and other
      proprietary rights, if any, for the full term thereof throughout the world
      in respect of all copyright works created or made by the Employee during
      the Employment (except only those copyright works created or made by the
      Employee wholly unconnected with the Employment).

15.   PRINCIPLES AND POLICIES. The Employee will abide by the Company's
      principles and policies, including eLoyalty Corporation Principles and
      Policies of Business Conduct, as amended from time to time, which is
      incorporated herein by reference.

16.   ASSIGNMENT. The Employee acknowledges that the services to be rendered
      pursuant to this Agreement are unique and personal. Accordingly, the
      Employee may not assign any of the Employee's rights or delegate any of
      the EMPLOYEE'S duties or obligations under this Agreement. The Company may
      assign its rights, duties or obligations under this Agreement to a member
      of the Group or a purchaser or transferor of a majority of the US Parent's
      or the Company's outstanding capital stock or a purchaser of all, or
      substantially all, of the assets of the US Parent or the Company.

                                       9
<PAGE>   10

17.   NOTICES.

      17.1   All notices will be in writing.

      17.2   Notices intended for the Company will be sent by registered or
             certified mail addressed to the Company at Regina House, 5 Queen
             Street, London EC4N 1SP, Attention: President, with a copy to
             eLoyalty Corporation at Two Conway Park, 150 Field Drive, Suite
             250, Lake Forest, Illinois 60045, USA, Attention: General Counsel.

      17.3   Notices intended for the Employee will be either delivered
             personally to the Employee or sent by registered or certified mail
             addressed to the Employee's last known address.

      17.4   Any such notice given pursuant to this clause 17 will be deemed to
             have been received and effectively served:

             (a)  upon delivery if delivered personally; or

             (b)  upon the next following business day (as defined below) if
                  sent by registered or certified mail.

18.   STATUTORY PARTICULARS. The written particulars of employment required to
      be given under the provisions of Section I of the Employment Rights Act
      1996 are, unless otherwise previously set out above, stated in Schedule 1
      attached hereto. Terms used in Schedule 1 but not defined therein have the
      meaning ascribed thereto in this Agreement.

19.   ENTIRE AGREEMENT. This Agreement (including attachments hereto)
      constitutes the entire agreement between the Company and the Employee
      relating to the Employment and supersedes any prior agreement (whether
      oral or written) relating to his employment by the Company. Neither the
      Employee nor the Company may modify this Agreement by oral agreements,
      promises or representations. The parties may modify this Agreement only by
      a written instrument signed by the parties.

20.   APPLICABLE LAW AND JURISDICTION. The validity, construction and
      performance of this Agreement will be governed by English law.

21.   SEVERABILITY. Whenever possible, each provision of this Agreement will be
      interpreted in such manner as to be effective and valid under applicable
      law, but if any provision of this Agreement is held to be prohibited by or
      invalid under applicable law, such provision will be ineffective only to
      the extent of such prohibition or invalidity, without invalidating the
      remainder of such provision or the remaining provisions of this Agreement.

22.   HEADINGS. Headings are for ease of reference only and will not affect the
      meaning or construction of any provision in this Agreement.

                                       10
<PAGE>   11

23.   ACKNOWLEDGEMENT. The Employee acknowledges that the Employee has read,
      understood and accepts the provisions of this Agreement.

                                   SIGNATURES

IN WITNESS WHEREOF, this Contract of Employment has been duly executed by the
parties on the date first set forth above.

For and on behalf of
eLOYALTY (U.K.) LIMITED

By:
   ---------------------------------------------
Name:       Kelly Conway
Position:   Director and Chief Executive Officer

THE EMPLOYEE

-------------------------------
Vaughan Thomas

                                       11

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