Document:

Exhibit 10.1

ASSET PURCHASE AGREEMENT

This
ASSET PURCHASE AGREEMENT (the “Agreement”) is made as of October 27,
2006, by and between DynTek, Inc., a Delaware corporation (“Parent”),
DynTek Canada Inc., an Ontario corporation and wholly owned subsidiary of Parent
(“Buyer”), Sensible Security Solutions Inc., an Ontario corporation (“Seller”),
3849597 Canada Inc., a Canadian corporation (the “Shareholder”) and Paul
Saucier, a natural person who is the President of Seller and who owns
indirectly all of the issued and outstanding common shares of Seller (the “Principal
Owner” and collectively with the Shareholder, the “Principal Owners”).  Capitalized terms used herein and not defined
herein are defined in Exhibit A attached hereto.

R E C I T A L S

WHEREAS, Seller is
engaged in the business of providing information technology service offerings
including, among other things, hardware and software management and
integration, network and custom software design, project management and
consulting services (the “Business”);

WHEREAS, Buyer desires to
purchase and Seller desires to sell to Buyer substantially all of the assets of
the Business, subject to the terms and conditions of this Agreement; and

WHEREAS, the Board of
Directors of Parent and Buyer, in accordance with the laws of their respective
jurisdictions of organization and their respective charter documents, and the
Board of Directors and the sole shareholder of Seller, in accordance with the
laws of the Province of Ontario and Seller’s constating documents, have
approved this Agreement upon the terms and subject to the conditions set forth
in this Agreement.

A G R E E M E N T

NOW, THEREFORE, in
consideration of the terms, covenants, and conditions hereinafter set forth,
the parties hereto agree as follows:

ARTICLE I

PURCHASE OF ASSETS; ASSUMPTION OF LIABILITIES

1.1          Purchased Assets.  Subject to the terms and conditions of this
Agreement, Buyer hereby agrees to purchase from Seller, and Seller hereby
agrees to sell, convey, transfer and assign to Buyer, on the Closing Date (as
hereinafter defined), all of Seller’s right, title and interest in and to the
assets of Seller used in connection with the Business, other than the Excluded
Assets (collectively, the “Purchased Assets”), free and clear of any and
all Encumbrances, except for the Permitted Encumbrances (as hereinafter
defined) set forth on Schedule 1.1 and other than the restrictions on
the transfer of the Assigned Contracts. 
The Purchased Assets shall include, but shall not be limited to, the
following:

 

(a)           All of Seller’s rights
and obligations under all of the agreements of the Seller relating to the
Business, all of which are identified on Schedule 1.1(a) attached hereto
(collectively the “Assigned Contracts”);

(b)           All of Seller’s
accounts or notes receivable from and including October 1, 2006, and all cash
and cash equivalents, related to the Business, all of which are identified on Schedule
1.1(b) attached hereto and all schedules, records and other documentation
related to such accounts or notes receivable, and cash or cash equivalents;

(c)           All of Seller’s
supplies, computers, equipment, furniture and fixtures, and all other tangible
personal property owned by Seller and used in connection with the conduct of
the Business, all of which, to the extent each individual asset has an
undepreciated value in excess of Two Thousand Five Hundred Dollars ($2,500),
shall be identified in the fixed asset schedule to be attached hereto as Schedule
1.1(c) (the “Fixed Assets”);

(d)           All of Seller’s books
and records directly related to, or used in connection with, the conduct of the
Business or pertaining to the Purchased Assets, regardless of the medium on
which such information is stored or maintained including, without limitation,
all customer and employment records, vendor information and contracts, business
plans and strategies, financial and operational data and reports, and marketing
information and materials;

(e)           To the extent
transferable, all of Seller’s licenses, permits or other authorizations of
governmental or regulatory entities that are required under any laws, rules and
regulations applicable to or affecting the Business, all of which are set forth
on Schedule 1.1(e);

(f)            All of Seller’s owned
and leased real property, including any leasehold improvements thereon, all of
which are identified in the real property schedule attached hereto as Schedule 1.1(f);

(g)           All of Seller’s
inventory, a detailed list of which shall be set forth on Schedule 1.1(g);

(h)           All of Seller’s
Intellectual Property Rights which are set forth on Schedule 1.1(h);

(i)            All insurance
benefits, including rights and proceeds, arising from or relating to the
Purchased Assets or the Assumed Obligations (as defined herein);

(j)             All advance payments,
claims for refunds, deposits and other prepaid items as of the Closing Date;

(k)           All of Seller’s claims,
including claims against third parties, relating to the Purchased Assets,
whether choate or inchoate, known or unknown, contingent or ascertained; and

(l)            The goodwill
associated with the Purchased Assets and the Business.

1.2          Excluded Assets.  The Purchased Assets being purchased by Buyer
hereunder shall include all of the assets of Seller with the exception of the
particular assets set forth on Schedule 1.2, which assets shall be
retained by Seller (collectively, the “Excluded Assets”).

 

1.3          Assumed Obligations.  Buyer hereby agrees to assume only those
obligations at the Closing and effective as of the Effective Time, and agrees
to pay, perform and discharge only those liabilities and obligations accruing
due and relating to the period subsequent to the Effective Time under the
Assigned Contracts and the accounts payable specifically identified on Schedule 1.3
(collectively, the “Assumed Obligations”).  The Assumed Obligations shall only include those
obligations or liabilities arising out of any default under any Assumed
Obligation that occurs subsequent to the Effective Time, and Buyer shall not be
obligated to assume any Assumed Obligation which is in default prior to the
Closing Date, or which default arises from the operations of Seller prior to
the Effective Time, unless otherwise expressly provided for in this Agreement.

1.4          Liabilities Not Being
Assumed.  Except for the Assumed
Obligations, Seller agrees that Buyer shall not be obligated to assume or
perform, and is not assuming or performing, any liabilities or obligations of
Seller, whether known or unknown, fixed or contingent, certain or uncertain,
and regardless of when such liabilities or obligations may arise or may have
arisen or when they are or were asserted (the “Retained Liabilities”),
and Seller shall remain responsible for all Retained Liabilities, which shall
include, without limitation, any and all of the following obligations or
liabilities of Seller:

(a)           Any compensation or benefits
payable to present or past employees of Seller arising in connection with their
employment by Seller, including without limitation, any liabilities arising
under the Employment Standards Act
(Ontario), any employee pension or profit sharing plan or other employee
benefit plan and any of Seller’s obligations for vacation, holiday or sick pay,
any obligations under any employment, consulting or non-competition agreement
to which Seller is a party, whether written or oral, and any liabilities or
obligations arising out of the termination by Seller of any of its employees in
anticipation or as a consequence of, or following, consummation of the
transactions contemplated hereby;

(b)           All federal,
provincial, local, foreign or other taxes (i) that have arisen prior to the
Closing Date or may arise thereafter out of business or other operations
conducted by Seller either prior to or after the Closing Date, or (ii) for
which Seller is or, at any time hereafter, may become liable; provided,
however, that the Retained Liabilities shall not include any taxes arising out
of the conduct by Buyer, on or after the Closing Date, of the Business, or the
ownership, on or after the Closing Date, of the Purchased Assets;

(c)           All Encumbrances except
for the Permitted Encumbrances on any of the Purchased Assets and all
obligations and liabilities secured thereby that are not Assumed Obligations;

(d)           All accounts or notes
payable obligations for borrowed money, all purchase money obligations and any
other indebtedness or payment obligations of Seller, other than those
specifically identified on Schedule 1.3; and

(e)           Any claims, demands,
actions, suits or legal proceedings that have been asserted or threatened prior
to the Closing Date against Seller, the Business or the Purchased Assets or
which may be asserted or threatened hereafter against the Purchased Assets, the
Business or Buyer that arise in any way from or in connection with Seller’s
operation of the Business prior to the Closing Date.

 

ARTICLE II

CONSIDERATION FOR PURCHASED ASSETS

2.1          Purchase Price.  As consideration for (i) the sale to Buyer of
the Purchased Assets, and (ii) the assumption of the Assumed Liabilities, Buyer
shall pay Seller the “Closing Consideration” set forth in
Section 2.2 below and the “EBITDA Earn-Out Consideration” set forth
in Section 2.3 below (collectively, the “Purchase Price”).

2.2          Closing Consideration.  On the Closing Date, Buyer shall pay to
Seller each of the following:

(a)           A cash payment of One
Million Two Hundred Thousand Dollars ($1,200,000), which shall be adjusted in
accordance with Section 2.7 and reduced by the amount used by Buyer to pay off
the Secured Obligations (as defined below) as set forth in Section 8.8 (the “Cash
Consideration”).  The Cash
Consideration shall be sent by wire transfer of immediately available funds to
an account designated by Seller.

(b)           A payment of such
number of shares of Parent’s common stock (the “Common Stock”) equal to
Three Hundred Thousand Dollars ($300,000) divided by the Average Per Share
Price.  For purposes of this
Section 2.2 only, the “Average Per Share Price” means the average
of the closing prices per share of the Common Stock as reported on the
Over-the-Counter Bulletin Board (“OTC”) during the fifteen (15) trading
days preceding the Closing Date, provided, however, that in no event shall the
Average Per Share Price be less than Fifteen Cents ($0.15) or more than Twenty
Five Cents ($0.25).

2.3          EBITDA
Earn-Out Consideration.  In addition
to the payments to be made to Seller pursuant to Section 2.2 above, on the
terms and subject to the conditions of this Section 2.3, Seller shall be
entitled to receive certain additional payments (each an “EBITDA Earn-Out
Payment” and collectively the “EBITDA Earn-Out Payments”) contingent
upon the achievement of specified EBITDA (as hereinafter defined) targets as
more fully described herein.

(a)           For the period from
October 1, 2006 through December 31, 2006 (the “First Quarter”),
Buyer shall pay to Seller $1,000,000;

(i)            minus the difference
between: (A) $1,000,000; and (B) EBITDA earned by the combined
operation of the Purchased Assets and Buyer’s operations in Canada
(collectively the “Canadian Business”) during the First Quarter (“First
Quarter EBITDA”); and

(ii)           minus: (A) if First
Quarter EBITDA earned by the Canadian Business is less than $125,000, the full
amount of the First Quarter EBITDA earned by the Canadian Business; (B) if
First Quarter EBITDA earned by the Canadian Business is greater than $125,000
and less than $250,000, $1.00 for each dollar that First Quarter EBITDA earned
by the Canadian Business is less than $250,000 (not to exceed $125,000); or
(C) if First Quarter EBITDA earned by the Canadian Business is equal to or
greater than $250,000 then by zero dollars.

 

(iii)          The consideration to be
paid, if any, pursuant to this Section 2.3(a) shall be referred to as the “First
Quarter EBITDA Consideration.”

(b)           For the period from
October 1, 2006 through March 31, 2007 (the “Second Quarter”), Buyer
shall pay to Seller $2,000,000;

(i)            minus the difference
between: (A) $2,000,000; and (B) EBITDA earned by the Canadian Business during
the Second Quarter (“Second Quarter EBITDA”);

(ii)           minus: (A) if Second
Quarter EBITDA earned by the Canadian Business is less than $250,000, the full
amount of the Second Quarter EBITDA earned by the Canadian Business; (B) if
Second Quarter EBITDA earned by the Canadian Business is greater than $250,000
and less than $500,000, $1.00 for each dollar that Second Quarter EBITDA earned
by the Canadian Business is less than $500,000 (not to exceed $250,000); or (C)
if Second Quarter EBITDA earned by the Canadian Business is equal to or greater
than $500,000 then by zero dollars; and

(iii)          minus the First Quarter
EBITDA Consideration

(iv)          The consideration to be
paid, if any, pursuant to this Section 2.3(b) shall be referred to as the “Second
Quarter EBITDA Consideration.

(c)           For the period from
October 1, 2006 through June 30, 2007 (the “Third Quarter”),
Buyer shall pay to Seller $3,000,000;

(i)            minus the difference
between: (A) $3,000,000; and (B) EBITDA earned by the Canadian
Business during the Third Quarter (“Third Quarter EBITDA”);

(ii)           minus: (A) if
Third Quarter EBITDA earned by the Canadian Business is less than $375,000, the
full amount of the Third Quarter EBITDA earned by the Canadian Business;
(B) if Third Quarter EBITDA earned by the Canadian Business is greater
than $375,000 and less than $750,000, $1.00 for each dollar that Third Quarter
EBITDA earned by the Canadian Business is less than $750,000 (not to exceed
$375,000); or (C) if Third Quarter EBITDA earned by the Canadian Business
is equal to or greater than $750,000 then by zero dollars; and

(iii)          minus the aggregate of the First Quarter EBITDA
Consideration and the Second Quarter EBITDA Consideration.

(iv)          The consideration to be
paid, if any, pursuant to this Section 2.3(c) shall be referred to as the “Third
Quarter EBITDA Consideration.”

(d)           For the period from
October 1, 2006 through September 30, 2007 (the “Fourth Quarter”),
Buyer shall pay to Seller $4,000,000;

(i)            minus the difference
between: (A) $4,000,000; and (B) EBITDA earned by the Canadian
Business during the Fourth Quarter (“Fourth Quarter EBITDA”); and

 

(ii)           minus: (A) if Fourth
Quarter EBITDA earned by the Canadian Business is less than $500,000, the full
amount of the Fourth Quarter EBITDA earned by the Canadian Business;
(B) if Fourth Quarter EBITDA earned by the Canadian Business is greater
than $500,000 and less than $1,000,000, $1.00 for each dollar that Fourth
Quarter EBITDA earned by the Canadian Business is less than $1,000,000 (not to
exceed $500,000); or (C) if Fourth Quarter EBITDA earned by the Canadian
Business is equal to or greater than $1,000,000 then by zero dollars.

(iii)          minus the aggregate of the First Quarter EBITDA
Consideration, the Second Quarter EBITDA Consideration and the Third Quarter
EBITDA Consideration

(iv)          The consideration to be
paid, if any, pursuant to this Section 2.3(d) shall be referred to as the “Fourth
Quarter EBITDA Consideration.”

(v)           In the event that the Fourth Quarter EBITDA Consideration
is a positive number, the Seller shall receive such amount in accordance with
Section 2.5 below.  In the event that the
Fourth Quarter EBITDA Consideration is a negative number, the Seller shall be
obligated to repay to Buyer the absolute value of such amount (the “Repayment
Obligation”) within ten (10) days of the date on which the Final EBITDA
Determination (as defined below) is made with respect to the Fourth Quarter
EBITDA Consideration.  Seller may elect
to satisfy the Repayment Obligation by delivery of cash to Seller or delivery
of Earn-Out Shares, as defined below, pursuant to Section 2.5(c).  In no event shall the amount of the Repayment
Obligation exceed the value of the Earn-Out Shares issued to the Seller in the
First Quarter, Second Quarter and Third Quarter and once the Earn-Out Shares
from such periods have been extinguished in order to satisfy all or part of the
Repayment Obligation, the Buyer and Parent acknowledge and agree that they
shall have no further recourse to the Repayment Obligation from the Seller and
the Principal Owners.

(e)           For the period from
October 1, 2007 through September 30, 2008 (the “Second Year”),
Buyer shall pay to Seller $5,000,000;

(i)            minus the difference
between: (A) $5,000,000; and (B) EBITDA earned by the Canadian
Business during the Second Year (“Second Year EBITDA”); and

(ii)           minus: (A) if
Second Year EBITDA earned by the Canadian Business is less than $750,000, the
full amount of the Second Year EBITDA earned by the Canadian Business;
(B) if Second Year EBITDA earned by the Canadian Business is greater than
$750,000 and less than $1,250,000, $1.00 for each dollar that Second Year
EBITDA earned by the Canadian Business is less than $1,250,000 (not to exceed
$500,000); or (C) if Second Year EBITDA earned by the Canadian Business is
equal to or greater than $1,250,000 then by zero dollars.

(iii)          The consideration to be
paid, if any, pursuant to this Section 2.3(e) shall be referred to as the “Second
Year EBITDA Consideration.”

(f)            For the period from
October 1, 2008 through September 30, 2009 (the “Third Year”),
Buyer shall pay to Seller $10,000,000;

 

(i)            minus the difference
between: (A) $10,000,000; and (B) EBITDA earned by the Canadian
Business during the Third Year (“Third Year EBITDA”); and

(ii)           minus: (A) if
Third Year EBITDA earned by the Canadian Business is less than $1,125,000, the
full amount of the Third Year EBITDA earned by the Canadian Business;
(B) if Third Year EBITDA earned by the Canadian Business is greater than
$1,125,000 and less than $1,650,000, $1.00 for each dollar that Third Year
EBITDA earned by the Canadian Business is less than $1,650,000 (not to exceed
$525,000); or (C) if Third Year EBITDA earned by the Canadian Business is
equal to or greater than $1,650,000 then by zero dollars.

(iii)          The consideration to be
paid, if any, pursuant to this Section 2.3(f) shall be referred to as the “Third
Year EBITDA Consideration.”

(g)           For illustration
purposes only, attached hereto as Schedule 2.3 is an example calculation
of the EBITDA Earn-Out Payments based upon a hypothetical situation.  The attached Schedule 2.3 is intended
to further evidence the intent of the parties with respect to the methodology
used to calculate the EBITDA Earn-Out Payments.

2.4          Determination of EBITDA.  Within forty five (45) days after the end of
any of the EBITDA Earn-Out Payment periods set forth in Section 2.3 (a)
through (f) above (each an “EBITDA Earn-Out Period” and collectively the
“EBITDA Earn-Out Periods”), Buyer and its auditors shall conduct a
review of Buyer’s financial statements as of the end of the then-relevant
Earn-Out Period and shall prepare and deliver to Seller (or Seller’s appointed
representative, as the case may be) a computation of EBITDA earned by the
Canadian Business for such Earn-Out Period (the “EBITDA Earn-Out Notice”).  EBITDA shall be determined in accordance with
GAAP as determined by Buyer and its auditors in their sole discretion.  If Seller disagrees with the computation of
EBITDA earned by the Canadian Business with respect to any EBITDA Earn-Out
Period, Seller may, within ten (10) days after receipt of the EBITDA Earn-Out
Notice, deliver a notice (an “EBITDA Earn-Out Objection Notice”) to
Buyer setting forth Seller’s calculation of EBITDA earned by the Canadian
Business for such Earn-Out Period.  If
Seller does not deliver an Earn-Out Objection Notice within such ten (10) day
period, then EBITDA for the Earn-Out Period shall be deemed finally determined
to be as set forth in the EBITDA Earn-Out Notice.  Buyer and Seller (each a “Party” and
collectively the “Parties” for purposes of this Section 2.4 only)
agree to use reasonable best efforts to resolve any disagreements as to the
computation of EBITDA for any particular Earn-Out Period, but if they do not
obtain a final resolution within thirty (30) days after Buyer has received the
Earn-Out Objection Notice, the Parties shall jointly retain an independent
accounting firm of recognized national standing to resolve any remaining
disagreements (the “Firm”).  The
Parties shall direct the Firm to render a determination within thirty (30) days
after its retention and the Parties agree to cooperate with the Firm during its
engagement.  The Firm will consider only
those items and amounts in the calculation of EBITDA earned by the Canadian
Business set forth in the EBITDA Earn-Out Objection Notice which the Parties
are unable to resolve.  The Parties shall
each make written submissions to the Firm promptly (and, in any event, within
thirty (30) days after the Firm’s engagement), which submissions shall contain
such Party’s computation of EBITDA earned by the Canadian Business for the
Earn-Out Period and information, arguments, and support for its position.  The Firm shall review such submissions and
base its determination solely on them. 
In resolving any disputed item, the Firm may not assign a value to any
item greater than the greatest value for such item claimed by either Party or 

 

less than the smallest value for such item
claimed by either Party.  The Firm’s
determination will be based on the definition of EBITDA included herein.  The determination of EBITDA earned by the
Canadian Business for a particular period made by the Firm shall be binding and
conclusive on the parties hereto for all purposes under this Agreement (the “Final
EBITDA Determination”).  All fees of
the Firm shall be paid by the party that proposed the EBITDA earned by the
Canadian Business furthest from the Final EBITDA Determination.  If the Final EBITDA Determination is exactly
half way between the figure for EBITDA earned by the Canadian Business proposed
by each of Buyer and Seller, then Buyer and Seller shall pay equal amounts of
the Firm’s fees.

2.5          Payment of EBITDA
Earn-Out Payments.  The payment by
Buyer of any of the EBITDA Earn-Out Payments set forth in Section 2.3 may
be made in cash or Common Stock, so long as the cash portion shall not be less
than fifty percent (50%) of any such payment.

(a)           To the extent that
Buyer is obligated to make an EBITDA Earn-Out Payment in cash, as determined in
accordance with Section 2.5 above, Buyer shall remit such cash payment to
Seller (or Seller’s appointed representative as the case may be) within fifteen
(15) days of the date on which the EBITDA Earn-Out Notice is first delivered to
the Seller (or Seller’s appointed representative as the case may be).

(b)           To the extent Buyer
determines to pay a portion of any EBITDA Earn-Out Payments in Common Stock,
the number of shares of Common Stock payable to Seller shall be equal to the
quotient obtained by dividing (i) the amount of the applicable EBITDA Earn-Out
Payment less that portion of the EBITDA Earn-Out Payment to be paid in cash, by
(ii) the applicable Average Per Share Price. 
For purposes of this Section 2.5 only, the “Average Per Share Price”
means the average of the closing prices per share of the Common Stock as
reported on the OTC during the ten (10) trading days preceding the final date
of the applicable EBITDA Earn-Out Period, provided, however, that the
applicable Average Per Share Price shall be subject to the following
limitations:

(i)            For each of the First
Quarter EBITDA Consideration, Second Quarter EBITDA Consideration, Third
Quarter EBITDA Consideration and Fourth Quarter EBITDA Consideration, the
Average Per Share Price shall be not less than Twenty Cents ($0.20) per share;

(ii)           For the Second Year
EBITDA Consideration, the Average Per Share Price shall be not less than Twenty
Five Cents ($0.25) per share; and

(iii)          For the Third Year
EBITDA Consideration, the Average Per Share Price shall be not less than Thirty
Cents ($0.30) per share.

(c)           Upon final
determination of the number of shares of Common Stock payable pursuant to
Section 2.5(b) above at the conclusion of any EBITDA Earn-Out Period,
Buyer shall issue certificates representing the applicable number of shares of
Common Stock (the “Earn-Out Shares”) to Seller within ten (10) days of the date
on which the EBITDA Earn-Out Notice is first delivered to the Seller (or Seller’s
appointed representative as the case may be), provided that Seller delivers to
Buyer an executed investor representation letter in a form reasonably
acceptable to Buyer.  Immediately upon
receipt of the Earn-Out Shares with respect to the First Quarter EBITDA
Consideration, the Second Quarter EBITDA Consideration and the Third Quarter
EBITDA 

 

Consideration, Seller shall immediately
deposit the certificates representing such Earn-Out Shares, together with a
stock power or other instrument of transfer endorsed in blank, with Buyer, to
be held in escrow by Buyer.  In the event
there is a Repayment Obligation by Seller to Buyer pursuant to Section
2.3(d)(v), Seller may elect to satisfy such Repayment Obligation by delivery to
Buyer of such number of Earn-Out Shares having a value equal to the amount of
the Repayment Obligation.  For purposes
of this Section 2.5(c), the value per share of the Buyer’s Common Stock shall
be the weighted average value per share of all of the Earn-Out Shares held in
escrow by Buyer, using the Average Per Share Price used to calculate the number
of Earn-Out Shares issued to Seller.  In
the event Seller does not repay the Repayment Obligation within ten (10) days
of the Final EBITDA Determination with respect to the Fourth Quarter EBITDA
Consideration, Seller shall be deemed to have elected to pay the Repayment
Obligation by the transfer of Earn-Out Shares. 
Any Earn-Out Shares not transferred back to Buyer pursuant to this
Section 2.5 shall be promptly delivered to Seller.

(d)           If a Final EBITDA
Determination reveals that the respective EBITDA Earn-Out Payment was less than
the Final EBITDA Determination amount, then such respective EBITDA Earn-Out
Payment shall be increased by an amount obtained by subtracting the EBITDA
Earn-Out Payment from the respective Final EBITDA Determination amount (the “Deficiency”).  Deficiencies shall be payable by Buyer to
Seller in immediately available funds, within ten (10) days of the date on
which the Firm has delivered its determination for such matter.

(e)           If a Final EBITDA
Determination reveals that the respective EBITDA Earn-Out Payment was greater
than the Final EBITDA Determination amount, then such respective EBITDA
Earn-Out Payment shall be decreased by an amount obtained by subtracting the
Final EBITDA Determination amount from the respective EBITDA Earn-Out Payment
(the “Over Payment”).  Over
Payments shall be payable by Seller to Buyer in immediately available funds,
within ten (10) days of the date on which the Firm has delivered its
determination for such matter or Buyer may set off the aggregate of such amount
against a future EBITDA Earn-Out Payment.

2.6          Issuance of Restricted
Shares.  To the extent any shares of
Common Stock are issued to pay some of the Closing Consideration or a portion
of any EBITDA Earn-Out Payment as set forth in Section 2.5 above, such
shares shall be issued pursuant to a private placement transaction and shall
not have been, and, except as set forth in Section 6.6 below, are not
being, registered under the Securities Act of 1933, as amended (the “Securities
Act”), or any applicable state securities laws, and are, therefore, subject
to certain restrictions on transferability. 
All shares of Common Stock to be issued pursuant to this Agreement will
be duly authorized, validly issued, fully paid and nonassessable.

2.7          Adjustment to Cash Consideration.  The Cash Consideration shall be adjusted to
reflect the amount of net working capital on Seller’s Balance Sheet (as
hereinafter defined) on the Closing Date (the “Net Working Capital”).  For purposes of this Agreement, “Net Working
Capital” means current assets less current liabilities as such terms shall be
determined in accordance with United States generally accepted accounting
principles (“GAAP”), provided, however, that, whether or not required by GAAP,
current liabilities shall include, without limitation, expenses of Seller
relating to the transaction contemplated by this Agreement and expenses
relating to severance payments.

 

(a)           Seller agrees to
deliver an estimate of the Net Working Capital on the Closing Date (the “Estimated
Net Working Capital”).  If the
Estimated Net Working Capital is less than Two Hundred Fifty Thousand Dollars
($250,000) (the “Target Net Working Capital”), Buyer will decrease the
Cash Consideration by the amount which is obtained by subtracting the Estimated
Net Working Capital from the Target Net Working Capital.  If the Estimated Net Working Capital is
greater than the Target Net Working Capital, Buyer will increase the Cash
Consideration by the amount which is obtained from subtracting the Target Net
Working Capital from the Estimated Net Working Capital.

(b)           Within thirty (30) days
following the Closing Date, Buyer will provide Seller with its final
calculation of the Net Working Capital (“Buyer’s Net Working Capital
Calculation”).  Seller shall have
thirty (30) days to review Buyer’s Net Working Capital Calculation, which shall
be final and binding upon Seller unless Seller disputes the same in writing
within such thirty (30) day period. 
Seller may dispute Buyer’s Net Working Capital Calculation by specifying
in reasonable detail the nature of the disagreement, the basis for such
disagreement and Seller’s calculation of the Net Working Capital.  In the event Seller so notifies Buyer in
writing within such thirty (30) day period of any such dispute, Buyer and Seller
shall attempt to resolve all such disputes in writing, and the Net Working
Capital shall be adjusted to reflect any such resolution.  If Buyer and Seller are unable to resolve all
such disputes within fifteen (15) days after such notification, then the
matters still in dispute shall be submitted to an accounting firm mutually
acceptable to Buyer and Seller.  If Buyer
and Seller are unable to agree on the choice of an accounting firm, then the
accounting firm will be an accounting firm independent with respect to both
Buyer and Seller selected by Seller and Buyer from a list of such firms
compiled by Seller and the auditors of Buyer (the “Arbitrating Accountants”).  Buyer and Seller shall be afforded the
opportunity to present to the Arbitrating Accountants (with copies to be
provided to the other party) any material related to the unresolved disputes
and to discuss the issues with the Arbitrating Accountants.  The Arbitrating Accountants shall determine
the amount of each of the items being disputed and notify the parties of the
Arbitrating Accountants’ determinations in writing within thirty (30) days
after the submission of the unresolved disputes to the Arbitrating
Accountants.  The Arbitrating Accountants
shall resolve all remaining points of disagreement with respect to the
calculation of the Net Working Capital, which resolution shall be final and
binding upon Buyer and Seller with no right of appeal.  In making such final resolution, the
Arbitrating Accountants may only consider those matters identified by Buyer and
Seller to be in dispute and may only determine the Net Working Capital to be an
amount equal to the amount proposed by Buyer, the amount proposed by Seller or
some amount within the range of the amounts proposed by Buyer and Seller.  In resolving any disputed item, the
Arbitrating Accountants may not assign a value to any item greater than the
greatest value for such item claimed by either party or less than the smallest
value for such item claimed by either party. 
The final determination of Net Working Capital as calculated pursuant to
this Section 2.7(b) shall be referred to herein as the “Final Net
Working Capital”.  All fees of the
Arbitrating Accountants shall be paid by the party that proposed the Net
Working Capital furthest from the Final Net Working Capital determined by the
Arbitrating Accountants.  If the Final
Net Working Capital determined by the Arbitrating Accountants is exactly half
way between the Final Net Working Capital proposed by each of Buyer and Seller,
then Buyer and Seller shall pay equal amounts of the Arbitrating Accountants’
fees.

(c)           If the Final Net
Working Capital as determined in accordance with Section 2.7(b) above is
different from the Estimated Net Working Capital as determined in
Section 2.7(a) above 

 

then such discrepancy shall be resolved as
set forth herein.  To the extent the
Final Net Working Capital is less than the Estimated Net Working Capital,
Seller agrees to pay Buyer, in immediately available funds, within ten (10)
days of the date on which the Final Net Working Capital is determined, the
amount obtained by subtracting the Final Net Working Capital from the Estimated
Net Working Capital (the “Working Capital Adjustment”).  If Seller fails to pay the Working Capital
Adjustment within the required time period, Buyer shall, along with other
remedies that may be available to Buyer, be entitled to deduct such amount in
the aggregate from an EBITDA Earn-Out Payment. 
To the extent the Final Net Working Capital is greater than the
Estimated Net Working Capital, Buyer agrees to pay Seller, in immediately
available funds, within ten (10) days of the date on which the Final Net
Working Capital is determined, the amount obtained by subtracting the Estimated
Net Working Capital from the Final Net Working Capital.

2.8          Allocation of Purchase
Price.

(a)           The parties agree to
allocate the Purchase Price among the Purchased Assets for all purposes
(including financial accounting and tax purposes) in accordance with the
allocation schedule attached hereto as Schedule 2.8.  The Seller and the Buyer acknowledge that
such allocation represents the fair market value of the Purchased Assets
arrived at by arms’ length negotiations and shall be binding upon the parties
for all applicable Taxes. The Seller and the Buyer each covenant to report
proceeds of acquisition or cost of acquisition, as the case may be, in a manner
consistent with Schedule 2.8 on all Tax returns filed by each of them
subsequent to Closing and not to voluntarily take any inconsistent position
therewith in any administrative or judicial proceeding relating to such
returns, without the prior written consent of the other party, which consent
shall not be arbitrarily or unreasonably withheld.

(b)           The Buyer and the
Seller will, at the Closing Date, jointly execute elections, in prescribed form
and containing the prescribed information to have the provisions of subsection
167(1) of the Excise Tax Act
apply to the purchase and sale of the Purchased Assets hereunder in order to
minimize the tax payable in respect of such purchase and sale under Part IX of
the Excise Tax Act.  The Buyer will file such elections with CRA
within the times prescribed by the applicable legislation.

2.9          Transfer Taxes, Etc.

(a)           Subject to subsection
2.9(b), the Buyer shall pay to the Seller or, where permitted by applicable
law, directly to the appropriate governmental authority, all commodity and
transfer taxes, registration charges and transfer fees, including GST and ORST
payable by it in respect of the purchase and sale of the Purchased Assets under
this Agreement.

(b)           Without limiting the
applicability of Section 1.1 hereof, each of the Seller and the Buyer shall use
reasonable commercial efforts to minimize the amounts referred to in Section
2.9(a), including executing and delivering exemption certificates and similar
documents to the extent applicable.

 

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF SELLER AND THE
PRINCIPAL OWNERS

Subject to the
disclosures and exceptions set forth in the disclosure schedules attached
hereto (the “Seller’s Disclosure Schedules”), Seller and the Principal
Owners hereby jointly and severally make the representations and warranties set
forth hereinafter in this Article III to Buyer:

3.1          Authority and Binding
Effect.  Seller has the full
corporate power and authority to execute and deliver this Agreement and the
Bill of Sale (as hereinafter defined). 
This Agreement, and the Bill of Sale, and the consummation by Seller of
its obligations contained herein and therein, have been duly authorized by all
necessary corporate actions of Seller, including shareholder approval which
approval is a condition to Closing, and such agreements have been duly executed
and delivered by Seller.  This Agreement
is a valid and binding agreement of Seller, enforceable against Seller in
accordance with its terms, subject to shareholder approval, and upon execution
and delivery, the Bill of Sale will be a valid and binding agreement of Seller
and shall be enforceable against it in accordance with its terms, except as
enforceability of the obligations of Seller under this Agreement and the Bill
of Sale may be limited by (i) bankruptcy, insolvency, moratorium or other
similar laws affecting creditors’ rights generally, and (ii) general principles
of equity relating to the availability of equitable remedies (whether such
agreements are sought to be enforced in a proceeding at law or a proceeding in
equity).  Except as set forth on Schedule 3.1,
and except for approval of the shareholders of Seller and consents necessary
for assignment of Assigned Contracts, it is not necessary for Seller to take
any action or to obtain any approval, consent or release by or from any third
person, government or other, to enable Seller to enter into or perform its
obligations under this Agreement and the Bill of Sale.

3.2          Organization and
Standing.  Seller is a
corporation duly formed, validly existing and in good standing under the laws
of Ontario and Seller is qualified to do business in each jurisdiction where
such qualification is necessary and where the failure to be so qualified would
have a Material Adverse Effect on Seller. 
Seller has the requisite corporate power and authority to conduct its
business as now conducted and to own or lease the Purchased Assets, and to use
such Purchased Assets in the conduct of its Business.  True and complete copies of the constating
documents of Seller have been delivered to Buyer.  Seller is not in violation of its constating
documents.  Seller has no subsidiaries.

3.3          Financial Statements.  Seller has delivered to Buyer unaudited
notice to reader financial statements of Seller consisting of balance sheets as
of the end of, and the related statements of income and cash flows for, each of
the years in the three-year period ended December 31, 2005, and an unaudited balance
sheet and related statements of income and cash flows for the period beginning
January 1, 2006 and ending September 30, 2006 (collectively, the “Financial
Statements”).  True and correct
copies of the Financial Statements are attached hereto as Schedule 3.3.
The Financial Statements were prepared in accordance with GAAP, consistently
applied, and fairly present, on an accrual basis, the financial condition of
Seller and the results of its operations as at the relevant dates thereof and
for the respective periods covered thereby. 
Seller has no debts, obligations or liabilities, fixed or contingent, of
a nature that would be required, in accordance with GAAP, to be shown on a
balance sheet and that are not shown on the balance sheet as of the nine (9) month
period 

 

ended September 30, 2006 (the “Balance
Sheet”), other than liabilities incurred after September 30, 2006 in
the ordinary course of Seller’s Business and consistent with past practices.

3.4          Absence of Certain
Changes.  Except as set forth on Schedule 3.4,
since September 30, 2006, there has not been:

(a)           any sale, transfer, or
other disposition of, or the incurrence or imposition of, any Encumbrance of
any kind on or affecting, any of the Purchased Assets;

(b)           any damage, destruction
or loss, whether or not covered by insurance, of any of the Purchased Assets;

(c)           the entry or violation
of any judgment, order, writ or decree that has had or could reasonably be
expected to have a Material Adverse Effect on Seller;

(d)           any material default or
breach or any amendment, termination or revocation or, to the Knowledge of
Seller, any written threatened termination or revocation of, any of the
Assigned Contracts;

(e)           any actual or
threatened amendment, termination or revocation of any license, permit or franchise
required for the continued operation of the Business; or

(f)            the occurrence of any
other event or circumstance which has or could reasonably be expected to have a
Material Adverse Effect on Seller.

3.5          Title to and Condition
of Purchased Assets.

(a)           Fixed Assets.  The
Fixed Assets are in good working order and condition, ordinary wear and tear
excepted, have been properly maintained, are suitable for the uses for which
they are being utilized in the Business and comply with all requirements under
applicable laws, regulations and licenses which govern the use and operation
thereof.

(b)           Title to and Adequacy of Purchased Assets.  Except as disclosed on Schedule 3.5
hereto, Seller has, and on the Closing Date will convey and transfer to Buyer,
good, complete and marketable title to all of the Purchased Assets, free and
clear of all Encumbrances other than the Permitted Encumbrances of any nature
whatsoever other than restrictions on transfer of Assigned Contracts.  Except as set forth on Schedule 3.5,
all of the Purchased Assets are in the exclusive possession and control of
Seller and Seller has the unencumbered right to use, and to sell to Buyer in
accordance with the terms and provisions of this Agreement, all of the
Purchased Assets without interference from and free of the rights and claims of
others.  The Purchased Assets constitute
all of the assets, properties, rights, privileges and interest which Seller
either owns or controls, or uses or holds for use exclusively in connection
with the Business and which are necessary for Buyer to own and operate the
Business as currently conducted and as proposed to be conducted.

 

3.6          Intellectual Property.

(a)           Set forth on Schedule
1.1(h) is a complete list of all Intellectual Property Rights, owned,
licensed or used (except as otherwise set out therein) by the Seller in
connection with the Business that will be transferred to Buyer (the “Business
Intellectual Property Rights”). 
Except as set out in Schedule 1.1(h), all of the Business Intellectual
Property Rights are either owned or used under license by Seller, as indicated
on Schedule 1.1(h).  Use by Seller
of the Business Intellectual Property Rights owned by Seller, and, to the
Knowledge of Seller and the Principal Owner, use by Seller of the Business Intellectual
Property Rights licensed by Seller, do not infringe upon or misappropriate the
Intellectual Property Rights of any third party and no third party has provided
Seller with notice of any such possible violation.  Seller is not aware of any valid basis for
any claim of the type specified in this Section 3.6(a).  To the Knowledge of Seller and the Principal
Owner, no third party is violating, infringing, or misappropriating any
Business Intellectual Property Right.

(b)           Seller has not granted
any licenses to third parties with respect to the Business Intellectual
Property Rights. The execution, delivery and performance of this Agreement and
the transactions contemplated hereby will not in any way impair the right of
Buyer to use any Business Intellectual Property Rights or portion thereof.

(c)           Each current and former
employee, independent contractor and consultant of the Seller who has
participated in any material respect in the development of any Business
Intellectual Property Rights has properly assigned such individual’s rights in
such Business Intellectual Property Rights to Seller.  No Seller stockholder, employee or
contractor, nor any of their respective affiliates, has any right, title or
interest in or to any Business Intellectual Property Right.

(d)           To the Knowledge of
Seller and the Principal Owner, no employee of Seller is in violation of any
term of any employment contract, invention disclosure agreement or any other
contract or agreement relating to Seller’s Business.

(e)           Except as set forth in Schedule
1.1(h), none of the Seller’s proprietary software or, to the Knowledge of
Seller or the Principal Owner, any software licensed to the Seller to which the
Seller has made modifications contains, is based on or derived from, was
developed using or with reference to or is distributed or linked (statically or
dynamically) with any open source software licensed or distributed pursuant to
any public license.

(f)            The Business
Intellectual Property Rights constitute all of the intellectual property rights
necessary for the conduct of the Business as presently conducted by Seller.

3.7          The Assigned Contracts
and Other Agreements.  Accurate and
complete copies of all of the Assigned Contracts have been furnished by Seller
to Buyer.  Each of the Assigned Contracts
is a valid and binding obligation of Seller and, to Seller’s Knowledge, the
other parties thereto, enforceable in accordance with its terms, except as may
be affected by bankruptcy, insolvency, moratorium or similar laws affecting
creditors’ rights generally and general principles of equity relating to the
availability of equitable remedies. 
There have not been any defaults by Seller or, to the Knowledge of
Seller, defaults or any claims of default or claims of nonenforceability by the
other party or parties under or with respect to any of the Assigned Contracts
which, individually or in 

 

the aggregate, would have a Material Adverse
Effect on Seller, and to the Knowledge of Seller there are no facts or
conditions that have occurred or that are anticipated to occur which, with the
passage of time or the giving of notice, or both, would constitute a default by
Seller, or to the Knowledge of Seller, by the other party or parties, under any
of the Assigned Contracts or would cause a creation or imposition of any
Encumbrance upon any of the Purchased Assets or otherwise would have a Material
Adverse Effect on Seller.  None of the
Assigned Contracts contains any provisions which, after the date hereof, would
hinder or prevent Buyer from continuing to use any of the assets or property,
tangible or intangible, that are the subject of the Assigned Contract in the
manner in which they are currently used.

3.8          Conflicts.  Subject to obtaining all necessary consents
to assignments of Assigned Contracts, neither the execution and delivery of,
nor the consummation of, the transactions contemplated by this Agreement or the
Bill of Sale will or could result in: 
(a) a default or an event that, with notice or lapse of time, or both,
would be a default, breach or violation of the constating documents of Seller,
or of any Assigned Contract; (b) the creation or imposition of any Encumbrance
other than the Permitted Encumbrances on any of the Purchased Assets; (c) the
violation or breach of any writ, injunction or decree that would become or is
now applicable to or binding on any of the Purchased Assets; (d) a loss or
adverse modification of any license, franchise, permit or other authorization
or right (contractual or other) to operate Seller’s Business or to own any of
the Purchased Assets, granted to or otherwise held by Seller or used in its
Business, which would have a Material Adverse Effect on Seller; (e) the right
to cease or terminate any other business relationship or arrangement between
Seller and any third party that would have a Material Adverse Effect on Seller;
(f) the right to terminate any Assigned Contract, or the acceleration of the
maturity of any indebtedness or other obligation of Seller which would have a
Material Adverse Effect on Seller, or (g) any other consequence that would have
a Material Adverse Effect on Seller.

3.9          Customers.  Schedule 3.9 attached hereto
contains correct and current lists of Seller’s ten (10) largest customers, in
terms of the revenues generated from the conduct of Seller’s Business, in the
twenty (20) month period ended August 31, 2006, showing the approximate
aggregate dollar amount of revenues from each such customer during such
period.  Seller has no written
information and no Knowledge that any of the customers listed on Schedule 3.9
intends to cease doing business, or not renew contracts, with Seller, or Buyer
after the Closing Date, or alter materially the amount of the business that any
of them is presently doing with Seller, or will require, as a condition to the
continuation of its business relationship with Seller, or Buyer after the
Closing Date, a change in the prices at or any other material terms under which
any of such customers has been doing business with Seller.

3.10        Warranties and
Liabilities.  Schedule 3.10
attached hereto sets forth the product return policies (the “Return Policies”)
of, and all Warranties (as hereinafter defined) given or made by, Seller
relating to its Business.  “Warranties”
shall mean all service, repair, replacement and other obligations based upon,
or arising out of, express and implied warranties made or deemed made in
connection with Seller’s Business.  Since
August 31, 2006, Seller has not extended or granted any return rights or given
or made any Warranties with respect to its Business, except for those set forth
on Schedule 3.10.  Since
August 31, 2006, none of Seller’s customers has claimed to Seller that Seller’s
products or services are defective. 
Seller does not know of any products or services which have been
delivered by Seller since August 31, 2006, in a condition that such products or
services 

 

might reasonably be expected to be returned
by the customers of the Business, and Seller has not received written notice of
any intention on the part of any such customer to return any of Seller’s
products.  Except as otherwise set forth
on Schedule 3.10, Seller does not have any Knowledge of any present
or future claim against Seller, whether or not fully covered by insurance, for
liability on account of negligence or product liability or on account of any
Return Policies or Warranties of the Business which would have, individually or
in the aggregate, a Material Adverse Effect on Seller, and adequate reserves
have been set aside in Seller’s financial statements for claims relating to
Warranties and product returns.

3.11        Insurance.  Seller has delivered to Buyer true and
correct copies of all insurance policies, including those relating to coverage
for fire, general liability, worker’s compensation, errors and omissions,
malpractice and other forms of insurance maintained by or on behalf of Seller
in connection with its Business as protection for the Purchased Assets (the “Insurance
Policies”).  All of such policies are
now in full force and effect.  A brief
description of each of the Insurance Policies is set forth on Schedule 3.11
attached hereto.  Seller has not received
any notice of cancellation or material amendment of any such policies.  No coverage thereunder is being disputed; and
all material claims thereunder have been filed in a timely manner.

3.12        Compliance with
Law/Permits.

(a)           Except as set forth on Schedule 3.12(a),
insofar as the Business is concerned, Seller is in compliance with all, and is
not in violation of any, law, ordinance, order, decree, rule or regulation of
any governmental or regulatory agency or authority, the violation of, or
noncompliance with, which could have a Material Adverse Effect on Seller.  Except as set forth on Schedule 3.12(a),
no (i) charges of violations of laws or regulations relating to its Business
have been made or, to Seller’s Knowledge, threatened, (ii) proceedings or
investigations relating to its Business are pending or, to Seller’s Knowledge,
have been threatened, and (iii) citations or notices of deficiency have been
issued or, to Seller’s Knowledge, have been threatened, against Seller relating
to or arising out of its Business by any governmental or regulatory
authorities, which has had or could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Seller; and, to
Seller’s Knowledge, there are no facts or circumstances upon which any such
charges, proceedings, investigations, or citations or deficiency notices,
reasonably may be instituted, issued or brought hereafter.

(b)           Schedule 3.12(b)
contains a true, correct and complete list of all governmental or regulatory
licenses, permits, authorizations, franchises, certificates or rights
(contractual or other) to operate Seller’s Business, that are held by Seller
(collectively, “Licenses and Permits”). 
To the Knowledge of Seller, each of such Licenses and Permits are in
full force and effect as of the date hereof. 
There is no other license, permit, authorization, franchise, certificate
or right to operate the absence of which has had a Material Adverse Effect on
Seller.  Seller is in compliance with the
conditions and requirements imposed by or in connection with such Licenses and
Permits.  Seller has not received any
notice, nor does Seller have any Knowledge, that any governmental authority
intends to cancel, terminate or modify any of such Licenses or Permits.

 

3.13        Taxes and Tax Returns.  For purposes of this Agreement (a) the term “Tax”
or “Taxes” means any federal, provincial, state, local or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under IRC
Section 59A), customs duties, capital stock, franchise, profits,
withholding, social security, unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or
add-on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty or addition thereto, whether disputed or not; and (b) the
term “Tax Return” means any return, declaration, report, claim for refund, or
information return or statement (including, without limitation, information
returns or reports related to back-up withholding and any payments to third
parties) relating to any Taxes, including any schedule or attachment thereto,
and including any amendment thereof.  All
Tax Returns required to be filed with any taxing authority with respect to any
taxable period ending on or before the date of this Agreement, or the Closing
Date, as applicable, by or on behalf of Seller, have been or will be filed when
due.  All such Tax Returns are or will be
true, complete and correct in all material respects.  All Taxes due and payable by Seller have been
paid or accrued in the Balance Sheet, except for unpaid accruable Taxes
incurred by Seller in the ordinary course of its business since the date of the
Balance Sheet.  Buyer shall have no
liability or obligation whatsoever, and shall not incur any loss, expense or
cost, and none of the Purchased Assets, or any assets of Buyer, shall be
subjected to any Encumbrance, by reason of any Taxes arising out of (x) Seller’s
Business as conducted by Seller prior to the consummation of the sale hereunder
of the Purchased Assets to Buyer, or (y) any other operations or activities of
Seller whether conducted prior to the date hereof or hereafter.  Seller further represents and warrants that
it is relying solely on its own accountants and advisors for advice as to the
tax consequences to it of the transactions contemplated hereby.

3.14        Litigation and
Proceedings.  Except as set forth on Schedule 3.14,
there is no action, suit, proceeding or investigation, or any counter or
cross-claim in an action brought against, by or on behalf of Seller, whether at
law or in equity, or before or by any governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, or before any
arbitrator of any kind, that is pending or, to Seller’s Knowledge,
threatened,  which (i) could reasonably
be expected to affect adversely Seller’s ability to perform its obligations
under this Agreement or the Bill of Sale or complete any of the transactions
contemplated hereby or thereby, or (ii) 
which may become a claim, or liability against Buyer or the Purchased
Assets.  To Seller’s Knowledge, there are
no facts or circumstances that could reasonably be expected to give rise to any
actions of the type set forth in this Section 3.14.  Seller is not subject to any judgment, order,
writ, injunction, decree or award of any court, arbitrator or governmental
department, commission, board, bureau, agency or instrumentality having
jurisdiction over Seller, any of the Purchased Assets or its Business that
affects, involves or relates to the Purchased Assets.

3.15        Environmental and Safety
Matters.  Seller has complied with,
and the operation of its Business and the use and ownership of the Purchased
Assets, are in compliance with all federal, provincial, state, regional, local
or other governmental statutes, laws, ordinances, rules, regulations and orders
relating to the protection of human health and safety, natural resources or the
environment, including, but not limited to, air pollution, water pollution,
noise control, on site or off site hazardous substance discharge, disposal or
recovery, toxic or hazardous substances, training, information and warning
provisions relating to toxic or hazardous substances, and employee safety
relating to its business or the Purchased Assets (collectively the “Environmental
Laws”); and no notice of violation of any Environmental Laws or of any
permit, license or other authorization relating thereto has been received or
threatened against Seller in connection with its Business, and to 

 

the Knowledge of Seller, there is no factual
basis for the giving of any such notice. 
Seller has not received any notice or claim to the effect that Seller or
its Business is or may be liable to any governmental authority or private party
as a result of the release or threatened release of any toxic or hazardous
substances in connection with the conduct or operation of its Business, and to
Seller’s Knowledge, there are no facts or circumstances that could reasonably
be expected to give rise to such a claim. 
None of the operations of Seller’s Business or Seller and none of the
Purchased Assets is the subject of any federal, state, provincial or local
investigation evaluating whether any remedial action is needed to respond to a
release or a threatened release of any toxic or hazardous substances at any
real properties leased, used or operated by Seller in connection with its
Business or any other operations or activities of Seller.

3.16        Employee Benefit Plans.

(a)           The Seller has provided
Buyer with complete and accurate (i) copies of all employee benefit plans that
have been reduced to writing and (ii) all existing written summaries of any
employee benefit plans, whether or not reduced to writing (“Benefit Plan”).  All Benefit Plans are, and in administering
such plans the Seller is, in compliance in all material respects with all
applicable laws.  Except as set forth in Schedule 3.16,
the occurrence of the transactions contemplated by this Agreement will not
result in the vesting or acceleration of any benefits under such Benefit Plans
or any payment obligations, including severance, under any such Benefit Plans.

(b)           All costs of
administering and contributions required to be made by Seller to each Benefit
Plan under the terms of that Benefit Plan, and all applicable laws have in all
material respects been timely made.  All
amounts properly accrued to date as liabilities of Seller under or with respect
to each Benefit Plan (including administrative expenses and incurred but not
reported claims) for the current plan year of the Benefit Plan have been
recorded on the appropriate books, to the extent required by law or GAAP.

(c)           Each Benefit Plan has
been maintained and operated in accordance with, and complies currently with,
in all material respects, all applicable laws. 
Each Benefit Plan has been operated in all material respects in accordance
with its terms.

(d)           Seller does not
maintain any plan that provides (or will provide) medical or death benefits to
one or more, current or future former employees (including retirees) beyond
their retirement or other termination of service.

(e)           There are no
proceedings or lawsuits, pending or, to Seller’s Knowledge, threatened, and, to
Seller’s Knowledge, there are no investigations currently in progress relating
to any Benefit Plan, by any administrative agency, whether local, provincial or
federal or by any fiduciary, participant or beneficiary of such plan.

3.17        Collective Bargaining
Arrangements.  Seller is not a party
to or bound by any employee collective bargaining agreement, a party to or
affected by or, to Seller’s Knowledge, threatened with, any dispute or
controversy with a union or with respect to unionization or collective
bargaining involving the employees of Seller.

 

3.18        Accounts Receivable;
Unearned Income.

(a)           The accounts receivable
reflected on the Balance Sheet are owned free and clear by Seller and are based
on Seller’s reasonable judgment and its normal credit review procedures,
business practices and GAAP, and are fully collectible in accordance with their
terms in an amount not less than their aggregate book value, except for any
amounts that become uncollectible after the Closing Date due to actions taken
by Buyer which could reasonably be expected to have a material adverse effect
on the collectibility of the accounts receivable.  “Aggregate book value”, for this purpose,
shall mean the aggregate recorded amounts of such accounts receivable, less the
aggregate recorded allowance for doubtful accounts, trade allowances and return
allowances, all as established in accordance with GAAP consistently
applied.  All accounts receivable for
customer collections and billings prior to the Closing Date have been properly
recorded on Seller’s books and records on a timely basis and in the month in
which Seller’s efforts and activities generating such income were expended.

(b)           The unearned income
reflected on the Balance Sheet is based on Seller’s reasonable judgment,
business practices, as established in accordance with GAAP consistently
applied.  All unearned income relating to
contracts executed prior to the Closing Date have been properly recorded on
Seller’s books and records on a timely basis and in the month in which Seller’s
received the cash payment.

3.19        Employees, Directors and
Officers.  Schedule 3.19
comprises a complete and correct list of all of Seller’s present employees who
devote a significant portion of their time to the Business (“Employees”),
including the direct compensation (including wages, salaries and actual or
anticipated bonuses) to be paid in the current fiscal year to such
persons.  No unpaid salary, other than
for the immediately preceding pay period and other than pursuant to the
existing deferred compensation plans of Seller, is now payable to any of such
Employees.  Seller (i) is in compliance
in all material respects with all applicable foreign, federal, provincial and
local laws, rules and regulations respecting employment, employment practices,
terms and conditions of employment and wages and hours, (ii) has withheld all
amounts required by law or by agreement to be withheld from the wages, salaries
and other payments to its employees, (iii) is not liable for any arrears of
wages or any Taxes or any penalty for failure to comply with any of the
foregoing, and (iv) is not liable for any payment to any trust or other fund or
to any governmental entity with respect to unemployment compensation benefits,
social security or other benefits or obligations for employees.

3.20        Operational Restrictions.  Seller’s Business is not subject to (a)
any restrictions under any applicable laws or regulations or (b) any constating
document or other corporate or contractual restriction or (c) any judgment,
order, writ, injunction, decree or order, which has had or could reasonably be
expected to have a Material Adverse Effect on Seller.

3.21        Inventory.  The inventories of the Seller are in good
and marketable condition and are saleable in the ordinary course of business,
other than what is reserved for obsolescence on the Financial Statements.  Since the date of the Balance Sheet, Seller
has maintained inventory at levels consistent with Seller’s past practices in
the ordinary course of business.

3.22        No Broker.  Seller has not retained or used the
services of an agent, finder or broker in connection with the transactions
contemplated by this Agreement.  Seller
shall pay, and shall indemnify, hold harmless and defend Buyer from and
against, all commissions, finder’s and other fees and expenses charged or
asserted by any agent, finder or broker, by reason of any such retention or use
of the services of any such agent, finder or broker by Seller.

 

3.23        Affiliate
Transactions.  Other than transactions which do not impair
the Seller’s ability to transfer good, complete and marketable title to the
Purchased Assets to the Buyer, and except as set forth on Schedule 3.23,
there are no loans, leases or other agreements or transaction between Seller
and any present director, officer, shareholder or employee of Seller, or to
Seller’s Knowledge, any member of such director’s, officer’s, stockholder’s or
employee’s immediate family, other than compensation arrangements entered into
with employees in the ordinary course of business in connection with past.

3.24        Investment Representations
and Warranties.  Seller and the
Principal Owners (each an “Investor” for purposes of this
Section 3.24 only) represent and warrant to Parent, severally and solely
with respect to themselves and their respective investments in, and receipt of,
the Common Stock hereunder, that:

(a)           The Investor is
investing in the Common Stock for its own account and not with a present view
toward the public sale or distribution thereof, except pursuant to sales
registered or exempted from registration under the Securities Act; provided,
however, that by making the representation herein, the Investor does not agree
to hold any of the Common Stock for any minimum or other specific term and
reserves the right to dispose of the Common Stock at any time in accordance
with, or pursuant to, a registration statement filed in accordance with
Section 5.5 below, or an exemption from registration under the Securities
Act.

(b)           The Investor is an “accredited
investor” as defined in Rule 501(a) of Regulation D.  The Investor has delivered to Parent an
Investor Questionnaire in substantially the form set forth on Exhibit D.

(c)           The Investor
understands that the Common Stock is being offered and sold to it in reliance
upon specific exemptions from the registration requirements of United States
federal and state securities laws and that Parent is relying upon the truth and
accuracy of, and the Investor’s compliance with, the representations,
warranties, agreements, acknowledgments and understandings of the Investor set
forth herein in order to determine the availability of such exemptions and the
eligibility of the Investor to acquire the Common Stock.

(d)           The Investor and its
advisors, if any, have been furnished with all materials relating to the
business, finances and operations of Parent, and materials relating to the
offer and sale of the Common Stock, that have been requested by the Investor or
its advisors, if any.  The Investor and
its advisors, if any, have been afforded the opportunity to ask questions of
Parent.  The Investor acknowledges and
understands that its investment in the Common Stock involves a significant
degree of risk.

(e)           The Investor
understands that no United States federal or state agency, or any other
government or governmental agency, has passed upon or made any recommendation
or endorsement of the Common Stock or an investment therein.

(f)            The Investor
understands that:

 

(i)            except as provided in
Section 5.5 below, the Common Stock has not been, and is not being,
registered under the Securities Act or any applicable state securities laws
and, consequently, the Investor may have to bear the risk of owning the Common
Stock for an indefinite period of time because the Common Stock may not be
transferred unless (A) the resale of the Common Stock is registered pursuant to
an effective registration statement under the Securities Act, (B) the Investor
has delivered to the Company an opinion of counsel (in form, substance and
scope customary for opinions of counsel in comparable transactions) to the
effect that the Common Stock to be sold or transferred may be sold or
transferred pursuant to an exemption from such registration, (C) the Common
Stock is sold or transferred pursuant to Rule 144, promulgated under the
Securities Act (“Rule 144”), or (D) the Common Stock is sold or
transferred to an affiliate (as defined in Rule 144) of the Investor; provided
that, notwithstanding any other provision in this Agreement to the contrary,
the parties agree and acknowledge that Seller may distribute any Common Stock
that it receives to the Shareholder, and the Shareholder may distribute any
Common Stock that it receives to the Principal Owner, and Parent hereby
consents to any such distributions.

(ii)           any sale of the Common
Stock made in reliance on Rule 144 may be made only in accordance with the
terms of Rule 144 and, if Rule 144 is not applicable, any resale of the Common
Stock under circumstances in which the seller (or the person through whom the
sale is made) may be deemed to be an underwriter (as that term is defined in
the Securities Act) may require compliance with some other exemption under the
Securities Act, or the rules and regulations of the SEC thereunder; and

(iii)          except as provided in
Section 5.5 below, neither Parent nor any other person is under any obligation
to register the Common Stock under the Securities Act or any state securities
laws or to comply with the terms and conditions of any exemption thereunder.

(g)           The Investor
understands that until (a) the Common Stock may be sold by the Investor under
Rule 144(k) or (b) such time as the resale of the Common Stock has been
registered under the Securities Act as contemplated by Section 5.5 below, the
certificates representing the Common Stock will bear a restrictive legend in
substantially the following form (and a stop-transfer order may be placed
against transfer of the certificates for such Common Stock):

THE SECURITIES
REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED
STATES.  THE SECURITIES MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS, OR UNLESS OFFERED, SOLD OR
TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THOSE LAWS.

3.25        Representations and
Warranties of Seller and the Principal Owners.  The representations and warranties of Seller
and the Principal Owners contained herein, and the disclosures contained in
Seller’s Disclosure Schedule do not contain any statement of a material fact
that was untrue when made or omits any information necessary to make any such
statement contained therein, in light of the circumstances under which such
statement was made, not misleading.  The
copies of all documents furnished by Seller to Parent pursuant to the terms of
this Agreement are complete and accurate copies of the original documents.

 

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF BUYER AND PARENT

Buyer and Parent hereby
make the representations and warranties set forth in this Article IV to
Seller:

4.1          Authority and Binding
Effect.  Buyer and Parent have the
full corporate power and authority to execute and deliver this Agreement and
the Bill of Sale.  This Agreement, and
the Bill of Sale, and the consummation by Buyer and Parent of its obligations
contained herein and therein, have been duly authorized by all necessary
corporate actions of Buyer and Parent, and such agreements have been duly
executed and delivered by Buyer and Parent. 
This Agreement is a valid and binding agreement of Buyer and Parent,
enforceable against Buyer and Parent in accordance with its terms, and, upon
execution and delivery, the Bill of Sale will be valid and binding agreements
of Buyer and Parent and shall be enforceable against them in accordance with
its terms, except as enforceability of the obligations of Buyer and Parent
under this Agreement and the Bill of Sale may be limited by (i) bankruptcy,
insolvency, moratorium or other similar laws affecting creditors’ rights
generally, and (ii) general principles of equity relating to the availability
of equitable remedies (whether such agreements are sought to be enforced in a
proceeding at law or a proceeding in equity). 
It is not necessary for Buyer or Parent to take any action or to obtain
any approval, consent or release by or from any third person, governmental or
other, to enable Buyer or Parent to enter into or perform its obligations under
this Agreement and the Bill of Sale.

4.2          Organization and
Standing.  Buyer and Parent are
corporations duly organized and validly existing under, and are in good
standing under, the laws of the Province of Ontario and State of Delaware,
respectively.  Buyer and Parent have the
requisite corporate power to own and operate their respective properties and
assets, and to carry on their respective business as presently conducted.  Buyer and Parent are duly qualified to do
business and are in good standing in each jurisdiction in which the character
of the business conducted by them or the location of the properties owned or
leased by them make such qualification necessary, except for jurisdictions in
which the failure to so qualify would not have a Material Adverse Effect on
Buyer or Parent.

4.3          SEC Documents; Financial
Statements.

(a)           Parent has filed all
forms, reports and documents required to be filed by Parent with the Securities
and Exchange Commission (the “SEC”) since July 1, 2005 (the “SEC
Documents”).  As of their respective
filing dates, the SEC Documents complied in all material respects with the
requirements of the Securities Act and the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), and none of the SEC Documents contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements made therein, in light
of the circumstances in which they were made, not misleading, except to the
extent corrected by subsequently filed SEC Documents.

 

(b)           The financial
statements of Parent included in the SEC Documents were complete and correct in
all material respects as of their respective filing dates; complied as to form
in all material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto; were prepared
in accordance with GAAP applied on a consistent basis and fairly present the
consolidated financial condition and operating results of Parent at the dates
and during the periods indicated therein.

4.4          Compliance with Other
Instruments.  The execution and
delivery of this Agreement, the Bill of Sale, and all other agreements to be
entered into in connection herewith, and the consummation of the transactions
contemplated hereby and thereby, will not conflict with or result in any
violation of any law, rule, regulation, judgment, order, decree or ordinance
applicable to Buyer or Parent or any of their respective properties or assets,
or conflict with or result in any breach or default (with or without notice or
lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or to loss of a material
benefit, under (i) any provisions of the respective Certificates of
Incorporation or bylaws of Buyer or Parent; or (ii) any material agreement,
contract, note, mortgage, indenture, lease, instrument, permit, concession,
franchise or license or any writ, order or decree to which Buyer or Parent are
a party or by which Buyer or Parent or any of their respective properties are bound.

4.5          Consents and Approvals;
No Violations.  Except for filings,
permits, authorizations, consents and approvals as may be required under, and
other applicable requirements of, the Securities Act, the Exchange Act, and the
rules and regulations promulgated thereunder, or of any regulatory authority
pursuant thereto, or of any state securities or blue sky laws, no filing with
or notice to, and no permit, authorization, consent or approval of, any third
party, governmental or other entity is necessary for the consummation by Buyer
or Parent of the transactions contemplated hereby.

4.6          Litigation and
Proceedings.  There is no action,
suit, proceeding or investigation, or any counter or cross-claim in an action
brought against, by or on behalf of Buyer or Parent, whether at law or in
equity, or before or by any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or before any arbitrator of any
kind, that is pending or, to Buyer’s Knowledge and Parent’s Knowledge,
threatened, which (i) could reasonably be expected to adversely affect Buyer’s
ability or Parent’s ability to perform their respective obligations under this
Agreement, or the Bill of Sale, or complete any of the transactions
contemplated hereby or thereby, or (ii) which may become a claim, or liability
against Buyer or Parent.  To Buyer’s
Knowledge and Parent’s Knowledge, there are no facts or circumstances that
could reasonably be expected to give rise to any actions of the type set forth
in this Section 4.6.

4.7          No Broker.  Buyer and Parent have not retained or used
the services of an agent, finder or broker in connection with the transactions
contemplated by this Agreement.  Buyer
and Parent shall pay, and shall indemnify, hold harmless and defend Seller from
and against, all commissions, finder’s and other fees and expenses charged or
asserted by any agent, finder or broker, by reason of any such retention or use
of the services of any such agent, finder or broker by Buyer or Parent.

 

4.8          Capitalization.  The entire authorized capital stock of Parent
consists of (a) 450,000,000 Common Shares, of which 56,054,526 shares were
issued and outstanding as of September 30, 2006, and no shares were held in
treasury as of September 30, 2006, and (b) 10,000,000 Series A Preferred
Shares, of which none was issued and outstanding and none was held in treasury
as of September 30, 2006.  All of
the issued and outstanding shares of capital stock of Parent have been duly
authorized and are validly issued, fully paid and non-assessable.  There are no preemptive rights that have not
been waived or terminated with respect to the shares of Common Stock to be
issued to Seller pursuant to this Agreement. 
All shares of Common Stock to be issued to Seller pursuant to this
Agreement will be duly authorized for issuance, validly issued, fully paid and
nonassessable and of the same class of Common Shares as are currently listed by
Parent for trading on the OTC under the symbol “DYNK”.  Each share of Common Stock of Parent,
including each share issued to Seller pursuant to this Agreement, has one vote
per share on all matters on which the stockholders of Parent are entitled to
vote.

4.9          Representations and
Warranties of Buyer.  The
representations and warranties of Buyer contained herein do not contain any
statement of a material fact that was untrue when made or omits any information
necessary to make any such statement contained therein, in light of the
circumstances under which such statement was made, not misleading.  The copies of all documents furnished by
Buyer to Seller pursuant to the terms of this Agreement are complete and
accurate copies of the original documents.

ARTICLE V

OBLIGATIONS SURVIVING THE CLOSING

5.1          Payment of Secured
Obligations and Termination of Liens and Encumbrances.  Seller hereby covenants that Seller shall have
arranged to pay, prior to the Closing Date, all of the indebtedness or other
obligations listed on Schedule 5.1 (the “Secured Obligations”)
other than the Permitted Encumbrances and for the holders of the Secured
Obligations to deliver, in exchange for such payment, (i) a Financing Change
Statement issued by the Ontario Personal Property Registry evidencing a
discharge of such registered security interest or such other instruments and
documents as Buyer may reasonably request to effectuate the removal and
termination of any Encumbrances affecting any of the Purchased Assets and
evidence the release by such holders of any claims they may have against the
Purchased Assets or the Business, and (ii) such documents as Buyer may
reasonably request to evidence the payment of such Secured Obligations.  If it is determined at any time hereafter
that Seller failed to remove or cause to be removed, without liability or cost
or expense to Buyer and without the disposition or diminution in the value of
any of the Purchased Assets, any Encumbrance on any of the Purchased Assets
that was in existence prior to the Effective Time, or if any Encumbrance is
imposed or placed on any of the Purchased Assets (or any replacements thereof)
after the Closing Date as a result of any act or omission of Seller, occurring
prior to the Effective Time, then, without limiting any other right or remedy
Buyer may have, Seller shall cause such Encumbrance to be removed at no expense
or liability to Buyer, and without any reduction or disposition of any of the
Purchased Assets; provided, that in the first instance Buyer shall notify
Seller of the Encumbrance and provide Seller with an opportunity to cause such
Encumbrance to be removed.

 

5.2          Further Assurances.  Each party hereto shall execute and deliver,
after the date hereof, such additional documents or instruments, and shall take
such additional actions, as the other party may reasonably request in order to
carry out the intent of this Agreement or to better evidence or effectuate the
transactions contemplated herein.

5.3          Expenses.  Unless otherwise specifically provided for
herein, each party shall pay all of its respective costs and expenses incurred
or to be incurred by it in negotiating and preparing this Agreement and the
other agreements contemplated hereby, and in carrying out and closing the
transactions contemplated by this Agreement whether or not this Agreement or
the transactions contemplated hereby are ever consummated.

5.4          Taxes.  Seller shall pay all Taxes of any kind or
nature arising from (i) the conduct or operation of its business up to the
Closing Date and the conduct or operation by Seller, prior to or after the
Closing Date, of any other business or business activities operations and (ii)
any liquidation, partial or whole, of Seller. 
If any Taxes required under this Section 5.4 to be borne by Seller
are assessed against Buyer or any of the Purchased Assets, Buyer shall notify
Seller in writing promptly thereafter and Seller shall be entitled to contest,
in good faith, such assessment or charge so long as such assessment does not
cause a Material Adverse Effect on Buyer or the Purchased Assets or Buyer’s
business.  Notwithstanding the foregoing,
Buyer may (but shall not be obligated to) pay any such Taxes assessed against
it, its business or any of the Purchased Assets, but which are payable by
Seller pursuant hereto, if Buyer’s failure to do so, in the reasonable judgment
of Buyer, could result in the immediate imposition of an Encumbrance on any of
the Purchased Assets or any other assets of Buyer or if Seller fails to contest
such assessment or charge diligently and in good faith.  If in accordance with the immediately
preceding sentence, Buyer pays any Taxes which pursuant hereto are required to
be borne by Seller, Buyer shall be entitled to reimbursement thereof from
Seller in accordance with the indemnity provisions set forth in Article X
hereof.

5.5          Registration Rights.

(a)           Piggyback Registration.  If at any time following issuance of the
Common Stock pursuant to this Agreement (such shares of the Common Stock, for
purposes of this Section 5.5 and Section 5.6 only, are collectively
referred to as the “Registrable Shares”) Buyer shall determine to
register any of its Common Stock under the Securities Act other than pursuant
to (1) a registration relating solely to the sale of securities to participants
in a Buyer employee benefits plan, (2) a registration relating to securities
issued in connection with an acquisition by Buyer, or (3) a registration in
which the only Common Stock being registered is Common Stock issuable upon
conversion of debt securities which are also being registered, it shall send to
Seller (or Seller’s appointed representative, as the case may be) written
notice of such determination and, if within twenty (20) days after receipt of
such notice, Seller shall so request in writing, Buyer shall use its
commercially reasonable best efforts to include in such registration all or any
part of the Registrable Shares that Seller requests to be registered, provided,
however, that if such registration involves an underwritten public offering and
the managing underwriter reasonably determines that marketing factors require a
limitation on the number of shares that may be included in the registration,
the number of shares to be included in such registration shall be reduced as
follows:  (i) First, the Common Stock
held by officers and directors of Buyer shall be ratably excluded to the extent
required by such limitation,  (ii)
Second, the Registrable Shares requested to be registered by Seller

 

and all other selling stockholders who
acquired registration rights after the date of this Agreement shall be ratably
excluded to the extent required by such limitation, and (iii) Third, the Common
Stock requested to be registered by selling stockholders with registration
rights other than under this Agreement and granted before the date hereof shall
be excluded to the extent required by such limitation.  If Seller disapproves of the terms of such
underwriting, he may elect to withdraw therefrom by written notice to Buyer and
the underwriter.

(b)           Seller Information.  Seller covenants and agrees that it shall
provide to Buyer on a timely basis such consents, representations and
information as may reasonably be required by Buyer in connection with the
preparation and filing of a registration statement or related prospectus or any
amendment or supplement thereto.

(c)           Expenses. 
Buyer shall pay all expenses of registration of any shares of the Common
Stock pursuant to Section 5.5(a), except brokerage commissions, legal fees
and expenses, and such other fees and expenses as may be incurred by Seller,
which commissions and expenses shall be paid by the Seller.

(d)           Notification.  Buyer will promptly notify Seller upon the
occurrence of any of the following events in respect of a registration
statement or related prospectus: (i) receipt of any request for additional
information by the SEC or any other federal or state governmental authority
during the period of effectiveness of the registration statement or amendments
or supplements to the registration statement or any related prospectus; (ii)
the issuance by the SEC or any other federal or state governmental authority of
any stop order suspending the effectiveness of the registration statement or
the initiation of any proceedings for that purpose; (iii) receipt of any
notification with respect to the suspension of the qualification or exemption
from qualification of the Registrable Shares registered pursuant to
Section 5.5(a) for sale in any jurisdiction or the initiation of any
proceeding for such purpose; (iv) the happening of any event that makes any
statement made in the registration statement, or related prospectus, or any
document incorporated or deemed to be incorporated therein by reference, untrue
in any material respect or that requires the making of any changes in the
registration statement, related prospectus, or other documents so that, in the
case of the registration statement, it will not contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and that in
the case of the related prospectus, it will not contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.

(e)           Assignment of Registration Rights.  The rights set forth in this
Section 5.5, may be assigned by Seller to transferees or assignees of all
or any portion of the Registrable Shares, but only if (a) Seller agrees in
writing with the transferee or assignee to assign such rights, and a copy of
such agreement is furnished to Buyer within a reasonable time after such
assignment, (b) Buyer is, within a reasonable time after such transfer or
assignment, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being transferred or assigned, (c) after such transfer
or assignment, the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act and applicable state securities
laws, and (d) at or before the time Buyer received the written notice
contemplated by clause (b) of this sentence, the transferee or assignee agrees
in writing with Buyer to be bound by all of the provisions contained herein.

 

(f)            Additional Requirements.  Until termination of the registration
statement, Buyer will use all commercially reasonable efforts to make and keep
current public information available, as those terms are understood and defined
in Rule 144, and file on a timely basis with the SEC all information that it
may be required to file under either Section 13 or Section 15(d) of
the Exchange Act, and, so long as it is required to file such information
(without regard to the effectiveness of any registration statement), use all
commercially reasonable efforts to maintain the availability of Rule 144 (or
any successor exemptive rule hereinafter in effect) with respect to shares of
the Common Stock and to cooperate with any holder of Common Stock who desires
to make a sale under Rule 144.

(g)           Termination.  The registration rights of Seller under
Section 5.5(a) shall terminate on such date as the Registrable Shares are
otherwise saleable under Rule 144 without limitations on volume during any
ninety (90) day period.

5.6          Market Stand Off
Agreement.  The Seller and the
Principal Owners agree that, if requested by the managing underwriter of a
registration of the Registrable Shares in accordance with Section 5.5
above, they will not, without prior written consent of such underwriter, sell
or otherwise transfer or dispose of any of their respective Registrable Shares
(other than to donees who agree to be similarly bound), and, in the case of
Seller, will use commercially reasonable best efforts to prevent any of its
officers, directors, employees, consultants, or affiliates who hold Registrable
Shares from selling or otherwise transferring or disposing of any of their
respective Registrable Shares, during such period of time, not to exceed ninety
(90) days following the effective date of the registration statement filed by
Buyer with respect to such registration of Registrable Shares.

5.7          Employment of Seller’s
Employees.  Buyer covenants that it
shall, conditional on Closing, and prior to the Closing Date, extend offers of
employment substantially in the form of the offer attached hereto as Schedule 5.7
“A” to all of the current Employees of the Business listed on Schedule 3.19
on terms and conditions in the aggregate no less favourable than those on which
they were employed by Seller and honour their years of service and seniority
for all purposes to the extent permitted under applicable employee benefit
plans.  Schedule 5.7 “B” sets
out the base salary that will be payable by Buyer to those Employees that
accept the Buyer’s offer of employment. 
The Seller shall co-operate with the Buyer in its efforts to ensure that
each Employee accept offers of employment; provided that in providing such
cooperation, Seller shall not be required to expend funds or incur any
obligations or liabilities in connection therewith.  In respect of the period during which the
Employees are considering Buyer’s offer of employment hereunder, as between
Buyer and Seller, Buyer shall be responsible for (i) the remuneration payable
to each Employee in respect of the period commencing at the Effective Time and
ending at the time such Employee accepts or rejects, as the case may be, Buyer’s
offer of employment, and (ii) the obligations and liabilities of an employer of
such Employees; provided that for greater certainty, the Buyer shall not be
responsible for and is not assuming hereunder any obligation or liability owed
to any Employee that rejects Buyer’s offer of employment hereunder for
termination pay, severance pay or damages in lieu of notice of termination, which
shall be considered a Retained Liability hereunder.

 

ARTICLE VI

SURVIVAL OF REPRESENTATIONS AND WARRANTIES

All of the respective
representations and warranties of Seller and Buyer set forth in this Agreement
or in any of such party’s disclosure schedules, or in any certificates
delivered by such party on the Closing Date shall survive the consummation of
the transactions contemplated hereby for eighteen (18) months.  The covenants of any party hereto that cannot
be or are not fully performed by such party on or prior to the Closing Date
shall survive until they are otherwise terminated pursuant to their terms or
fully performed.

ARTICLE VII

CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER

The obligation of Buyer
to consummate the purchase of the Purchased Assets from Seller is subject to
the fulfillment, or the waiver by Buyer, at or prior to the Closing, of each of
the following conditions precedent:

7.1          Absence of Material
Litigation.  Except as set forth on Schedule 3.14,
there shall be (a) no pending or overtly threatened litigation (other than
litigation which is determined by the parties in good faith, after consulting
their respective attorneys, to be without legal or factual substance or merit),
whether brought against Seller or Buyer, that seeks to enjoin the consummation
of any of the transactions contemplated by this Agreement, (b) no order that
has been issued by any court or governmental agency having jurisdiction that
restrains or prohibits the consummation of the purchase and sale of the Purchased
Assets hereunder and no proceedings pending which are reasonably likely to
result in the issuance of such an order; and (c) no pending or overtly
threatened litigation, which has had or is reasonably expected to have a
Material Adverse Effect on Seller.

7.2          Performance of
Obligations.  Seller shall have
performed and complied, in all material respects with all of the covenants
required by this Agreement to have been performed prior to the Closing.

7.3          No Material Adverse
Change.  Since the date of this
Agreement, there shall not have been any change in or other event that has had
or is reasonably expected to have a Material Adverse Effect on Seller.

7.4          Delivery of Additional
Instruments.  On the Closing Date,
Seller shall deliver, or cause to be delivered to Buyer, the following
documents and instruments, in form and substance satisfactory to Buyer and its
counsel, unless waived in writing by Buyer:

(a)           The Bill of Sale and
Assumption Agreement in substantially the form of Exhibit B hereto, duly executed
by Seller (the “Bill of Sale”);

(b)           Evidence of the receipt
of all third party consents described on Schedule 3.1 or otherwise
referred to in Section 3.1 in connection with the consummation of the
transactions contemplated herein;

 

(c)           A legal opinion of
counsel to Seller in such form as is reasonably satisfactory to Buyer;

(d)           A Certificate of
Status, dated as of a date that is not more than ten (10) days prior to the
Closing Date, from the Ministry of Consumer and Business Affairs of the
Province of Ontario, for Seller; and

(e)           Such other documents
and instruments as Buyer or Buyer’s counsel may reasonably request so as better
to evidence or effectuate the transactions contemplated hereby.

7.5          Employment Agreements
for Key Employees.  Buyer shall have
entered into agreements for employment with each of the Employees of Seller
(the “Employment Agreements”) as set forth in Section 5.7 hereof.

7.6          Shareholder Approval.  This Agreement, and the transactions
contemplated hereby, shall have been duly approved by special resolution (as
provided for under the Business Corporations
Act (Ontario)) of the shareholders of Seller.

ARTICLE VIII

CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER

The obligation of Seller
to consummate the sale of the Purchased Assets to Buyer is subject to the
fulfillment, or the waiver by Seller, at or prior to the Closing, of each of
the following conditions precedent:

8.1          Absence of Material
Litigation.  There shall be (a) no
pending or overtly threatened litigation (other than litigation which is
determined by the parties in good faith, after consulting their respective
attorneys, to be without legal or factual substance or merit), whether brought
against Seller or Buyer that seeks to enjoin the consummation of any of the
transactions contemplated by this Agreement, (b) no order that has been issued
by any court or governmental agency having jurisdiction that restrains or
prohibits the consummation of the purchase and sale of the Purchased Assets
hereunder and no proceedings pending which are reasonably likely to result in
the issuance of such an order, and (c) no pending or overtly threatened
litigation which has had or is reasonably expected to have a Material Adverse
Effect on Buyer.

8.2          Performance of
Obligations.  Buyer shall have performed
and complied in all material respects with all of its covenants required by
this Agreement to have been performed by it at or prior to the Closing.

8.3          No Material Adverse
Change.  Since the date of this
Agreement, there shall not have been any change in or other event that has had
or is reasonably expected to have a Material Adverse Effect on Buyer.

8.4          Delivery of Additional
Instruments.  On the Closing Date,
Buyer shall deliver, or cause to be delivered to Seller, the following
documents and instruments, in form and substance satisfactory to Seller and its
counsel, unless waived in writing by Seller:

 

(a)           The Bill of Sale duly
executed by Buyer;

(b)           Legal opinions of
counsels to Parent and Buyer in such forms as are reasonably satisfactory to
Seller;

(c)           A good standing
certificate, dated as of a date that is not more than ten (10) days prior to
the Closing Date, from the Secretary of State of Delaware, for the Parent;

(d)           A Certificate of Status
dated as of a date that is not more than ten (10) days prior to the Closing
Date, from the Ministry of Consumer and Business Affairs of the Province of
Ontario; and

(e)           Such other documents
and instruments as Seller or Seller’s counsel may reasonably request so as
better to evidence or effectuate the transactions contemplated hereby.

8.5          Delivery of
Consideration.  At the Closing, Buyer
shall deliver to Seller a cash payment in the amount set forth in
Section 2.2(a) hereof, wired to an account designated by Seller, and
Parent shall issue an irrevocable instruction letter to its transfer agent
authorizing the transfer agent to issue shares of Common Stock to Seller as set
forth in Section 2.2(b) hereof.

8.6          Employment Agreements
for Key Employees.  Buyer shall have
entered into the Employment Agreements as set forth in Section 5.7 hereof.

8.7          Reservation of Stock
Options.  On the Closing Date, Buyer
shall have reserved for issuance and granted to employees of Buyer who were
formerly employees of Seller, an aggregate of Three Hundred Thousand (300,000)
options (the “Options”) to purchase shares of Common Stock from Parent’s
stock option plan (the “Stock Option Plan”).  The Common Stock issuable upon exercise of
the Options shall be shares of the Common Stock of Parent which are the same as
those shares of Parent quoted for trading on the OTC on the Closing Date.  The exercise price of the Options shall be
the price at which the last trade was made in the Common Stock of Parent as
quoted on the OTC on the last day the OTC was open for trading immediately
preceding the Closing Date.  The Options
shall vest annually subsequent to the Closing Date at a rate of 33 1/3% per
annum, all as set forth on Schedule 8.7. 
Buyer shall grant and allocate the Options to the persons and in the
amounts set forth on Schedule 8.7 hereto.  In the event, a person listed on Schedule 8.7
is no longer employed by Buyer, or an affiliate of Buyer, on the date that any
of the Options are scheduled to vest, Buyer shall cancel such previous grant of
the Options to such former employee and shall reallocate such Options on a pro
rata basis among the remaining persons listed on Schedule 8.7.  Buyer shall deliver evidence of such grants
to Seller at the Closing.

8.8          Payment of Secured
Obligations.  On the Closing Date,
the Buyer shall pay the full amount of the Secured Obligations, the final
payments for which shall be determined by the delivery of pay off letters to
Buyer not later than the day before the Closing Date.  The total amount to be paid by the Buyer for
the Secured Obligations pursuant to this Section 8.8 is $657,582.65.

 

ARTICLE IX

THE CLOSING

The consummation of the
transactions contemplated hereby (the “Closing”) shall take place on the
first business day following the satisfaction or waiver of the closing
conditions set forth in Article VII and Article VIII above (the “Closing
Date”) at the offices of Stradling Yocca Carlson & Rauth or at such
other date and place as the parties may agree and shall be deemed to occur at
12:00 p.m., California time (the “Effective Time”), on such date; provided,
however, that the Closing shall occur on or prior to October 30, 2006.

9.1          Closing Deliveries of
Seller.  At the Closing, Seller shall
deliver, or cause to be delivered to Buyer, the documents and instruments set
forth in Article VII above, in form and substance reasonably satisfactory
to Buyer and its counsel.

9.2          Closing Deliveries of
Buyer.  At the Closing, Buyer shall
deliver, or cause to be delivered, the Purchase Price to Seller and the
documents and instruments set forth in Article VIII above, in form and
substance reasonably satisfactory to Seller and its counsel.

ARTICLE X

INDEMNIFICATION

10.1        Obligations of Seller.  Seller and the Principal Owners hereby agree,
jointly and severally, that they will indemnify, hold harmless and defend Buyer
and each of its directors, officers, members, employees and agents and the
respective successors and assigns of Buyer and such persons (all of the
foregoing, collectively, the “Indemnified Parties” or, individually, an “Indemnified
Party”), from and against any and all Losses that arise from or are in
connection with:

(a)           any breach of or
inaccuracy in any of the representations or warranties of Seller contained in
this Agreement or in Seller’s Disclosure Schedules or other documents
contemplated hereby;

(b)           any breach or default
by Seller or the Principal Owners of any of the covenants or agreements
contained in this Agreement;

(c)           the failure by Seller
or the Principal Owners to discharge when due any of the Retained Liabilities;

(d)           the failure to have
paid or to pay, when due, any Taxes that arose out of the operations of Seller
or the consummation of the transactions contemplated by this Agreement or the
failure to have filed, when due, any Tax Returns related to any such Taxes or
any period up to the Closing Date, whether or not such failure constitutes a
breach of the representations or warranties of Seller contained in
Section 3.13 or is disclosed in this Agreement or Seller’s Disclosure
Schedules; and

(e)           the failure to comply
with the Bulk Sales Act (Ontario).

 

10.2        Limitations on Obligations
of Seller.  In no event shall Seller
or the Principal Owners have any obligation to indemnify the Indemnified
Parties for or in respect of any of the Assumed Obligations identified on Schedule 1.3,
and Buyer agrees to indemnify, hold harmless and defend Seller and the
Principal Owners (in the same manner and on the same terms and conditions that
are applicable to Seller and the Principal Owners’ indemnification obligations
under this Article X), from and against any and all Losses, incurred by Seller
or the Principal Owners as a result of (a) any failure by Buyer to pay or
otherwise discharge, or from any failure by Buyer to comply with the provisions
of, any of the Assumed Obligations after the Closing Date, or (b) any breach or
default by Buyer of any of its covenants or agreements, or any representations
or warranty hereunder (in which case the provisions of this Article X
shall apply mutatis mutandis).

No Indemnified Party
shall be entitled to any indemnification under this Article X with respect
to any particular representation or warranty unless it gives notice to the
Indemnifying Party with respect to the claim for indemnification at a time
during which the particular representation or warranty with respect to the
claim is made survives pursuant to Article VI.

10.3        Claims Procedure.  Promptly after the receipt by any Indemnified
Party of notice of the commencement of any action or proceeding against such
Indemnified Party, such Indemnified Party shall, if a claim with respect
thereto is or may be made against any indemnifying party (the “Indemnifying
Party”) pursuant to this Article X, give such Indemnifying Party
written notice of the commencement of such action or proceeding and give such
Indemnifying Party a copy of such claim and/or process and all legal pleadings
in connection therewith.  The failure to
give such notice shall not relieve any Indemnifying Party of any of its
indemnification obligations contained in this Article X, except where, and
solely to the extent that, such failure adversely affects or prejudices the
rights of such Indemnifying Party.  Such
Indemnifying Party shall have the right to defend, at his or its own expense
and by his or its own counsel reasonably acceptable to the Indemnified Party,
any such matter involving the asserted liability of the Indemnified Party;
provided, however, that the Indemnified Party shall have the right to
participate in the defense or such asserted liability at the Indemnified Party’s
own expense.  In any event, the
Indemnified Party, such Indemnifying Party and its counsel shall cooperate in
the defense against, or compromise of, any such asserted liability, and in
cases where the Indemnifying Party shall have assumed the defense, the
Indemnified Party shall have the right to participate in the defense of such
asserted liability at the Indemnified Party’s own expense.  In the event that such Indemnifying Party
shall decline to participate in or assume the defense of such action, in
accordance with the provisions hereof, or if the Indemnifying Party
discontinues the diligent and timely conduct thereof, any of the Indemnified
Parties may undertake such defense and the Indemnifying Party shall be
responsible for reimbursing the Indemnified Parties for their reasonable legal
fees and expenses in connection therewith as and when such fees and expenses
are incurred by them.  If the
Indemnifying Party is defending the claim as set forth above, the Indemnifying
Party shall have the sole right to settle the claim, subject to obtaining the
consent of the Indemnified Party, which consent will not unreasonably be
withheld or delayed; provided, however, that if the Indemnified Party shall
fail to consent to the settlement of such a claim by the Indemnifying Party,
which settlement (i) the claimant has indicated it will accept, and (ii)
includes an unconditional release of the Indemnified Party by the claimant and
imposes no restrictions on the future activities of the Indemnified Party and
its affiliates, the Indemnifying Party shall have no liability with respect to
any payment required to be made to such claimant in respect of such claim.  If the Indemnified Party is defending the
claim as set forth above, the Indemnified Party shall have

 

the right to settle or compromise any claim
against it after consultation with, but without the necessity of obtaining the
prior approval of, any Indemnifying Party, provided, however, that such
settlement or compromise shall not, unless consented to in writing by such
Indemnifying Party, which consent shall not be unreasonably withheld, be
conclusive as to the liability of such Indemnifying Party to the Indemnified
Party.

10.4        Limitations on Liability.  No indemnification for breaches of
representations, warranties and covenants for all claims under
Section 10.1(a) and (b) shall be made unless the aggregate amount of
Losses incurred by the Indemnified Party exceeds Ten Thousand Dollars
($10,000); provided, however, that in the event the Losses exceed such amount,
indemnification shall be made with respect to all Losses, and provided however,
in no event shall indemnification under Section 10.1(a) and (b) for
breaches of representations, warranties and covenants exceed the Purchase Price
actually paid by Buyer to Seller. 
Indemnification pursuant to this Article X shall be the sole and
exclusive remedy for breaches of representations and warranties and covenants
to be performed prior to Closing.

ARTICLE XI

MISCELLANEOUS

11.1        Assignment.  Neither Seller nor Buyer may assign this
Agreement, or assign its rights or delegate its duties hereunder, without the
prior written consent of the other party hereto.  This Agreement will be binding upon, inure to
the benefit of, and be enforceable by the parties and their respective
successors and assigns.

11.2        Severability.  Any provision of this Agreement which is
illegal, invalid or unenforceable shall be ineffective to the extent of such
illegality, invalidity or unenforceability, without affecting in any way the
remaining provisions hereof.

11.3        Governing Law.  This Agreement, its construction and the
remedies for its enforcement or breach are to be applied pursuant to, and in
accordance with, the laws of the State of Delaware, without regard to the
principles of conflicts of law thereof.

11.4        Consent to Jurisdiction,
Service and Venue.  For the purpose
of any suit, action or proceeding arising out of or relating to this Agreement,
each of the parties hereby agrees that exclusive jurisdiction and venue for any
suit between the parties shall be in the courts of the State of Delaware or the
Province of Ontario, regardless of the convenience of such forums.  Neither party will oppose the enforcement
against it in any other jurisdiction of any judgement or order obtained from a
Delaware or Ontario court regarding this Agreement. The parties further agree
and consent to accept and acknowledge all service of process carried out by
means of registered mail, return receipt requested, in accordance with
Section 11.10,  in connection with
any such matter.

11.5        Judgment Currency.  If for the purpose of obtaining judgment
against a party in any court in any jurisdiction with respect to this
Agreement, it becomes necessary to convert into the currency of such
jurisdiction (in this Section referred to as the “Judgment Currency”)
any amount due hereunder in any currency other than the Judgment Currency (in
this Section referred to as the

 

“Currency of the Agreement”), then
conversion shall be made at the rate of exchange prevailing on the Business Day
preceding (i) the date of actual payment of the amount due, in the case of
proceedings in the courts of any jurisdiction that will give effect to such
conversion being made on such day, or (ii) the day on which the judgment is
given, in the case of proceedings in the courts of the Province of Ontario or
of any other jurisdiction (the applicable date as of which such conversion is
made pursuant to this Section being referred to as the “Judgment
Conversion Date”).  For this purpose,
“rate of exchange” means the rate at which the Royal Bank of Canada
would be prepared on the relevant date, to sell the Currency of the Agreement
to obtain the Judgment Currency.  In the
event that there is a change in the rate of exchange prevailing between the
Judgment Conversion Date and the date of payment of the amount due, the Party
against which judgment is rendered shall, on the date of payment, pay such
additional amounts (if any) as may be necessary to ensure that the amount paid
on such date is the amount in the Judgment Currency which, when converted at
the rate of exchange prevailing on the date of payment, is the amount then due
under this Agreement in the Currency of the Agreement.  Any additional amount due under this
Section 11.4 will be due as a separate debt and shall not be affected by
judgment being obtained for any other sums due or in respect of this Agreement.

11.6        Bulk Sales.  In consideration of the indemnity
provided herein by the Seller and the Principal Owners to the Buyer, the Buyer
hereby waives compliance by the Seller with the provisions of any applicable
bulk transfer laws, including the Bulk Sales
Act (Ontario), of any jurisdiction in connection with the
transactions contemplated by this Agreement.

11.7        Entire Agreement;
Amendment.  This Agreement, including
the exhibits and schedules hereto, and each additional agreement or other
document to be executed and delivered pursuant hereto, constitute all of the
agreements of the parties with respect to, and supersede all prior agreements
and understandings relating to the subject matter of, this Agreement and the
transactions contemplated hereunder. 
This Agreement may not be modified or amended except by a written
instrument specifically referring to this Agreement signed by the parties
hereto.

11.8        Waiver.  No waiver by one party of the other party’s
obligations, or of any breach or default hereunder by any other party, shall be
valid or effective, unless such waiver is set forth in writing and is signed by
the party giving such waiver; and no such waiver shall be deemed a waiver of any
subsequent breach or default of the same or similar nature or any other breach
or default by such other party.

11.9        Interpretation;
Headings.  This Agreement is the
result of arms’-length negotiations between the parties hereto and no provision
hereof, because of any ambiguity found to be contained therein or otherwise,
shall be construed against a party by reason of the fact that such party or its
legal counsel was the draftsman of that provision.  The section, subsection and any paragraph
headings contained herein are for the purpose of convenience only and are not
intended to define or limit or affect, and shall not be considered in
connection with, the interpretation of any of the terms or provisions of this
Agreement.

11.10      Notices.  All notices, requests, demands or other
communications hereunder shall be in writing and shall be deemed to have been
duly given to the person designated below (i) on the date of delivery if
delivered in person; (ii) on the first business day after being sent by fax, provided
that

 

the successful transmission of the fax has
been confirmed through a confirmation function sheet provided by the fax
machine used for such transmission; (iii) on the third business day following
the deposit thereof in the United States Mail or in Canada Post, provided it is
mailed by certified mail, return receipt requested and postage prepaid and
properly addressed; or (iv) on the second business day after being sent by air
courier.  Any party hereto may from time
to time, by written notice to the other parties, designate a different address,
which shall be substituted for the one specified below:

If to Seller:

Sensible Security
Solutions Inc.

45 O’Connor Street, Suite
870

Ottawa, Ontario Canada
K1P 1A4

Attn:  Paul Saucier

Fax:   (613)
721-6744

with a copy to:

Gowling Lafleur Henderson
LLP

160 Elgin Street, Suite
2600

Ottawa, Ontario Canada K1P1C3

Attn:  Michael Boehm

Fax:   (613)
788-3467

If to Buyer, to:

DynTek, Inc.

19700 Fairchild Road,
Suite 230

Irvine, California 92612

Attn:  Chief Executive Officer

Fax:  (949) 271-6798

with a copy to:

Stradling Yocca Carlson
& Rauth

660 Newport Center Drive,
Suite 1600

Newport Beach, CA 92660
6441

Attn:  Christopher D. Ivey

Fax:  (949)
725-4100

11.11      Public Announcements.  Neither Seller or Buyer will make any public
announcements concerning matters set forth in this Agreement or the negotiation
thereof without the prior written consent of the other party unless such
disclosure is required by law or the rules and regulations of the SEC.  Any such disclosure shall be provided for
review to the other party in advance of public release to the extent reasonably
practical.

 

11.12      Attorneys Fees.  If any action or proceeding relating to this
Agreement or the enforcement of any provision of this Agreement is brought by a
party hereto against any party hereto, the prevailing party shall be entitled
to recover reasonable attorneys’ fees, costs and disbursements, in addition to
any other relief to which the prevailing party may be entitled.

11.13      Counterparts.  This Agreement may be executed in
separate counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.  This Agreement shall become effective when
counterparts have been signed by each of the parties and delivered by facsimile
or other means to the other party.

[Signature page to follow]

 

IN WITNESS WHEREOF, each
of Seller, Buyer and the Principal Owners have caused a duly authorized
representative to execute this Asset Purchase Agreement on the date first
written above.

	
   

  	
   

  
	
   

  	
  PARENT

  
	
   

  	
   

  
	
   

  	
  DYNTEK,
  INC.,

  
	
   

  	
  a Delaware
  corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Casper Zublin, Jr.

  	
   

  
	
   

  	
  Name:

  	
  Casper Zublin, Jr.

  
	
   

  	
  Title:

  	
  Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
  BUYER

  
	
   

  	
   

  
	
   

  	
  DYNTEK
  CANADA INC.

  
	
   

  	
  an Ontario
  corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Casper Zublin, Jr.

  	
   

  
	
   

  	
  Name:

  	
  Casper Zublin, Jr.

  
	
   

  	
  Title:

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
  SELLER

  
	
   

  	
   

  
	
   

  	
  SENSIBLE
  SECURITY SOLUTIONS INC.,

  
	
   

  	
  an Ontario
  corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Paul Saucier

  	
   

  
	
   

  	
  Name:

  	
  Paul Saucier

  
	
   

  	
  Title:

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
  SHAREHOLDER

  
	
   

  	
   

  
	
   

  	
  3849597
  CANADA INC.,

  
	
   

  	
  a Canadian
  corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Paul Saucier

  	
   

  
	
   

  	
  Name:

  	
  Paul Saucier

  
	
   

  	
  Title:

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ Paul Saucier

  	
   

  
	
  Witness

  	
  PAUL SAUCIERExhibit
10.1

Standard Form of OFFICE
BUILDING LEASE Developed by PORTLAND METROPOLITAN ASSOCIATION OF BUILDING
OWNERS AND MANAGERS

OFFICE LEASE

This lease, made and entered into at Portland, Oregon,
this 7th day of September 2006 by and between

LANDLORD: Union Bank of California
as Trustee for Quest Group Trust VII

and

TENANT: ImageWare Systems,
Incorporated

Landlord hereby leases to Tenant the following: approximately 3,470
rentable square feet, known as Suite     
(the  Premises),
located at 9200 S.E. Sunnybrook Blvd., Clackamas, Oregon, containing
approximately 103,734 rentable square feet (the Building), calculated
using a load factor of (15%) fifteen percent.

Tenant’s
Proportion Share for purposes of Section 19 shall be 3.35%.

This lease is for a term of thirty-seven (37) months commencing October
1, 2006 and continuing through October 31, 2009 at a Monthly Base Rental as
follows:

	
  October 1, 2006 through
  October 31, 2006

  	
   

  	
  Free Rent

  
	
   

  	
   

  	
   

  
	
  November 1, 2006
  through September 30, 2007

  	
   

  	
  $6,940.00 per month ($24.00 per square foot
  annually)

  
	
   

  	
   

  	
   

  
	
  October 1, 2007
  through September 30, 2008

  	
   

  	
  $7,229.17 per month ($25.00 per square foot
  annually)

  
	
   

  	
   

  	
   

  
	
  October 1, 2008
  through October 31, 2009

  	
   

  	
  $7,373.75 per month ($25.50 per square foot
  annually)

  

 

Rent is
payable in advance on the first day of each month.

Landlord and
Tenant covenant and agree as follows:

1.1       Delivery of Possession.

Should Landlord be unable to deliver possession of the
Premises on the date fixed for the commencement of the term, commencement will
be deferred and Tenant shall owe no rent until notice from Landlord tendering
possession to Tenant, unless such delay is caused by Tenant Delay as defined in
the Addendum.  If possession is not so
tendered within 90 days following commencement of the term, unless due to
Tenant Delay, then Tenant may elect to cancel this lease by notice to Landlord
within 10 days following expiration of the 90-day period.  Landlord shall have no liability to Tenant
for delay in delivering possession, nor shall such delay extend the term of
this lease in any manner unless the parties execute a written extension
agreement.

2.1       Rent Payment.

Tenant shall pay the Base Rent for the Premises and
any additional rent provided herein without deduction or offset.  Rent for any partial month during the lease
term shall be prorated to reflect the number of days during the month that
Tenant occupies the Premises.  Additional
rent means amounts determined under Section 19 of this Lease and any other sums
payable by Tenant to Landlord under this Lease. 
Rent not paid when due shall bear interest at the rate of
one-and-one-half percent per month until paid. 
Landlord may at its option impose a late charge of $.05 for each $1 of
rent for rent payments made more than 10 days late in lieu of interest for the
first month of delinquency, without waiving any other remedies available for
default.  Failure to impose a late charge
shall not be a waiver of Landlord’s rights hereunder.

3.1       Lease Consideration.

Upon execution of the lease Tenant has paid the Base
Rent for the first full month of the lease term for which rent is payable and
in addition has paid the sum of $7,373.75 as
lease consideration.  Landlord may apply
the lease consideration to pay the cost of performing any obligation which
Tenant fails to perform within the time required by this lease, but such
application by Landlord shall not be the exclusive remedy for Tenant’s
default.  If the lease consideration is
applied by Landlord, Tenant shall on demand pay the sum necessary to replenish
the lease consideration to its original amount. To the extent not applied by
Landlord to cure defaults by Tenant, the lease consideration shall be applied
to costs at the end of the lease term, including but not limited to, repairs in
excess of “normal wear and tear” and reconciliation of operating expenses. Any
portion of the lease consideration not used to cover the end of term expenses
shall be refundable. If Tenant is in default under this Lease more than two (2)
times within any twelve-month period, irrespective of whether or not such
default is cured, then without limiting Landlord’s other rights and remedies
provided for in this Lease or at law or equity, the lease consideration shall
automatically be increased by an amount equal to three (3) times the original
lease consideration.

4.1       Use.

Tenant shall use the
Premises as business for a general office use and for no other purpose without
Landlord’s written consent.  In
connection with its use, Tenant shall at its expense promptly comply and cause
the Premises to comply with all applicable laws, ordinances, rules and
regulations of any public authority and shall not annoy, obstruct, or interfere
with

 

Please Initial  Landlord          Tenant          

 1
 

 

the rights of other tenants of the Building.  Tenant shall create no nuisance nor allow any
objectionable fumes, noise, or vibrations to be emitted from the Premises.  Tenant shall not conduct any activities that
will increase Landlord’s insurance rates for any portion of the Building or
that will in any manner degrade or damage the reputation of the Building.

4.2       Equipment.

Tenant shall install in the Premises only such office
equipment as is customary for general office use and shall not overload the
floors or electrical circuits of the Premises or Building or alter the plumbing
or wiring of the Premises or Building. 
Landlord must approve in advance the location of and manner of
installing any wiring or electrical, heat generating or communication equipment
or exceptionally heavy articles.  All
telecommunications equipment, conduit, cables and wiring, additional dedicated
circuits and any additional air conditioning required because of heat
generating equipment or special lighting installed by Tenant shall be installed
and operated at Tenant’s expense. 
Landlord shall have no obligation to permit the installation of
equipment by any telecommunications provider whose equipment is not then
servicing the Building.

4.3       Signs.

No signs, awnings, antennas, or other apparatus shall
be painted on or attached to the Building or anything placed on any glass or
woodwork of the Premises or positioned so as to be visible from outside the
Premises without Landlord’s written approval as to design, size, location, and
color.  All signs installed by Tenant
shall comply with Landlord’s standards for signs and all applicable codes and
all signs and sign hardware shall be removed upon termination of this lease
with the sign location restored to its former state unless Landlord elects to
retain all or any portion thereof.

5.1       Utilities and Services.

Landlord will furnish water and electricity to the
Building at all times and will furnish heat and air conditioning (if the
Building is air conditioned) during the normal Building hours as established by
Owner.  Janitorial service will be
provided in accordance with the regular schedule of the Building, which
schedule and service may change from time to time.  Tenant shall comply with all government laws
or regulations regarding the use or reduction of use of utilities on the
Premises.  Interruption of services or
utilities shall not be deemed an eviction or disturbance of Tenant’s use and
possession of the Premises, render Landlord liable to Tenant for damages, or
relieve Tenant from performance of Tenant’s obligations under this lease.  Landlord shall take all reasonable steps to
correct any interruptions in service. 
Electrical service furnished will be 110 volts unless different service
already exists in the Premises.  Tenant
shall provide its own surge protection for power furnished to the Premises.

5.2       Extra Usage.

If Tenant uses excessive amounts of utilities or
services of any kind because of operation outside of normal Building hours,
high demands from office machinery and equipment, nonstandard lighting, or any
other cause.  Landlord may impose a
reasonable charge for supplying such extra utilities or services, which charge
shall be payable monthly by Tenant in conjunction with rent payments.  In case of dispute over any extra charge under
this paragraph, Landlord shall designate a qualified independent engineer whose
decision shall be conclusive on both parties. 
Landlord and Tenant shall each pay one-half of the cost of such
determination.

5.3       Security.

Landlord may but shall have no obligation to provide
security service or to adopt security measures regarding the Premises, and
Tenant shall cooperate with all reasonable security measures adopted by
Landlord.  Tenant may install a security
system within the leased Premises with Landlord’s written consent, which will
not be unreasonably withheld.  Landlord
will be provided with an access code to any security system and shall not have
any liability for accidentally setting off Tenant’s security system.  Landlord may modify the type or amount of
security measures or services provided to the Building or the Premises at any
time.

6.1       Maintenance and Repair.

Landlord shall have no liability for failure to
perform required maintenance and repair unless written notice of such
maintenance or repair is given by Tenant and Landlord fails to commence efforts
to remedy the problem in a reasonable time and manner.  Landlord shall have the right to erect
scaffolding and other apparatus necessary for the purpose of making repairs,
and Landlord shall have no liability for interference with Tenant’s use because
of repairs and installations.  Tenant
shall have no claim against Landlord for any interruption or reduction of
services or interference with Tenant’s occupancy, and no such interruption or
reduction shall be construed as a constructive or other eviction of
Tenant.  Repair of damage caused by
negligent or intentional acts or breach of this lease by Tenant, its employees
or invitees shall be at Tenant’s expense.

6.2       Alterations.

Tenant shall not make any
alterations, additions, or improvements to the Premises, change the color of
the interior, or install any wall or floor covering without Landlord’s prior
written consent which may be withheld in Landlord’s sole discretion.  Any such improvements, alterations, wiring,
cables or conduit installed by Tenant shall at once become part of the Premises
and belong to Landlord except for removable machinery and unattached movable
trade fixtures.  Landlord may at its
option require that Tenant remove any improvements, alterations, wiring, cables
or conduit installed by or for Tenant and restore the Premises to the original
condition upon termination of this lease. 
Landlord shall have the right to approve the contractor used by Tenant
for any work in the Premises, and to post notices of nonresponsibility in
connection with work being performed by Tenant in the Premises.  Work by Tenant shall comply with all laws
then applicable to the Premises.

7.1       Indemnity.

Tenant shall not allow any liens to attach to the
Building or Tenant’s interest in the Premises as a result of its
activities.  Tenant shall indemnify and
defend Landlord and its managing agents from any claim, liability, damage, or
loss occurring on the Premises, arising out of any activity by Tenant, its
agents, or invitees or resulting from Tenant’s failure to comply

Please Initial  Landlord          Tenant          

 2
 

 

with any term of this lease.  Neither Landlord nor its managing agent shall
have any liability to Tenant because of loss or damage to Tenant’s property or
for death or bodily injury caused by the acts or omissions of other Tenants of
the Building, or by third parties (including criminal acts).

7.2       Insurance.

Tenant shall carry liability insurance with limits of
not less than two Million Dollars ($2,000,000) combined single limit bodily
injury and property damage which insurance shall have an endorsement naming
Landlord and Landlord’s managing agent, if any, as an additional insured, cover
the liability insured under paragraph 7.1 of this lease and be in form and with
companies reasonably acceptable to Owner. 
Prior to occupancy, Tenant shall furnish a certificate evidencing such
insurance, which shall state that the coverage shall not be cancelled or
materially changed without 10 days advance notice to Landlord and Landlord’s
managing agent, if any.  A renewal
certificate shall be furnished at least 10 days prior to expiration of any
policy.

8.1       Fire or Casualty.

“Major Damage” means damage by fire or other casualty
to the Building or the Premises which causes the Premises or any substantial
portion of the Building to be unusable, or which will cost more than 25 percent
of the pre-damage value of the Building to repair, or which is not covered by
insurance.  In case of Major Damage,
Landlord may elect to terminate this lease by notice in writing to the Tenant
within 30 days after such date.  If this
lease is not terminated following Major Damage, or if damage occurs which is
not Major Damage, Landlord shall promptly restore the Premises to the condition
existing just prior to the damage. 
Tenant shall promptly restore all damage to tenant improvements or
alterations installed by Tenant or pay the cost of such restoration to Landlord
if Landlord elects to do the restoration of such improvements.  Rent shall be reduced from the date of damage
until the date restoration work being performed by Landlord is substantially
complete, with the reduction to be in proportion to the area of the Premises
not useable by Tenant.

8.2       Waiver of Subrogation.

Tenant shall be responsible for insuring its personal
property and trade fixtures located on the Premises and any alterations or
tenant improvements it has made to the Premises.  Neither Landlord, its managing agent nor
Tenant shall be liable to the other for any loss or damage caused by water
damage, sprinkler leakage, or any of the risks that are or could be covered by
a special all risk property insurance policy, or for any business interruption,
and there shall be no subrogated claim by one party’s insurance carrier against
the other party arising out of any such loss. 
This waiver is binding only if it does not invalidate the insurance
coverage of either party hereto.

9.1       Eminent Domain.

If a condemning authority takes title by eminent
domain or by agreement in lieu thereof to the entire Building or a portion
sufficient to render the Premises unsuitable for Tenant’s use, then either
party may elect to terminate this lease effective on the date that possession
is taken by the condemning authority. 
Rent shall be reduced for the remainder of the term in an amount
proportionate to the reduction in area of the Premises caused by the
taking.  All condemnation proceeds shall
belong to Landlord, and Tenant shall have no claim against Landlord or the
condemnation award because of the taking.

10.1   Assignment and Subletting.

This lease shall bind and inure to the benefit of the
parties, their respective heirs, successors, and assigns, provided that Tenant
shall not assign its interest under this lease or sublet all or any portion of
the Premises without first obtaining Landlord’s consent in writing.  This provision shall apply to all transfers
by operation of law including but not limited to mergers and changes in control
of Tenant.  No assignment shall relieve
Tenant of its obligation to pay rent or perform other obligations required by
this lease, and no consent to one assignment or subletting shall be a consent
to any further assignment or subletting. 
Landlord shall not unreasonably withhold its consent to any assignment
or subletting provided the effective rental paid by the subtenant or assignee
is not less than the current scheduled rental rate of the Building for
comparable space and the proposed Tenant is compatible with Landlord’s normal
standards for the Building.  If Tenant
proposes a subletting or assignment to which Landlord is required to consent
under this paragraph, Landlord shall have the option of terminating this lease
and dealing directly with the proposed subtenant or assignee, or any third
party.  If an assignment or subletting is
permitted, any cash profit, or the net value of any other consideration
received by Tenant as a result of such transaction shall be paid to Landlord
promptly following its receipt by Tenant. 
Tenant shall pay any costs incurred by Landlord in connection with a
request for assignment or subletting, including reasonable attorneys’ fees.

11.1   Default.

Any of the following shall constitute a default by
Tenant under this lease:

(a)          Tenant’s failure to pay
rent or any other charge under this lease within 10 days after it is due, or
failure to comply with any other term or condition within 20 days following
written notice from Landlord specifying the noncompliance.  If such noncompliance cannot be cured within
the 20-day period, this provision shall be satisfied if Tenant commences
correction within such period and thereafter proceeds in good, faith and with
reasonable diligence to effect compliance as soon as possible.  Time is of the essence of this lease.

(b)         Tenant’s insolvency,
business failure or assignment for the benefit of its creditors.  Tenant’s commencement of proceedings under
any provision of any bankruptcy or insolvency law or failure to obtain
dismissal of any petition filed against it under such laws within the time
required to answer; or the appointment of a receiver for all or any portion of
Tenant’s properties or financial records.

(c)          Assignment or subletting
by Tenant in violation of paragraph 10.1.

(d)         Vacation or abandonment
of the Premises without the written consent of Landlord or failure to occupy
the Premises within 20 days after notice from Landlord tendering possession.

11.2   Remedies for Default.

In case of default as described in paragraph 11.1
Landlord shall have the right to the following remedies, which are intended to
be cumulative and in addition to any other remedies provided under applicable
law:

Please Initial  Landlord          Tenant          

 3
 

 

(a)          Landlord may at its
option terminate the lease by notice to Tenant. 
With or without termination, Landlord may retake possession of the
Premises and may use or relet the Premises without accepting a surrender or
waiving the right to damages.  Following
such retaking of possession, efforts by Landlord to relet the Premises shall be
sufficient if Landlord follows its usual procedures for finding tenants for the
space at rates not less than the current rates for other comparable space in
the Building.  If Landlord has other
vacant space in the Building, prospective tenants may be placed in such other
space without prejudice to Landlord’s claim to damages or loss of rentals from
Tenant.

(b)         Landlord may recover all
damages caused by Tenant’s default which shall include an amount equal to
rentals lost because of the default, lease commissions paid for this lease, and
the unamortized cost of any tenant improvements installed by Landlord to meet
Tenant’s special requirements.  Landlord
may sue periodically to recover damages as they occur throughout the lease
term, and no action for accrued damages shall bar a later action for damages
subsequently accruing.  Landlord may
elect in any one action to recover accrued damages plus damages attributable to
the remaining term of the lease.  Such
damages shall be measured by the difference between the rent under this lease
and the reasonable rental value of the Premises for the remainder of the term,
discounted to the time of judgement at the prevailing interest rate on
judgements.

(c)          Landlord may make any
payment or perform any obligation, which Tenant has failed to perform, in which
case Landlord shall be entitled to recover from Tenant upon demand all amounts
so expended, plus interest from the date of the expenditure at the rate of
one-and-one-half percent per month.  Any
such payment or performance by Landlord shall not waive Tenant’s default.

12.1   Surrender.

On expiration or early termination of this lease
Tenant shall deliver all keys to Landlord and surrender the Premises vacuumed,
swept, and free of debris and in the same condition as at the commencement of
the term subject only to reasonable wear from ordinary use.  Tenant shall remove all of its furnishings
and trade fixtures that remain its property and repair all damage resulting
from such removal.  Failure to remove
shall be an abandonment of the property, and Landlord may dispose of it in any
manner without liability.  If Tenant
fails to vacate the Premises when required, including failure to remove all its
personal property, Landlord may elect either: (i) to treat Tenant as a tenant from
month to month, subject to the provisions of this lease except that rent shall
be one-and-one-half times the total rent being charged when the lease term
expired, and any option or other rights regarding extension of the term or
expansion of the Premises shall no longer apply; or (ii) to eject Tenant from
the Premises and recover damages caused by wrongful holdover.

13.1   Regulations.

Landlord shall have the right but shall not be
obligated to make, revise and enforce regulations or policies consistent with
this lease for the purpose of promoting safety, health (including moving, use
of common areas and prohibition of smoking), order, economy, cleanliness, and
good service to all tenants of the Building. 
All such regulations and policies shall be complied with as if part of
this lease.

14.1   Access.

During times other than normal Building hours Tenant’s
officers and employees or those having business with Tenant may be required to
identify themselves or show passes in order to gain access to the
Building.  Landlord shall have no
liability for permitting or refusing to permit access by anyone.  Landlord may regulate access to any Building
elevators outside of normal Building hours. 
Landlord shall have the right to enter upon the Premises at any time by
passkey or otherwise to determine Tenant’s compliance with this lease, to
perform necessary services, maintenance and repairs or alterations to the
Building or the Premises, or to show the Premises to any prospective tenant or
purchasers.  Except in case of emergency
such entry shall be at such times and in such manner as to minimize
interference with the reasonable business use of the Premises by Tenant.

14.2   Furniture and Bulky Articles.

Tenant shall move furniture and bulky articles in and
out of the Building or make independent use of the elevators only at times
approved by Landlord following at least 24 hours written notice to Landlord of
the intended move.  Landlord will not
unreasonably withhold its consent under this paragraph.

15.1   Notices.

Notices between the parties relating to this lease shall
be in writing, effective when delivered, or if mailed, effective on the second
day following mailing, postage prepaid, to the address for the party stated in
this lease or to such other address as either party may specify by notice to
the other.  Notice to Tenant may always
be delivered to the Premises. Rent shall be payable to Landlord at the same
address and in the same manner, but shall be considered paid only when
received.

16.1   Subordination and Attornment.

This lease shall be subject to and subordinate to any
mortgages, deeds of trust, or land sale contracts (here after collectively
referred to as encumbrances) now existing against the Building.  At Landlord’s option this lease shall be
subject and subordinate to any future encumbrance hereafter placed against the
Building (including the underlying land) or any modifications of existing
encumbrances, and Tenant shall execute such documents as may reasonably be
requested by Landlord or the holder of the encumbrance to evidence this
subordination.  If any encumbrance is
foreclosed, then if the purchaser at foreclosure sale gives to Tenant a written
agreement to recognize Tenant’s lease, Tenant shall attorn to such purchaser
and this Lease shall continue.

16.2   Transfer of Building.

If the Building is sold or otherwise transferred by
Landlord or any successor, Tenant shall attorn to the purchaser or transferee
and recognize it as the lessor under this lease, and, provided the purchaser or
transferee assumes all obligations hereunder, the transferor shall have no
further liability hereunder.

Please Initial  Landlord          Tenant          

 4
 

 

16.3   Estoppels.

Either party will within 10 days after notice from the
other execute, acknowledge and deliver to the other party a certificate
certifying whether or not this lease has been modified and is in full force and
effect; whether there are any modifications or alleged breaches by the other
party; the dates to which rent has been paid in advance, and the amount of any
security deposit or prepaid rent; and any other facts that may reasonably be
requested.  Failure to deliver the
certificate within the specified time shall be conclusive upon the party of
whom the certificate was requested that the lease is in full force and effect
and has not been modified except as may be represented by the party requesting
the certificate.  If requested by the
holder of any encumbrance, or any ground lessor, Tenant will agree to give such
holder or lessor notice of and an opportunity to cure any default by Landlord
under this lease.

17.1
Attorneys’ Fees.

In any litigation arising out of this lease, the
prevailing party shall be entitled to recover attorneys’ fees at trial and on
any appeal.  If Landlord incurs attorneys’
fees because of a default by Tenant, Tenant shall pay all such fees whether or
not litigation is filed.

18.1   Quiet Enjoyment.

Landlord warrants that so long as Tenant complies with
all terms of this lease it shall be entitled to peaceable and undisturbed
possession of the Premises free from any eviction or disturbance by
Landlord.  Neither Landlord nor its
managing agent shall have any liability to Tenant for loss or damages arising
out of the acts, including criminal acts, of other tenants of the Building or
third parties, nor any liability for any reason which exceeds the value of its
interest in the Building.

19.1   Additional Rent-Tax Adjustment.

Whenever for any July 1 —
June 30 tax year the real property taxes levied against the Building and its
underlying land exceed those levied for the 2005-2006 tax year, then the
monthly rental for the next succeeding calendar year shall be increased by
one-twelfth of such tax increase times Tenant’s Proportionate Share.  “Real property taxes” as used herein means
all taxes and assessments of any public authority against the Building and the
land on which it is located, the cost of contesting any tax and any form of fee
or charge imposed on Landlord as a direct consequence of owning or leasing the
Premises, including but not limited to rent taxes, gross receipt taxes, leasing
taxes, or any fee or charge wholly or partially in lieu of or in substitution
for ad valorem real property taxes or assessments, whether now existing or
hereafter enacted.  If any portion of the
Building is occupied by a tax-exempt tenant so that the Building has a partial
tax exemption under ORS 307.112 or a similar statute, then real property taxes
shall mean taxes computed as if such partial exemption did not exist.  If a separate assessment or identifiable tax
increase arises because of improvements to the Premises, then Tenant shall pay
100 percent of such increase.

19.3   Operating Expense Adjustment.

Tenant shall pay as additional rent Tenant’s
Proportionate Share of the amount by which operating expenses for the Building
increase over those experienced by Landlord during the calendar year 2006 (base
year).  Effective January 1 of  each year Landlord shall estimate the amount
by which operating expenses are expected to increase, if any, over those
incurred in the base year.  Monthly
rental for that year shall be increased by one-twelfth of Tenant’s share of the
estimated increase.  Following the end of
each calendar year, Landlord shall compute the actual increase in operating
expenses and bill Tenant for any deficiency or credit Tenant with any excess
collected.  As used herein “operating
expenses” shall mean all costs of operating and maintaining the Building as
determined by standard real estate accounting practice, including, but not
limited to:  all water and sewer charges;
the cost of natural gas and electricity provided to the Building; janitorial
and cleaning supplies and services; administration costs and management fees;
superintendent fees; security services, if any; insurance premiums; licenses,
permits for the operation and maintenance of the Building and all of its
component elements and mechanical systems; the annual amortized capital
improvement cost (amortized over such a period as Landlord may select but not
shorter than the period allowed under the Internal Revenue Code and at a
current market interest rate) for any capital improvements to the Building
required by any governmental authority or those which have a reasonable
probability of improving the operating efficiency of the Building. In the event the Building is not at least ninety-five
percent (95%) occupied, the Landlord will gross up all Operating Expenses for
the base year and the comparison year to the level they would have been at had
the Building been ninety-five percent (95%) occupied.

19.4   Disputes.

If Tenant disputes any computation of additional rent
or rent adjustment under paragraphs 19.1 through 19.3 of this lease, it shall
give notice to Landlord not later than one year after the notice from Landlord
describing the computation in question, but in any event not later than 30 days
after expiration or earlier termination of this lease.  If Tenant fails to give such a notice, the
computation by Landlord shall be binding and conclusive between the parties for
the period in question.  If Tenant gives
a timely notice, the dispute shall be resolved by an independent certified
public accountant selected by Landlord whose decision shall be conclusive
between the parties.  Each party shall
pay one-half of the fee for making such determination except that if the
adjustment in favor of Tenant does not exceed ten percent of the escalation
amounts for the year in question, Tenant shall pay (i) the entire cost of any
such third-party determination; and (ii) Landlord’s out-of-pocket

Please Initial  Landlord          Tenant          

 5
 

 

costs and reasonable expenses for personnel time in
responding to the audit.  Nothing herein
shall reduce Tenant’s obligations to make all payments as required by this
lease.

20.1   Complete Agreement; No Implied
Covenants.

This lease and the attached Exhibits and Schedules if
any, constitute the entire agreement of the parties and supersede all prior
written and oral agreements and representations and there are no implied
covenants or other agreements between the parties except as expressly set forth
in this Lease.  Neither Landlord nor
Tenant is relying on any representations other than those expressly set forth
herein.

20.2   Space Leased AS IS.

Unless otherwise stated in this Lease, the Premises
are leased AS IS in the condition now existing with no alterations or other
work to be performed by Landlord.

20.3   Captions.

The titles to the paragraphs of this lease are
descriptive only and are not intended to change or influence the meaning of any
paragraph or to be part of this lease.

20.4   Nonwaiver.

Failure by Landlord to promptly enforce any
regulation, remedy or right of any kind under this Lease shall not constitute a
waiver of the same and such right or remedy may be asserted at any time after
Landlord becomes entitled to the benefit thereof notwithstanding delay in enforcement.

20.5   Exhibits.

The following Exhibits are attached hereto and
incorporated as a part of this lease:

	
  Exhibit A

  	
   

  	
  The Premises

  
	
  Exhibit B

  	
   

  	
  Description of Land

  
	
  Exhibit C

  	
   

  	
  Space Plan

  
	
  Exhibit D

  	
   

  	
  Building Standards

  
	
  Exhibit E

  	
   

  	
  Janitorial Specifications and HVAC Holiday Schedule

  
	
  Exhibit F

  	
   

  	
  Rules and Regulations for Office Lease

  
	
  Addendum A

  	
   

  	
  Additional Provisions

  
	
  Billing
  Information

  	
   

  	
   

  

 

IN WITNESS WHEREOF, the duly authorized
representatives of the parties have executed this lease as of the day and year
first written above.

LANDLORD: Union Bank of California as Trustee for Quest Group Trust VII

	
  By:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Jason Kaufman

  
	
  Title:

  	
   

  	
  Assistant Vice President

  

 

	
  Address for notices:

  	
   

  	
  Address for rent:

  
	
  Quest Property
  Management

  	
   

  	
  Quest Group Trust VII

  
	
  One SW Columbia,
  Suite 435

  	
   

  	
  P.O. Box 5037-221

  
	
  Portland, Oregon
  97258

  	
   

  	
  Portland, Oregon 97208

  

 

 

	
  TENANT: as Trustee for Quest Group Trust VII

  
	
   

  
	
  By: 

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Address
  for notices:

  
	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  
	
   

  

 

Please Initial  Landlord          Tenant          

 6

 

EXHIBIT A

The Premises

Please Initial
Landlord                
Tenant                

 7
 

 

EXHIBIT B

Description
of the Land

PARCEL I:

A tract of land located
in the Northwest one-quarter of Section 4, Township 2 South, Range 2 East of
the Willamette Meridian, in the County of Clackamas and State of Oregon, and
being more particularly described as follows:

Commencing at an iron
pipe at the intersection of the Northwest line of the William T. Matlock
Donation Land Claim No. 37 and the Northwesterly line of that parcel of land
described in Deed Records 71-18673, Clackamas County Deed Records, being the
Northwesterly line of State Highway I-205, said iron pipe lying South68o 09’ 42” West 698.90 feet distance from the
Northerly corner of the William T. Matlock Donation Land Claim No. 37; thence
South 68o 09’ 42” West 613.59 feet to the true point of
beginning; thence South 68o 09’ 42” West 106.34 feet; thence North 53o 27’ 55” West 136.44 feet; thence North 79o 44’ 56” West 274.14 feet; thence North 60o 49’ 33” West 157.21 feet; thence North 16o 04’ 47” East 148.56 feet; thence South 85o 07’ 07” 
West 127.83 feet; thence 01o 11’ 32” West 125.27 feet to the Southwest
corner of that tract of land described in Warranty Deed to Clackamas Water
District, Warranty Deed recorded July 2, 1982, Fee No. 82-18306; thence along
the Southerly line of said Water District Tract North 89o 48’
44” East 100.02 feet to the Southeast corner of said Water District Tract;
thence along the Easterly line of said Water District Tract North 01o 14’ 54” West 97.79 feet; thence North 89o 52’ 24” East 246.94 feet; thence South 01o 01’ 11” East 160.00 feet; thence North 88o 58’ 49” East 246.94 feet; thence South 01o 01’ 11” East 200.00 feet; thence North 88o 58’ 49” East 65.00 feet; thence South 01o 01’ 11” East 65.00 feet; thence North 88o 58’ 49” East 150.00 feet; thence South 01o 01’ 11” East 104.15 feet to the true point of
beginning.

EXCEPTING THEREFROM that
certain tract conveyed to Sisters of Providence in Oregon doing business as
Providence Medical Center, by Deed recorded as Fee No. 93-01240, Clackamas
County Deed Records.

ALSO EXCEPTING THEREFROM
that portion lying Westerly of the Easterly line of Oak Bluff Avenue as
described in Deed recorded as Recorder’s Fee No. 96-074103.

AND FURTHER EXCEPTING
THEREFROM any portion of the above property described in Bargain and Sale Deed
recorded September 18, 1998, as Recorder’s Fee No. 98-087434.

PARCEL II:

A track of land located
in the Northwest one-quarter of Section 4, Township 2 South, Range 2 East of
the Willamette Meridian, in the County of Clackamas and State of Oregon, and
being more particularly described as follows:

Commencing at an iron
pipe at the intersection of the Northwest line of the William T. Matlock
Donation land Claim No. 37 and the Northwesterly line of that parcel of land
described in Deed Records 71-18673, Clackamas County Deed Records, being the
Northwesterly line of State Highway I-205, said iron pipe lying South 68o 09’ 42” West 698.90 feet distance from the
Northerly corner of the William T. Matlock Donation Land Claim No. 37; thence
South 68o 09’ 42” West 613.59 feet and North 01o 01’ 11” West 104.15 feet to the true point of
beginning; thence South 88o 58’ 49” West 150.00 feet; thence North 01o 01’ 11” West 65.00 feet; thence South 88o 58’ 49” West 65.00 feet; thence North 01o 01’ 11” West 200.00 feet;  thence South 88o 58’
49” West 135.00 feet; thence North 01o 01’ 11” West 160.00 feet; thence North 89o 52’ 24” East 265.03 feet; thence South 01o 01’ 11” East 355.87 feet; thence North 88o 58’ 49” East 85.00 feet; thence South 01o 01’ 11” East 65.00 feet to the true point of
beginning.

EXCEPTING THEREFROM that
certain tract conveyed to Sisters of Providence in Oregon doing business as
Providence Medical Center, by Deed recorded as Fee No. 93-01240, Clackamas
County Deed Records.

AND FURTHER EXCEPTING
THEREFROM any portion of the above property described in Bargain and Sale Deed
recorded September 18, 1998 as Recorder’s Fee No. 98-087434.

PACRCEL III:

An access easement
including the terms and provisions created by instrument recorder September 15,
1998, as Recorder’s Fee No. 98-085958, over the following described land:

A parcel of land lying in
the Northwest one-quarter of Section 4, Township 2 South, Range 2 East, of the
Willamette Meridian, in the County of Clackamas and State of Oregon and being a
portion of and lying within that property deeded to Sisters of Providence in
Oregon and DBA Providence via Document No. 93-01240, recorded January 8, 1993,
said parcel being that portion of said Providence property included in a strip
of land variable in width, lying on the Southerly side of the relocated center
line of Sunybrook Road, which center line is described in Parcel I of that
instrument recorded September 15, 1998, as Recorder’s Fee No. 98-085958.

The widths in meters of the strip of land above referred to are as
follows:

	
  Station to Station

  	
   

  	
  Width on Southerly Side of Center Line

  
	
   

  	
   

  	
   

  
	
  11+229.765  11+230.098

  	
   

  	
  19.825m (65.04’) in a straight line to 41.00m
  (134.51’)

  
	
   

  	
   

  	
   

  
	
  11+230.098  11+250.00

  	
   

  	
  41.00m (134.51’) parallel to center line

  
	
   

  	
   

  	
   

  
	
  11+250.00  11+250.00

  	
   

  	
  41.00 (134.51’) in a straight line to 19.821M
  (65.03’)

  

 

EXCEPT THEREFROM
that portion of said property lying within the existing right-of-way of Sunnybrook
Road.

Please Initial Landlord                
Tenant                

 8
 

 

EXHIBIT C

The Space
Plan

Please Initial Landlord                
Tenant                

 9
 

 

 

EXHIBIT D

Building
Standards

1.                          SUITE
ENTRY DOOR:  Solid core hardwood,
cherry veneer entry doors from core area.

2.                      CEILING:  Building standard 2’ x 4’, U.S.G. #3575
acoustical tile in a white 15/16 exposed flange grid ceiling system. Ceiling
height first floor 9’-10” minimum; second through fourth floors 9’-00.

3.                          WINDOW
COVERING:  Building standard vertical
blinds on all exterior windows.

4.                          INTERIOR
WALLS: 2-1/2” metal stud with one layer 5/8” gypsum board each side taped
and finished smooth.

5.                          WALL
PAINT:  Acrylic satin latex enamel,
building standard color.  Manufacturer is
Rodda Laysen eggshell or Miller 6200 series or equal.

6.                          INTERIOR
OFFICE DOORS:  Building standard,
cherry solid core door with latch set. 
Hardware finish is bright chrome.

7.                          LIGHTING:   One fixture every 80 square feet, not to
exceed Oregon Energy Code.

8.                      FLOOR
COVERING:  Building standard
carpeting will be 32 ounce, anti-static direct, glue down carpet, solid color,
plush-cut pile by Designweave.

9.                          HEATING,
VENTILATING AND AIR CONDITIONING: 
Ductwork, supply, return grilles and thermostats; separate zones for
conference rooms, corner offices and private offices. Perimeter zones to be fan
powered VAV with electric reheat. 
Interior zones to be cooling only VAV. 
No cross zoning between tenants or between interior and perimeter
zones.  All lunch rooms and break rooms
to have exhaust fans.

10.                   ELECTRICAL
OUTLETS:   Building standard wall
duplex outlets at the rate of two (2) for each 150 square feet of leased area
on a shared circuit, not to exceed eight.

11.                   TELEPHONE
OUTLETS:   Building standard
telephone outlets consist of a four square box with a 3⁄4” conduit stubbed above
ceiling at two per 250 square feet of leased area.

12.                   PLUMBING:  None included in building standard items
within Tenant’s leased area but available at Tenant’s expense.  Restrooms, showers and water fountains
provided in common areas by Landlord.

13.                   SUITE
IDENTIFICATION:  Landlord will
determine suite number identification per building standard graphic system.

14.                   SPACE PLANNING:  All necessary space planning to design the
building standards.

Please Initial
Landlord                
Tenant                

 10
 

 

EXHIBIT E

Janitorial
Specifications and HVAC Holiday Schedule

TENANT OFFICE AREA

FIVE TIMES PER WEEK: Sunday
through Thursday evenings.

1.             Gather
waste paper and place for disposal.

2.               Empty
and wash ashtrays.

3.               Sweep
and/or dust mop floor surfaces.

4.               Vacuum
clean all carpeted traffic areas.  Spot
clean as necessary.

5.               Dust
chairs, tables and other office furniture, but not desk.

6.               Dust
lights and other flat surfaces within reach.

7.               Dust
counters, file cabinets and telephones.

8.               Properly
arrange furniture in offices.

9.               Remove
fingerprints from doors and partition glass.

10.         Check
doors and windows upon completion of work.

11.         Polish
brass push plates.

12.         Sweep
stairways.

13.         Leave only designated
night lights on.

ONE TIME PER WEEK

1.               Dust
high partition ledges and moldings.

2.               Clean
door kick plates and trashcans.

3.               Dust
panel walls and wood doors.

4.               Edge all carpeted
areas on a rotating basis.

ONE TIME PER MONTH

Clean, wax and polish
composition floors.

ONCE EVERY SIX MONTHS

Clean exterior of
perimeter windows.

ONE TIME PER YEAR

Clean interior of
perimeter windows and relites in tenant spaces

RESTROOMS

FIVE TIMES PER WEEK 

1.               Clean
restrooms, wash basins, dispensers and chrome platings.

2.               Clean
mirrors and frames.

3.               Wet
mop floors.

4.               Sanitize
toilets, toilet seats and urinals.

5.               Dust
ledges and partitions.

6.               Refill all
dispensers.

ONE TIME PER MONTH

Wash walls and
doors.

ONE TIME PER YEAR

Machine scrub and
seal restroom floors.

LOBBIES, STAIRWAYS, AND ELEVATORS

FIVE TIMES PER WEEK

1.               Wet
mop or vacuum main entrance lobby floors.

2.               Spot
wash walls and doors.

3.               Vacuum elevator.

Please Initial Landlord                
Tenant                

 11
 

 

4.               Damp
wipe or dust elevator walls, and polish call button plates.

5.               Clean
elevator doors and thresholds.

6.               Check
exit doors and lights in stairways and corridors.

7.               Clean and polish
main entrance doors.

ONE TIME PER WEEK

Clean elevator
walls and ceiling.

ONE TIME PER 
MONTH

1.               Dust high ledges
and partitions.

2.               Wet mop all stairs.

3.               Clean and polish
composition floors.

ONE TIME
PER YEAR

Professionally
clean common area carpet.

HVAC HOLIDAY SCHEDULE

The HVAC will not
be in operation on the following holidays:

New Years Day

Memorial Day

Independence Day / July 4

Labor Day

Veterans Day

Thanksgiving Day

Christmas Day

A schedule setting forth the days of observance of the
foregoing holidays will be furnished by the Lessor upon request.

Please Initial Landlord                
Tenant                

 12
 

 

EXHIBIT F

Rules and
Regulations For Office Lease

GENERAL
RULES

1.   Tenant
shall not suffer or permit the obstruction of any Common Areas, including but
not limited to driveways, walkways and stairways.

2.   Landlord reserves the right to refuse access
to any persons Landlord in good faith judges to be a threat to the safety,
reputation, or property of the Project and its occupants.

3.   Tenant shall not make or permit any noise or
odors that annoy or interfere with other lessees or persons having business
within the Project.

4.   Tenant shall not keep animals or birds
within the premises, and shall not bring bicycles, motorcycles, skateboards, or
other vehicles into areas not designated as authorized for same.

5.   Tenant shall not make, suffer or permit
litter except in appropriate receptacles for that purpose.

6.   Tenant shall not alter any lock or install
new or additional locks or bolts without prior authorization from Landlord.

7.   Tenant shall be responsible for the
inappropriate use of any toilet rooms plumbing, or other utilities.  No foreign substances of any kind are to be
inserted therein.

8.   Tenant shall not deface the walls,
partitions, or other surfaces of the premises or Project.

9.   Tenant shall not suffer or permit anything
in or around the premises or Building(s) that causes excessive vibration or
floor loading in any part of the Project.

10. Tenant shall not employ any
service or contractor for services or work to be performed within the premises,
except as approved by the Landlord.

11. Landlord reserves the right
to close and lock the Project on Saturdays, Sundays, and legal holidays, and on
other days between the hours of 6 P.M. and 8 A.M. of the following day.  If Tenant uses the Premises during such
periods, Tenant shall be responsible for securely locking any doors it may have
opened for entry.

12. Tenant shall return all keys
at the termination of its tenancy and shall be responsible for the cost of
replacing any keys that are lost.

13. No Tenant, employee or
invitee shall go upon the roof of the Building(s).

14. Tenant shall not suffer or
permit smoking or carrying of lighted cigars or cigarettes in areas reasonably
designated by Landlord or by applicable governmental agencies as non-smoking
areas.

15. Tenant shall not use any
method of heating or air conditioning other than as provided by Landlord.

16. Tenant shall not install,
maintain, or operate any vending machines on the premises without Landlord ‘s
written consent.

17. The Premises shall not be
used for lodging.

18. Tenant shall comply with all
safety, fire protection and evacuation regulations established by Landlord or
any governmental agency.

19. Landlord reserves the right
to waive any one of these rules or regulations, and/or as to any particular
Tenant, and any such waiver shall not constitute a waiver of any other rule or
regulation or any subsequent application thereof to such Tenant.

20. Tenant assumes all risks
from theft or vandalism and agrees to keep its Premises locked as may be
required.

21. Landlord reserves the right
to make such other reasonable rules and regulations as it may from time to time
deem necessary for the appropriate operation and safety of the Project and its
occupants. Tenant agrees to abide by these and such rules and regulations.

PARKING RULES

1.     Parking areas shall be used only for parking
by vehicles which have a “Quest Property Management Parking Permit”, if
applicable.

2.     Vehicles permitted shall be no longer than
full size passenger automobiles or pick up trucks and shall herein be called “Permitted
Size Vehicles.”

3.     Tenant shall not permit or allow any vehicles
that belong to or are controlled by Tenant or Tenant ‘s employees, suppliers,
shippers, customers, or invitees to be loaded, unloaded, or parked in areas
other than those designated by Landlord for such activities.

4.     Landlord reserves the right to relocate all or
a part of parking spaces from floor to floor within one floor, and/or to
reasonably adjacent offsite locations(s), and to reasonably allocate them
between compact and standard size spaces, as long as the same complies with
applicable laws, ordinances, and regulations.

5.     Users of the parking area will obey all
posted signs and park only in the areas designated for vehicle parking.

6.     Unless other wise instructed, every person
using the parking area is required to park and lock his own vehicle. Landlord
will not be responsible for any damage to vehicles, injury to persons, or loss
of property, all of which the party using the parking area assumes risks.

7.     The maintenance, washing, waxing or
cleaning of vehicles in the parking area(s) or Common Area is prohibited.

8.     Tenant shall be responsible for seeing that
all of its employees, agents, and invitees comply with the applicable parking
rules, regulations, laws and agreements.

9.     Landlord reserves the right to modify these
rules and/or adopt such other reasonable and non-discriminatory rules and
regulations, laws and agreements.

10.   Such parking use as is herein provided is
intended merely as a license only and no bailment is intended or shall be
created hereby.

Please Initial Landlord                
Tenant                

 13
 

 

ADDENDUM A

Addendum
to Office Lease, dated March      , 2006,

in which
Union Bank of California as Trustee for Quest Group Trust VII is referred to as
Landlord and ImageWare Systems, Incorporated is referred to as Tenant.

ADDITIONAL
PROVISIONS TO THE LEASE:

1.  Commencement Date.
Tenant warrants and agrees that Tenant, at Tenant ‘s expense, has made all
necessary inquiries and has or will take all action as required in order to
occupy and use the premises in the manner contemplated by Tenant.  Such action shall include but not be limited
to, the obtaining of a business license and the installation of any applicable
utilities deemed necessary for Tenant ‘s use. 
By executing the Lease, Tenant agrees to be responsible for all the
terms and conditions of the Lease, including their payment of rent, from the
Lease commencement date or from the date possession is tendered to Tenant, or
occupancy is assumed, whichever is earlier, regardless of whether or not Tenant
has commenced or completed any action required by Tenant herein. Landlord shall
not be responsible to Tenant in any manner whatsoever for any delay to Tenant
in obtaining such approvals or installations as may be required herein; where
such approval or installation is beyond the reasonable control of Landlord.

2.  Tenant Improvements:

Landlord will
provide a turnkey building out of the space plan identified in Exhibit C
utilizing building standard improvements set forth in Exhibit D.

3.  
Loitering. Tenant(s) and their guests and/or licensees shall
not loiter, or congregate in or about the premises in any area not specifically
designed and intended for such purposes. 
By way of example and not by way of limitation, areas in which loitering
or congregating shall not be allowed are parking areas, driveways, stairways,
walkways, passageways, hallways, storage areas, entrances to the buildings of
others, areas of construction and maintenance, and office areas.

4. Tenant
Delays.  All dates by
which Landlord is to complete the Tenant Improvements and/or deliver possession
of the Premises to Tenant shall be extended by the number of days of delay
occasioned by Tenant Delays.  “Tenant
Delays” are defined as delays caused by acts or omissions of Tenant or its
agents, including, but not limited to, delays caused by not providing the
Preliminary Plan or additional information needed by the architect to complete
the Plans in a timely manner, requests for changes to the Plans, by requests
for incorporation of materials for which lead times exceed the time allowed for
incorporation under Landlord’s then current schedule, and/or by delaying more
than two (2) Business Days in approving any sample, substitution, or other item
for which Landlord requests approval.  
Landlord shall be deemed to complete each of its obligations on the date
the same would have been completed absent Tenant Delays.  Tenant shall reimburse Landlord within thirty
(30) days of request for all cost increases and other expenses caused by Tenant
Delays.  Tenant acknowledges that the
installation or completion of above Building Standard work, including long
lead-time items, may delay substantial completion of the Tenant
Improvements.  In the event Landlord agrees
to any requested changes to the Plans, then (I) any additional costs resulting
from the change shall be paid by Tenant to Landlord upon Landlord’s approval of
the change, and (ii) any delays in substantial completion of the Tenant
Improvements as a result of the change shall be deemed Tenant Delays.

5.
Administration Fee. 
Should Landlord be in the position of incurring any costs including loss
of rents on behalf of Tenant, or should Tenant not fulfill any obligations of
which he is liable and of which Landlord incurs cost thereof, Tenant shall be
liable not only for costs incurred, but in addition shall be liable for a
twenty percent (20%) surcharge above and beyond said actual costs.  Any costs incurred due to lock changes by
Tenant shall be Tenant ‘s responsibility.

6.  Rules & Regulations.
Tenant hereby agrees to abide by and conform to the rules and regulations
attached hereto as Exhibit F.

7.  Parking.
The
Tenant shall be allowed a parking ratio of a maximum of 4 spaces per 1,000
rentable square feet leased on a non-reserved basis in common with the other
tenants of the Building in the Building parking lot.  Tenant shall not park cars in the Building
parking lot in excess of the parking ratio at any time during the Term of the
Lease.  The Landlord anticipates
enforcing tenant’s parking rights with the use of parking tags, and reserves
the right to tow violators without notice. Landlord reserves the right to
charge Tenant a fee for replacement of parking tags.

8.  Signage. 
The Landlord will provide Building standard signage for the Tenant at
the Tenant’s main entry door and on the Lobby directory sign.

Receipt of a copy
is hereby acknowledged.  The undersigned
acknowledges that this lease agreement, and the attached addendum(s) constitute
the entire agreement between Landlord and Tenant.  Any and all representations by Landlord or
its agents that are not written in the lease document are not a part of the
lease agreement.

ACKNOWLEDGED
AND ACCEPTED BY:

	
  LANDLORD: Union Bank of California

  	
   

  	
  TENANT: ImageWare Systems, Incorporated

  
	
  as Trustee for Quest Group Trust VII

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  BY:

  	
   

  	
   

  	
  BY:

  	
   

  	
   

  
	
   

  	
  Jason Kaufman, Assistant Vice President

  	
   

  	
  Wayne Wetherell, Sr. VP & CFO

  
	
   

  	
   

  	
   

  
	
  Date:

  	
   

  	
   

  	
  Date:

  	
  September 7,
  2006

  	
   

  
								

 

Please Initial Landlord                
Tenant                

 14
 

 

BILLING INFORMATION
SHEET

Please fill out the following
information:

Company: ImageWare
Systems, Inc.

Local Contact Person: David
Harding

Phone:  (858) 405-8035 Fax: (503) 698-4408

Premises Address: 

Billing Address: 10883
Thornmint Rd., San Diego, CA 92127

Contact: Paul Mosman

Phone:  (858)
673-8600 x126 Fax:   (858) 673-1770

Notice Address: 10883
Thornmint Rd., San Diego, CA 92127

Contact: Paul Mosman

Phone:(858) 673-8600 x126             Fax:  (858)
673-1770

After
Hours Emergency Contact:

Name:   David Harding

Phone:   (503)
392-4629  or (949) 279-2374

Please Initial Landlord                
Tenant                

 15

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