EXHIBIT 10.1
 
SECURITIES PURCHASE AGREEMENT

THIS SECURITIES PURCHASE AGREEMENT (this “Agreement”), dated as of May 30, 2008,
by and among TELKONET, INC., a Utah corporation (the “Company”), and the Buyers
listed on Schedule I attached hereto (individually, a “Buyer” or collectively
“Buyers”).
 
WITNESSETH

WHEREAS, the Company and the Buyer(s) are executing and delivering this
Agreement in reliance upon an exemption from securities registration pursuant to
Section 4(2) and/or Rule 506 of Regulation D (“Regulation D”) as promulgated by
the U.S. Securities and Exchange Commission (the “SEC”) under the Securities Act
of 1933, as amended (the “Securities Act”);
 
WHEREAS, the parties desire that, upon the terms and subject to the conditions
contained herein, the Company shall issue and sell to the Buyer(s), as provided
herein, and the Buyer(s) shall purchase (i) up to Three Million Five Hundred
Thousand Dollars ($3,500,000) of secured convertible debentures in the form
attached hereto as “Exhibit A” (the “Convertible Debentures”), which shall be
convertible into shares of the Company’s common stock, par value $0.001 (the
“Common Stock”) (as converted, the “Conversion Shares”), and (ii) warrants
substantially in the form attached hereto as “Exhibit B” (the “Warrants”), to
acquire up to that number of additional shares of Common Stock set forth
opposite such Buyer’s name on Schedule I (as exercised, the “Warrant Shares”) of
which One Million Five Hundred Thousand Dollars ($1,500,000) shall be funded
within five (5) business days following the date hereof (the “First Closing”);
One Million Dollars ($1,000,000) shall be funded within five business days of
satisfaction of each of the conditions set forth in Sections 6(b) and 7(b)
hereof  (the “Second Closing”); and One Million Dollars ($1,000,000) shall be
funded within five business days of satisfaction of each of the conditions set
forth in Sections 6(c) and 7(c) hereof (the “Third Closing”) (individually
referred to as a “Closing” collectively referred to as the “Closings”), for a
total purchase price of up to Three Million Five Hundred Thousand Dollars
($3,500,000) (the “Purchase Price”), in the respective amounts set forth
opposite each Buyer(s) name on Schedule I (the “Subscription Amount”);
 
WHEREAS, contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement
(the “Registration Rights Agreement”) pursuant to which the Company has agreed
to provide certain registration rights under the Securities Act and the rules
and regulations promulgated thereunder, and applicable state securities laws;
 
WHEREAS, contemporaneously with the execution and delivery of this Agreement,
(i) the Buyer, the Company, and each subsidiary of the Company are executing and
delivering a Security Agreement (all such security agreements shall be referred
to as the “Security Agreement”) pursuant to which the Company and its wholly
owned subsidiaries agree to provide the Buyer a security interest in Pledged
Property (as this term is defined in the Security Agreement), and (ii) each
subsidiary of the Company is executing and delivering a Guaranty dated the date
hereof (the “Guaranty” and collectively with the Security Agreement, the
“Security Documents”) in favor of the Buyer;
 
 
 

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WHEREAS, contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering Irrevocable Transfer Agent
Instructions (the “Irrevocable Transfer Agent Instructions”); and
 
WHEREAS, the Convertible Debentures, the Conversion Shares, the Warrants, and
the Warrant Shares collectively are referred to herein as the “Securities”).
 
NOW, THEREFORE, in consideration of the mutual covenants and other agreements
contained in this Agreement, the Company and the Buyer(s) hereby agree as
follows:
 
1.    PURCHASE AND SALE OF CONVERTIBLE DEBENTURES.
 
(a)    Purchase of Convertible Debentures.  Subject to the satisfaction (or
waiver) of the terms and conditions of this Agreement, each Buyer agrees,
severally and not jointly, to purchase at each Closing and the Company agrees to
sell and issue to each Buyer, severally and not jointly, at each Closing,
Convertible Debentures in amounts corresponding with the Subscription Amount set
forth opposite each Buyer’s name on Schedule I hereto and the Warrants to
acquire up that number of Warrant Shares as set forth opposite such Buyer’s name
on Schedule I .
 
(b)    Closing Dates.  The First Closing of the purchase and sale of the
Convertible Debentures and Warrants shall take place at 10:00 a.m. Eastern
Standard Time on the fifth (5th) business day following the date hereof, subject
to notification of satisfaction of the conditions to the First Closing set forth
herein and in Sections 6 and 7 below (or such other date as is mutually agreed
to by the Company and the Buyer(s)) (the “First Closing Date”).  The Second
Closing of the purchase and sale of the Convertible Debentures shall take place
at 4:00 p.m. Eastern Standard Time on the business day immediately following the
date the conditions to the Second Closing set forth in Sections 6 and 7 below
have been satisfied (or such later date as is mutually agreed to by the Company
and the Buyer(s)) (the “Second Closing Date”).  The Third Closing of the
purchase and sale of the Convertible Debentures shall take place at 4:00 p.m.
Eastern Standard Time on the business day immediately following the date the
conditions to the Third Closing set forth in Sections 6 and 7 below have been
satisfied (or such later date as is mutually agreed to by the Company and the
Buyer(s)) (the “Third Closing Date,” together with the First Closing Date and
the Second Closing Date, the “Closing Dates”).  The Closings shall occur on the
respective Closing Dates at the offices of Yorkville Advisors, LLC, 3700 Hudson
Street, Suite 3700, Jersey City, New Jersey 07302 (or such other place as is
mutually agreed to by the Company and the Buyer(s)).
 
(c)    Form of Payment.  Subject to the satisfaction of the terms and conditions
of this Agreement, on each Closing Date, (i) the Buyers shall deliver to the
Company such aggregate proceeds for the Convertible Debentures and Warrants to
be issued and sold to such Buyer at such Closing, minus the fees to be paid
directly from the proceeds of such Closing as set forth herein, and (ii) the
Company shall deliver to each Buyer, Convertible Debentures and Warrants which
such Buyer is purchasing at such Closing in amounts indicated opposite such
Buyer’s name on Schedule I, duly executed on behalf of the Company.
 
2.    BUYER’S REPRESENTATIONS AND WARRANTIES.
 
 
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Each Buyer represents and warrants, severally and not jointly, that:
 
(a)    Investment Purpose.  Each Buyer is acquiring the Securities for its own
account for investment only and not with a view towards, or for resale in
connection with, the public sale or distribution thereof, except pursuant to
sales registered or exempted under the Securities Act; provided, however, that
by making the representations herein, such Buyer reserves the right to dispose
of the Securities at any time in accordance with or pursuant to an effective
registration statement covering such Securities or an available exemption under
the Securities Act.  Such Buyer does not presently have any agreement or
understanding, directly or indirectly, with any Person to distribute any of the
Securities.
 
(b)    Accredited Investor Status.  At the time each Buyer was offered the
Securities it was, and at the date hereof, and on each date it exercises the
Warrants and converts the Convertible Debentures it will be, an “Accredited
Investor” as that term is defined in Rule 501(a)(3) of Regulation D.  Such Buyer
is not a registered broker-dealer under Section 15 of the Exchange Act.
 
(c)    Reliance on Exemptions.  Each Buyer understands that the Securities are
being offered and sold to it in reliance on specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying in part upon the truth and accuracy of, and such
Buyer’s compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire the Securities.
 
(d)    Information.  Each Buyer and its advisors (and his or, its counsel), if
any, have been furnished with all materials relating to the business, finances
and operations of the Company and information such Buyer and/or its advisors, if
any, deemed material to making an informed investment decision regarding the
purchase of the Securities, which have been requested by such Buyer.  Each Buyer
and its advisors, if any, have been afforded the opportunity to ask questions of
the Company and its management.  Neither such inquiries nor any other due
diligence investigations conducted by such Buyer or its advisors, if any, or its
representatives shall modify, amend or affect such Buyer’s right to rely on the
Company’s representations and warranties contained in Section 3 below.  Each
Buyer understands that its investment in the Securities involves a high degree
of risk and represents that it is able to bear the economic risk of an
investment in the Securities and, as of the date of this Agreement, is able to
afford a complete loss of such investment.  Each Buyer, either alone or together
with its representatives, has such knowledge, sophistication and experience in
business and financial matters so as to be capable of evaluating the merits and
risks of an investment in the securities and has so evaluated the merits and
risks of such investment.  Each Buyer has sought such accounting, legal and tax
advice, as it has considered necessary to make an informed investment decision
with respect to its acquisition of the Securities.
 
(e)    No Governmental Review.  Each Buyer understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Securities, or the
fairness or suitability of the investment in the Securities, nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.
 
 
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(f)    Transfer or Resale.  Each Buyer understands that except as provided in
the Registration Rights Agreement: (i) the Securities have not been and are not
being registered under the Securities Act or any state securities laws, and may
not be offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) such Buyer shall have delivered to the Company an
opinion of counsel, in a generally acceptable form, to the effect that such
Securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration requirements, or (C)
such Buyer provides the Company with reasonable assurances (in the form of
seller and broker representation letters) that such Securities can be sold,
assigned or transferred pursuant to Rule 144, Rule 144(k), or Rule 144A
promulgated under the Securities Act, as amended (or a successor rule thereto)
(collectively, “Rule 144”), in each case following the applicable holding period
set forth therein; (ii) any sale of the Securities made in reliance on Rule 144
may be made only in accordance with the terms of Rule 144 and further, if Rule
144 is not applicable, any resale of the Securities 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) neither the Company nor any other
person is under any obligation to register the Securities under the Securities
Act or any state securities laws or to comply with the terms and conditions of
any exemption thereunder.
 
(g)    Legends.  Each Buyer agrees to the imprinting, so long as is required by
this Section 2(g), of a restrictive legend in substantially the following form:
 
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS.  THE SECURITIES HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT PURPOSES AND NOT
WITH A VIEW TOWARD RESALE AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR
ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS.
 
Certificates evidencing the Conversion Shares or Warrant Shares shall not
contain any legend (including the legend set forth above), (i) while a
registration statement (including the Registration Statement) covering the
resale of such security is effective under the Securities Act, (ii) following
any sale of such Conversion Shares or Warrant Shares pursuant to Rule 144, (iii)
if such Conversion Shares or Warrant Shares are eligible for sale under Rule
144(k), or (iv) if such legend is not required under applicable requirements of
the Securities Act (including judicial interpretations and pronouncements issued
by the staff of the SEC).  The Company shall cause its counsel to issue a legal
opinion to the Company’s transfer agent
 
 
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promptly after the effective date (the “Effective Date”) of a Registration
Statement if required by the Company’s transfer agent to effect the removal of
the legend hereunder.  If all or any portion of the Convertible Debentures or
Warrants are exercised by a Buyer that is not an Affiliate of the Company (a
“Non-Affiliated Buyer”) at a time when there is an effective registration
statement to cover the resale of the Conversion Shares or the Warrant Shares,
such Conversion Shares or Warrant Shares shall be issued free of all
legends.  The Company agrees that following the Effective Date or at such time
as such legend is no longer required under this Section 2(g), it will, no later
than three (3) Trading Days following the delivery by a Non-Affiliated Buyer to
the Company or the Company’s transfer agent of a certificate representing
Conversion Shares or Warrant Shares, as the case may be, issued with a
restrictive legend (such third Trading Day, the “Legend Removal Date”), deliver
or cause to be delivered to such Non-Affiliated Buyer a certificate representing
such shares that is free from all restrictive and other legends.  The Company
may not make any notation on its records or give instructions to any transfer
agent of the Company that enlarge the restrictions on transfer set forth in this
Section.  Each Buyer acknowledges that the Company’s agreement hereunder to
remove all legends from Conversion Shares or Warrant Shares is not an
affirmative statement or representation that such Conversion Shares or Warrant
Shares are freely tradable.  Each Buyer, severally and not jointly with the
other Buyers, agrees that the removal of the restrictive legend from
certificates representing Securities as set forth in this Section 3(g) is
predicated upon the Company’s reliance that the Buyer will sell any Securities
pursuant to either the registration requirements of the Securities Act,
including any applicable prospectus delivery requirements, or an exemption
therefrom, and that if Securities are sold pursuant to a Registration Statement,
they will be sold in compliance with the plan of distribution set forth therein.
 
(h)    Authorization, Enforcement.  This Agreement has been duly and validly
authorized, executed and delivered on behalf of such Buyer and is a valid and
binding agreement of such Buyer enforceable in accordance with its terms, except
as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and
other similar laws relating to, or affecting generally, the enforcement of
applicable creditors’ rights and remedies.
 
(i)    Receipt of Documents.  Each Buyer and his or its counsel has received and
read in their entirety:  (i) this Agreement and each representation, warranty
and covenant set forth herein and the Transaction Documents (as defined herein);
(ii) all due diligence and other information necessary to verify the accuracy
and completeness of such representations, warranties and covenants; (iii) the
Company’s Form 10-K for the fiscal year ended December 31, 2007, and (iv)
answers to all questions each Buyer submitted to the Company regarding an
investment in the Company; and each Buyer has relied on the information
contained therein and has not been furnished any other documents, literature,
memorandum or prospectus.
 
(j)    Due Formation of Corporate and Other Buyers.  If the Buyer(s) is a
corporation, trust, partnership or other entity that is not an individual
person, it has been formed and validly exists and has not been organized for the
specific purpose of purchasing the Securities and is not prohibited from doing
so.
 
 
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(k)    No Legal Advice From the Company.  Each Buyer acknowledges, that it had
the opportunity to review this Agreement and the transactions contemplated by
this Agreement with his or its own legal counsel and investment and tax
advisors.  Each Buyer is relying solely on such counsel and advisors and not on
any statements or representations of the Company or any of its representatives
or agents for legal, tax or investment advice with respect to this investment,
the transactions contemplated by this Agreement or the securities laws of any
jurisdiction.
 
(l)    No Conflicts.  The execution, delivery and performance by such Buyer of
this Agreement and the Registration Rights Agreement and the consummation by
such Buyer of the transactions contemplated hereby and thereby will not (i)
result in a violation of the organizational documents of such Buyer, or (ii)
conflict with, or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which such Buyer is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment  or decree applicable to
such Buyer, except in the case of clauses (ii) and (iii) above, for such
conflicts, defaults, rights or violations which would not, individually or in
the aggregate, reasonably be expected to have a material adverse effect on the
ability of such Buyer to perform its obligations hereunder.
 
(m)    Limited Ownership.  The purchase by Buyers of the Securities issuable to
them at the Closing will not result in such Buyers (in the aggregate or together
with other persons with whom such Buyers have identified, or will have
identified, themselves as part of a “group” in a public filing made with the SEC
involving the Company’s securities) acquiring, or obtaining the right to
acquire, in excess of 19.99% of the outstanding shares of Common Stock or the
voting power of the Company on a post transaction basis that assumes that the
Closings shall have occurred. No Buyer presently intends to, alone or together
with others, make a public filing with the SEC to disclose that it has (or that
it together with such other persons have) acquired, or obtained the right to
acquire, as a result of the Closings (when added to any other securities of the
Company that it or they then own or have the right to acquire), in excess of
19.99% of the outstanding shares of Common Stock or the voting power of the
Company on a post transaction basis that assumes that the Closings shall have
occurred.
 
3.    REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
 
Except as set forth under the corresponding section of the Disclosure Schedules
which Disclosure Schedules shall be deemed a part hereof and to qualify any
representation or warranty otherwise made herein to the extent of such
disclosure, the Company hereby makes the representations and warranties set
forth below to each Buyer:
 
(a)    Subsidiaries.  All of the direct and indirect subsidiaries of the Company
are set forth on Schedule 3(a).  The Company owns, directly or indirectly, all
of the capital stock or other equity interests of each subsidiary free and clear
of any liens, and all the issued and outstanding shares of capital stock of each
subsidiary are validly issued and are fully paid, non-assessable and free of
preemptive and similar rights to subscribe for or purchase securities.
 
 
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(b)    Organization and Qualification.  The Company and its subsidiaries are
corporations duly organized, validly existing and in good standing under the
laws of the jurisdiction in which they are incorporated, and have the requisite
corporate power to own their properties and to carry on their business as now
being conducted.  Each of the Company and its subsidiaries is duly qualified as
a foreign corporation to do business and is in good standing in every
jurisdiction in which the nature of the business conducted by it makes such
qualification necessary, except to the extent that the failure to be so
qualified or be in good standing would not have or reasonably be expected to
result in (i) a material adverse effect on the legality, validity or
enforceability of any Transaction Document, (ii) a material adverse effect on
the results of operations, assets, business or condition (financial or
otherwise) of the Company and the subsidiaries, taken as a whole, or (iii) a
material adverse effect on the Company’s ability to perform in any material
respect on a timely basis its obligations under any Transaction Document (any of
(i), (ii) or (iii), a “Material Adverse Effect”) and no proceeding has been
instituted in any such jurisdiction revoking, limiting or curtailing or seeking
to revoke, limit or curtail such power and authority or qualification.
 
(c)    Authorization, Enforcement, Compliance with Other Instruments.  (i) The
Company has the requisite corporate power and authority to enter into and
perform its obligations under this Agreement, the Convertible Debentures, the
Warrants, the Security Documents, the Registration Rights Agreement, the
Irrevocable Transfer Agent Instructions, and each of the other agreements
entered into by the parties hereto in connection with the transactions
contemplated by this Agreement (collectively the “Transaction Documents”) and to
issue the Securities in accordance with the terms hereof and thereof, (ii) the
execution and delivery of the Transaction Documents by the Company and the
consummation by it of the transactions contemplated hereby and thereby,
including, without limitation, the issuance of the Securities, the reservation
for issuance and the issuance of the Conversion Shares, and the reservation for
issuance and the issuance of the Warrant Shares, have been duly authorized by
the Company’s Board of Directors and no further consent or authorization is
required by the Company, its Board of Directors or its stockholders, (iii) the
Transaction Documents have been duly executed and delivered by the Company, (iv)
the Transaction Documents constitute the valid and binding obligations of the
Company enforceable against the Company in accordance with their terms, except
as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of creditors’
rights and remedies.  The authorized officer of the Company executing the
Transaction Documents knows of no reason why the Company cannot file the
Registration Statement as required under the Registration Rights Agreement or
perform any of the Company’s other obligations under the Transaction Documents.
 
(d)    Capitalization.  The authorized capital stock of the Company consists of
100,000,000 shares of Common Stock and 15,000,000 shares of Preferred Stock, par
value $0.001 (“Preferred Stock”) of which 77,885,880 shares of Common Stock and
zero shares of Preferred Stock are issued and outstanding.  All of the
outstanding shares of capital stock of the Company are validly issued, fully
paid and nonassessable, have been issued in compliance with all federal and
state securities laws, and none of such outstanding shares was issued in
violation of any preemptive rights or similar rights to subscribe for or
purchase securities.  Except as disclosed in Schedule 3(d): (i) none of the
Company's capital stock is subject to preemptive rights or any other similar
rights or any liens or encumbrances suffered or permitted by the Company; (ii)
there are no outstanding options, warrants,
 
 
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scrip, rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, or exercisable or
exchangeable for, any capital stock of the Company or any of its subsidiaries,
or contracts, commitments, understandings or arrangements by which the Company
or any of its subsidiaries is or may become bound to issue additional capital
stock of the Company or any of its subsidiaries or options, warrants, scrip,
rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, or exercisable or
exchangeable for, any capital stock of the Company or any of its subsidiaries;
(iii) there are no outstanding debt securities, notes, credit agreements, credit
facilities or other agreements, documents or instruments evidencing indebtedness
of the Company or any of its subsidiaries or by which the Company or any of its
subsidiaries is or may become bound; (iv) there are no financing statements
securing obligations in any material amounts, either singly or in the aggregate,
filed in connection with the Company or any of its subsidiaries; (v) there are
no outstanding securities or instruments of the Company or any of its
subsidiaries which contain any redemption or similar provisions, and there are
no contracts, commitments, understandings or arrangements by which the Company
or any of its subsidiaries is or may become bound to redeem a security of the
Company or any of its subsidiaries; (vi) there are no securities or instruments
containing anti-dilution or similar provisions that will be triggered by the
issuance of the Securities; (vii) the Company does not have any stock
appreciation rights or "phantom stock" plans or agreements or any similar plan
or agreement; and (viii) the Company and its subsidiaries have no liabilities or
obligations required to be disclosed in the SEC Documents but not so disclosed
in the SEC Documents, other than those incurred in the ordinary course of the
Company's or its subsidiaries' respective businesses and which, individually or
in the aggregate, do not or would not result in a Material Adverse Effect.  The
Company has furnished to the Buyers true, correct and complete copies of the
Company's Certificate of Incorporation, as amended and as in effect on the date
hereof (the “Certificate of Incorporation”), and the Company's Bylaws, as
amended and as in effect on the date hereof (the “Bylaws”), and the terms of all
securities convertible into, or exercisable or exchangeable for, shares of
Common Stock and the material rights of the holders thereof in respect
thereto.  No further approval or authorization of any stockholder, the Board of
Directors of the Company or others is required for the issuance and sale of the
Securities.  There are no stockholders agreements, voting agreements or other
similar agreements with respect to the Company’s capital stock to which the
Company is a party or, to the knowledge of the Company, between or among any of
the Company’s stockholders.
 
(e)    Issuance of Securities.  The Convertible Debentures and the Warrants when
issued in accordance with this Agreement will be duly authorized and free from
all taxes, liens and charges with respect to the issue thereof.  The issuance of
the Conversion Shares and the Warrant Shares, upon conversion in accordance with
the terms of the Convertible Debentures or exercise in accordance with the
Warrants, as the case may be, will be validly issued, fully paid and
nonassessable, free from all taxes, liens and charges with respect to the issue
thereof.
 
(f)    No Conflicts.   The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby (including, without limitation, the
issuance of the Convertible Debentures and the Warrants, and reservation for
issuance and issuance of the Conversion Shares and the Warrant Shares in
accordance with the terms of this Agreement) will not (i) result in a violation
of any certificate of incorporation, certificate
 
 
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of formation, any certificate of designations or other constituent documents of
the Company or any of its subsidiaries, any capital stock of the Company or any
of its subsidiaries or bylaws of the Company or any of its subsidiaries or (ii)
conflict with, or constitute a default (or an event which with notice or lapse
of time or both would become a default) in any respect under, or give to others
any rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Company or any of its
subsidiaries is a party, or (iii) result in a violation of any law, rule,
regulation, order, judgment or decree (including foreign, federal and state
securities laws and regulations and the rules and regulations of the American
Stock Exchange (AMEX)) applicable to the Company or any of its subsidiaries or
by which any property or asset of the Company or any of its subsidiaries is
bound or affected; except in the case of each of clauses (ii) and (iii), such as
could not, individually or in the aggregate, have or reasonably be expected to
result in a Material Adverse Effect.  The business of the Company and its
subsidiaries is not being conducted, and shall not be conducted in violation of
any material law, ordinance, or regulation of any governmental entity.  Except
as specifically contemplated by this Agreement and as required under the
Securities Act, any applicable state securities laws and the rules and
regulations of the AMEX, the Company is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court or
governmental agency in order for it to execute, deliver or perform any of its
obligations under or contemplated by this Agreement or the Registration Rights
Agreement in accordance with the terms hereof or thereof.  All consents,
authorizations, orders, filings and registrations which the Company is required
to obtain pursuant to the preceding sentence have been obtained or effected on
or prior to the date hereof.  The Company and its subsidiaries are unaware of
any facts or circumstance, which might give rise to any of the foregoing.
 
(g)    SEC Documents; Financial Statements.  Except as set forth in Schedule
3(g), the Company has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), for the two years preceding the
date hereof (or such shorter period as the Company was required by law or
regulation to file such material) (all of the foregoing filed prior to the date
hereof or amended after the date hereof and all exhibits included therein and
financial statements and schedules thereto and documents incorporated by
reference therein, being hereinafter referred to as the “SEC Documents”) on
timely basis or has received a valid extension of such time of filing and has
filed any such SEC Document prior to the expiration of any such extension.  The
Company has delivered to the Buyers or their representatives, or made available
through the SEC’s website at http://www.sec.gov, true and complete copies of the
SEC Documents.  As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the Exchange Act and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC
Documents.  As of their respective dates, the financial statements of the
Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto.  Such financial statements have
been prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).  No other information provided by or on behalf of the Company to
the Buyers which is not included in the SEC Documents, including, without
limitation, information referred to in Section 2(i) of this Agreement, contains
any untrue statement of a material fact or omits to state any material fact
necessary in order to make the statements therein, in the light of the
circumstance under which they are or were made and not misleading.
 
 
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(h)    10(b)-5.  The SEC Documents do not, and did not at the time of their
filing, include any untrue statements of material fact, nor do they, nor did
they at the time of their filing, omit to state any material fact required to be
stated therein necessary to make the statements made, in light of the
circumstances under which they were made, not misleading.
 
(i)    Absence of Litigation.  Except as set forth in Schedule 3(i), there is no
action, suit, proceeding, inquiry or investigation before or by any court,
public board, government agency, self-regulatory organization or body pending
against or affecting the Company, the Common Stock or any of the Company’s
subsidiaries, wherein an unfavorable decision, ruling or finding would result in
a Material Adverse Effect.
 
(j)    Acknowledgment Regarding Buyer’s Purchase of the Convertible
Debentures.  The Company acknowledges and agrees that each Buyer is acting
solely in the capacity of an arm’s length purchaser with respect to this
Agreement and the transactions contemplated hereby.  The Company further
acknowledges that each Buyer is not acting as a financial advisor or fiduciary
of the Company (or in any similar capacity) with respect to this Agreement and
the transactions contemplated hereby and any advice given by each Buyer or any
of their respective representatives or agents in connection with this Agreement
and the transactions contemplated hereby is merely incidental to such Buyer’s
purchase of the Securities.  The Company further represents to each Buyer that
the Company’s decision to enter into this Agreement has been based solely on the
independent evaluation by the Company and its representatives.
 
(k)    No General Solicitation.  Neither the Company, nor any of its affiliates,
nor any person acting on its or their behalf, has engaged in any form of general
solicitation or general advertising (within the meaning of Regulation D under
the Securities Act) in connection with the offer or sale of the Securities.
 
(l)    No Integrated Offering.  Neither the Company, nor any of its affiliates,
nor any person acting on its or their behalf has, directly or indirectly, made
any offers or sales of any security or solicited any offers to buy any security,
under circumstances that would require registration of the Securities under the
Securities Act or cause this offering of the Securities to be integrated with
prior offerings by the Company for purposes of the Securities Act.
 
(m)    Employee Relations.  Neither the Company nor any of its subsidiaries is
involved in any labor dispute or, to the knowledge of the Company or any of its
subsidiaries, is any such dispute threatened.  None of the Company’s or its
subsidiaries’ employees is a member of a union and the Company and its
subsidiaries believe that their relations with their employees are good.
 
 
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(n)    Intellectual Property Rights.  The Company and its subsidiaries own or
possess adequate rights or licenses to use all trademarks, trade names, service
marks, service mark registrations, service names, patents, patent rights,
copyrights, inventions, licenses, approvals, governmental authorizations, trade
secrets and rights necessary to conduct their respective businesses as now
conducted, except as would not result in a Material Adverse Effect.  The Company
and its subsidiaries do not have any knowledge of any infringement by the
Company or its subsidiaries of trademark, trade name rights, patents, patent
rights, copyrights, inventions, licenses, service names, service marks, service
mark registrations, trade secret or other similar rights of others, and, to the
knowledge of the Company there is no claim, action or proceeding being made or
brought against, or to the Company’s knowledge, being threatened against, the
Company or its subsidiaries regarding trademark, trade name, patents, patent
rights, invention, copyright, license, service names, service marks, service
mark registrations, trade secret or other infringement; and the Company and its
subsidiaries are unaware of any facts or circumstances which might give rise to
any of the foregoing.
 
(o)    Environmental Laws.  The Company and its subsidiaries are (i) in
compliance with any and all applicable foreign, federal, state and local laws
and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants (“Environmental Laws”), (ii) have received all permits, licenses or
other approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval.
 
(p)    Title.  All real property and facilities held under lease by the Company
and its subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere with the
use made and proposed to be made of such property and buildings by the Company
and its subsidiaries.
 
(q)    Insurance.  The Company and each of its subsidiaries is insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as management of the Company believes to be prudent and
customary in the businesses in which the Company and its subsidiaries are
engaged.  Neither the Company nor any such subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such
subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition,
financial or otherwise, or the earnings, business or operations of the Company
and its subsidiaries, taken as a whole.
 
(r)    Regulatory Permits.  The Company and its subsidiaries possess all
material certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct their
respective businesses, and neither the Company nor any such subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit.
 
 
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(s)    Internal Accounting Controls.  The Company and each of its subsidiaries
maintains a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management’s general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset accountability,
and (iii) the recorded amounts for assets are compared with the existing assets
at reasonable intervals and appropriate action is taken with respect to any
differences.
 
(t)    No Material Adverse Breaches, etc.  Neither the Company nor any of its
subsidiaries is subject to any charter, corporate or other legal restriction, or
any judgment, decree, order, rule or regulation which in the judgment of the
Company’s officers has or is expected in the future to result in a Material
Adverse Effect on the business, properties, operations, financial condition,
results of operations or prospects of the Company or its subsidiaries.  Neither
the Company nor any of its subsidiaries is in breach of any contract or
agreement which breach, in the judgment of the Company’s officers, has or is
expected to result in a Material Adverse Effect on the business, properties,
operations, financial condition, results of operations or prospects of the
Company or its subsidiaries.
 
(u)    Tax Status.  The Company and each of its subsidiaries has made and filed
all federal and state income and all other tax returns, reports and declarations
required by any jurisdiction to which it is subject and (unless and only to the
extent that the Company and each of its subsidiaries has set aside on its books
provisions reasonably adequate for the payment of all unpaid and unreported
taxes) has paid all taxes and other governmental assessments and charges that
are material in amount, shown or determined to be due on such returns, reports
and declarations, except those being contested in good faith and has set aside
on its books provision reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or declarations
apply.  There are no unpaid taxes in any material amount claimed to be due by
the taxing authority of any jurisdiction, and the officers of the Company know
of no basis for any such claim.
 
(v)    Certain Transactions.  Except for arm’s length transactions pursuant to
which the Company makes payments in the ordinary course of business upon terms
no less favorable than the Company could obtain from third parties and other
than the grant of stock options disclosed in the SEC Documents, none of the
officers, directors, or employees of the Company is presently a party to any
transaction with the Company (other than for services as employees, officers and
directors), including any contract, agreement or other arrangement providing for
the furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any corporation,
partnership, trust or other entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner.
 
(w)    Fees and Rights of First Refusal.  The Company is not obligated to offer
the securities offered hereunder on a right of first refusal basis or otherwise
to any third parties including, but not limited to, current or former
shareholders of the Company, underwriters, brokers, agents or other third
parties.
 
 
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(x)    Investment Company. The Company is not, and is not an affiliate of, and
immediately after receipt of payment for the Securities, will not be or be an
affiliate of, an “investment company” within the meaning of the Investment
Company Act of 1940, as amended.  The Company shall conduct its business in a
manner so that it will not become subject to the Investment Company Act.
 
(y)    Registration Rights.  Except as set forth in Schedule 3(y), other than
each of the Buyers, no Person has any right to cause the Company to effect the
registration under the Securities Act of any securities of the Company.  Except
as set forth in Schedule 3(y), there are no outstanding registration statements
not yet declared effective and there are no outstanding comment letters from the
SEC or any other regulatory agency.
 
(z)    Private Placement. Assuming the accuracy of the Buyers’ representations
and warranties set forth in Section 2, no registration under the Securities Act
is required for the offer and sale of the Securities by the Company to the
Buyers as contemplated hereby. The issuance and sale of the Securities hereunder
does not contravene the rules and regulations of the Primary Market.
 
(aa)   Listing and Maintenance Requirements.  The Company’s Common Stock is
registered pursuant to Section 12(b) or 12(g) of the Exchange Act, and the
Company has taken no action designed to terminate, or which to its knowledge is
likely to have the effect of, terminating the registration of the Common Stock
under the Exchange Act nor has the Company received any notification that the
SEC is contemplating terminating such registration.  Except as set forth in
Schedule 3(aa), the Company has not, in the twelve (12) months preceding the
date hereof, received notice from any Primary Market on which the Common Stock
is or has been listed or quoted to the effect that the Company is not in
compliance with the listing or maintenance requirements of such Primary
Market.  The Company is, and has no reason to believe that it will not in the
foreseeable future continue to be, in compliance with all such listing and
maintenance requirements.
 
(bb)   Manipulation of Price.  The Company has not, and to its knowledge no one
acting on its behalf has, (i) taken, directly or indirectly, any action designed
to cause or to result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of any of the
Securities, (ii) sold, bid for, purchased, or, paid any compensation for
soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay
to any Person any compensation for soliciting another to purchase any other
securities of the Company, other than, in the case of clauses (ii) and (iii),
compensation paid to the Company’s placement agent in connection with the
placement of the Securities.
 
(cc)   Dilutive Effect.  The Company understands and acknowledges that the
number of Conversion Shares issuable upon conversion of the Convertible
Debentures and the Warrant Shares issuable upon exercise of the Warrants will
increase in certain circumstances.  The Company further acknowledges that its
obligation to issue Conversion Shares upon conversion of the Convertible
Debentures in accordance with this Agreement and the Convertible Debentures and
its obligation to issue the Warrant Shares upon exercise of the Warrants in
accordance with this Agreement and the Warrants, in each case, is absolute and
unconditional regardless of the dilutive effect that such issuance may have on
the ownership interests of other stockholders of the Company.
 
 
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(dd)   Disclosure.  The Company has made available to the Buyer and its counsel
all the information reasonably available to the Company that the Buyer or its
counsel have requested for deciding whether to acquire the Securities.  No
representation or warranty of the Company contained in this Agreement (as
qualified by the Disclosure Schedule) or any of the other Transaction Documents,
and no certificate furnished or to be furnished to the Buyer at the Closing, or
any due diligence evaluation materials furnished by the Company or on behalf of
the Company, including without limitation, due diligence questionnaires, or any
other documents, presentations, correspondence, or information contains any
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements contained herein or therein not misleading in
light of the circumstances under which they were made.
 
(ee)   Reporting Status.  With a view to making available to the Buyer the
benefits of Rule 144 or any similar rule or regulation of the SEC that may at
any time permit the Buyer to sell securities of the Company to the public
without registration, and as a material inducement to the Buyer’s purchase of
the Securities, the Company represents and warrants to the following: (i) the
Company is, and has been for a period of at least 90 days immediately preceding
the date hereof, subject to the reporting requirements of section 13 or 15(d) of
the Exchange Act (ii) the Company has filed all required reports under section
13 or 15(d) of the Exchange, as applicable, during the 12 months preceding the
date hereof (or for such shorter period that the Company was required to file
such reports)
 
(ff)   Prior Shell Company Status. The Company previously has been an issuer
defined as a “Shell Company,” but has ceased to be an issuer described as a
“Shell Company” since August 28, 2004, the date that is one year following the
filing of the “Form 10 Information” as described below.  The Company has filed
current “Form 10 Information” with the SEC reflecting its status as an entity
that no longer is a Shell Company in its Registration Statement on Form S-1,
which was filed with the SEC on August 28, 2003.  For the purposes hereof, the
term “Shell Company” shall mean an issuer that meets the description defined in
paragraph (i)(1)(i) of Rule 144 and the term “Form 10 Information” shall have
the meaning set forth in paragraph (i)(3) of Rule 144.
 
Each Buyer acknowledges and agrees that the Company has not made and does not
make any representations or warranties with respect to the transactions
contemplated hereby other than those specifically set forth in his Section 3.
 
4.    COVENANTS.
 
(a)    Best Efforts.  Each party shall use its best efforts to timely satisfy
each of the conditions to be satisfied by it as provided in Sections 6 and 7 of
this Agreement.
 
 
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(b)    Form D.  The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to each
Buyer promptly after such filing.  The Company shall, on or before the Closing
Date, take such action as the Company shall reasonably determine is necessary to
qualify the Securities, or obtain an exemption for the Securities for sale to
the Buyers at the Closing pursuant to this Agreement under applicable securities
or “Blue Sky” laws of the states of the United States, and shall provide
evidence of any such action so taken to the Buyers on or prior to the Closing
Date.
 
(c)    Reporting Status.  With a view to making available to the Buyer the
benefits of Rule 144 or any similar rule or regulation of the SEC that may at
any time permit the Buyer to sell securities of the Company to the public
without registration, and as a material inducement to the Buyer’s purchase of
the Securities, the Company represents, warrants, and covenants to the
following:
 
(i)    The Company is subject to the reporting requirements of section 13 or
15(d) of the Exchange Act and has filed all required reports under section 13 or
15(d) of the Exchange Act during the 12 months prior to the date hereof (or for
such shorter period that the issuer was required to file such reports), other
than Form 8-K reports;
 
(ii)    from the date hereof until all the Securities either have been sold by
the Buyer, or may permanently be sold by the Buyer without any restrictions
pursuant to Rule 144, (the “Registration Period”) the Company shall file with
the SEC in a timely manner all required reports under section 13 or 15(d) of the
Exchange Act and such reports shall conform to the requirement of the Exchange
Act and the SEC for filing thereunder;
 
(iii)    The Company shall furnish to the Buyer so long as the Buyer owns
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, (ii) a copy of the
most recent annual or quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information as may be
reasonably requested to permit the Buyers to sell such securities pursuant to
Rule 144 without registration; and
 
(iv)    During the Registration Period the Company shall not terminate its
status as an issuer required to file reports under the Exchange Act even if the
Exchange Act or the rules and regulations thereunder would otherwise permit such
termination.
 
(d)    Use of Proceeds.  The Company will use the proceeds from the sale of the
Convertible Debentures for general corporate and working capital purposes.
 
(e)    Reservation of Shares.  On the date hereof, the Company shall reserve
4,700,000 shares for issuance to the Buyers upon conversion of the Convertible
Debentures and exercise of the Warrants issued in the First Closing
(collectively, the “First Closing Share Reserve”).  On or before the date of the
Second Closing, the Company shall reserve for issuance 2,125,000 shares for
issuance to the Buyers upon conversion of the Convertible Debentures and
exercise of the Warrants issued in the Second Closing (collectively, the “Second
Closing Share Reserve”).  On or before the date of the Third Closing, the
Company shall reserve for issuance 12,526,000 shares for issuance to the
 
 
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Buyers upon conversion of the Convertible Debentures and exercise of the
Warrants issued in the Third Closing (collectively, the “Third Closing Share
Reserve,” together with the First Closing Share Reserve and the Second Closing
Share Reserve, the “Share Reserve”).  The Company represents that, as of the
date of this Agreement, it has sufficient authorized and unissued shares of
Common Stock available to create the First Closing Share Reserve after
considering all other commitments that may require the issuance of Common
Stock.  The Company shall take all action reasonably necessary to at all times
have authorized, and reserved for the purpose of issuance, such number of shares
of Common Stock as shall be necessary to effect the full conversion of the
Convertible Debentures and the full exercise of the Warrants then
outstanding.  If at any time the Share Reserve is insufficient to effect the
full conversion of the Convertible Debentures or the full exercise of the
Warrants then outstanding, the Company shall increase the Share Reserve
accordingly.  If the Company does not have sufficient authorized and unissued
shares of Common Stock available to increase the Share Reserve, the Company
shall call and hold a special meeting of the shareholders within sixty (60) days
of such occurrence, for the sole purpose of increasing the number of shares
authorized.  The Company’s management shall recommend to the shareholders to
vote in favor of increasing the number of shares of Common Stock
authorized.  Management shall also vote all of its shares in favor of increasing
the number of authorized shares of Common Stock.
 
(f)    Listings or Quotation.  The Company’s Common Stock shall be listed or
quoted for trading on any of (a) the American Stock Exchange, (b) New York Stock
Exchange, (c) the Nasdaq Global Market, (d) the Nasdaq Capital Market, or (e)
the Nasdaq OTC Bulletin Board (which does not include the Pink Sheets LLC)
(“OTCBB”) (each, a “Primary Market”).  The Company shall promptly secure the
listing of all of the Registrable Securities (as defined in the Registration
Rights Agreement) upon each national securities exchange and automated quotation
system, if any, upon which the Common Stock is then listed (subject to official
notice of issuance) and shall maintain such listing of all Registrable
Securities from time to time issuable under the terms of the Transaction
Documents.
 
(g)    Fees and Expenses.
 
(i)    The Company shall pay all of its costs and expenses incurred by it
connection with the negotiation, investigation, preparation, execution and
delivery of the Transaction Documents.
 
(ii)    The Company shall place into escrow an aggregate of $350,000, which
shall be disbursed pursuant to the Escrow Agreement attached hereto as Exhibit D
(the “Escrow Agreement”). This fee shall be payable at the First Closing
directly from the proceeds thereof (collectively, the “Monitoring Fees,” and as
deposited into escrow as provided herein, the “Escrow Funds”), which shall be
used to compensate Yorkville Advisors LLC (“Investment Manager”) for monitoring
and managing the purchase and investment made by YA Global Investments, L.P.
(“YA Global”) described herein, pursuant to the Investment Manager’s existing
advisory obligations to YA Global.  The Company, Investment Manager, and YA
Global shall enter into the Escrow Agreement appointing David Gonzalez, Esq. as
escrow agent (the “Escrow Agent”) to hold the Escrow Funds and to periodically
disburse portions of such Escrow Funds to the Investment Manager from escrow in
accordance with the terms of the Escrow Agreement.  The Investment Manager shall
periodically receive portions of the Escrow Funds in accordance with the Escrow
Agreement until either: (1) the Escrow Funds shall have been fully disbursed
pursuant the Escrow Agreement or (2) the Securities shall have been Fully
Retired.  “Fully Retired” shall mean that the Buyer shall have fully disposed of
all the Securities issued or issuable hereunder, shall no longer have any
investment in, or ownership of, any of the Securities, all amounts owed to YA
Global under the Transaction Documents shall have been paid, and the Transaction
Documents shall have been terminated.  When the Securities are Fully Retired,
the remaining Escrow Funds shall be returned to the Company or otherwise
disbursed in accordance with the Escrow Agreement.
 
 
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(iii)    The Company shall pay a structuring and due diligence  fee to Yorkville
Advisors LLC of One Hundred Thousand Dollars ($100,000), of which Five Thousand
Dollars ($5,000) has been paid and the remaining Ninety-Five Thousand Dollars
($95,000) shall be paid directly from the proceeds of the First Closing.  The
structuring and due diligence fee shall be nonrefundable and payable whether or
not any Closing occurs.
 
(h)    Corporate Existence.  So long as any of the Convertible Debentures remain
outstanding, the Company shall not directly or indirectly consummate any merger,
reorganization, restructuring, reverse stock split consolidation, sale of all or
substantially all of the Company’s assets or any similar transaction or related
transactions (each such transaction, an “Organizational Change”) unless, prior
to the consummation an Organizational Change, the Company obtains the written
consent of each Buyer, which consent shall not be unreasonably withheld,
conditioned or delayed.  In the event an Organizational Change is consummated,
the Company will make appropriate provision with respect to such holders’ rights
and interests to insure that the provisions of this Section 4(h) will thereafter
be applicable to the Convertible Debentures.
 
(i)    Transactions With Affiliates.  So long as any Convertible Debentures are
outstanding, the Company shall not, and shall cause each of its subsidiaries not
to, enter into, amend, modify or supplement, or permit any subsidiary to enter
into, amend, modify or supplement any agreement, transaction, commitment, or
arrangement with any of its or any subsidiary’s officers, directors, person who
were officers or directors at any time during the previous two (2) years,
stockholders who beneficially own five percent (5%) or more of the Common Stock,
or Affiliates (as defined below) or with any individual related by blood,
marriage, or adoption to any such individual or with any entity in which any
such entity or individual owns a five percent (5%) or more beneficial interest
(each a “Related Party”), except for (a) customary employment arrangements and
benefit programs on commercially reasonable terms, (b) any investment in an
Affiliate of the Company, (c) any agreement, transaction, commitment, or
arrangement on an arms-length basis on terms no less favorable than terms which
would have been obtainable from a person other than such Related Party, (d) any
agreement, transaction, commitment, or arrangement which is approved by a
majority of the disinterested directors of the Company; for purposes hereof, any
director who is also an officer of the Company or any subsidiary of the Company
shall not be a disinterested director with respect to any such agreement,
transaction, commitment, or arrangement.  “Affiliate” for purposes hereof means,
with respect to any person or entity, another person or entity that, directly or
indirectly, (i) controls, (ii) is controlled by, or (iii) is under common
control with that person or entity.  “Control” or “controls” for purposes hereof
means that a person or entity has the power, direct or indirect, to conduct or
govern the policies of another person or entity.
 
 
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(j)    Transfer Agent.  The Company covenants and agrees that, in the event that
the Company’s agency relationship with the transfer agent should be terminated
for any reason prior to a date which is two (2) years after the Closing Date,
the Company shall immediately appoint a new transfer agent and shall require
that the new transfer agent execute and agree to be bound by the terms of the
Irrevocable Transfer Agent Instructions (as defined herein).
 
(k)    Restriction on Issuance of the Capital Stock. So long as any Convertible
Debentures are outstanding, the Company shall not, without the prior written
consent of the Buyer(s), which shall not be unreasonably withheld, conditioned
or delayed, (i) issue or sell shares of Common Stock or Preferred Stock without
consideration or for a consideration per share less than the bid price of the
Common Stock determined immediately prior to its issuance, (ii) issue any
preferred stock, warrant, option, right, contract, call, or other security or
instrument granting the holder thereof the right to acquire Common Stock without
consideration or for a consideration less than such Common Stock’s Bid Price
determined immediately prior to it’s issuance, or (iii) enter into any security
instrument granting the holder a security interest in any and all assets of the
Company, except as required pursuant to any financing arrangement existing as of
the date of this Agreement, including, but not limited to, a request of
additional collateral pursuant to the Factoring and Security Agreement, dated
January 25, 2008, by and between the Company and Thermo Credit, LLC.
 
(l)    Neither the Buyer(s) nor any of its affiliates have an open short
position in the Common Stock of the Company, and the Buyer(s) agrees that it
shall not, and that it will cause its affiliates not to, engage in any short
sales of or hedging transactions with respect to the Common Stock as long as any
Convertible Debentures shall remain outstanding.
 
(m)    Additional Registration Statements.  Except as required to fulfill the
Company’s obligations existing on the date of this Agreement, until the
effective date of the initial Registration Statement, the Company will not file
a registration statement under the Securities Act relating to securities that
are not the Securities.
 
(n)    Review of Public Disclosures.  All SEC filings (including, without
limitation, all filings required under the Exchange Act, which include Forms
10-Q and 10-QSB, 10-K and 10-KSB, 8-K, etc) and other public disclosures made by
the Company, including, without limitation, all press releases, investor
relations materials, and scripts of analysts meetings and calls, shall be
reviewed and approved for release by the Company’s attorneys and, if containing
financial information, the Company’s independent certified public accountants.
 
(o)    Disclosure of Transaction.  Within four Business Days following the date
of this Agreement, the Company shall file a Current Report on Form 8-K
describing the terms of the transactions contemplated by the Transaction
Documents in the form required by the Exchange Act and attaching the material
Transaction Documents (including, without limitation, this Agreement, the form
of the Convertible Debenture, the form of Warrant and the form of the
Registration Rights Agreement) as exhibits to such filing.
 
 
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5.    TRANSFER AGENT INSTRUCTIONS.
 
(a)    The Company shall issue the Irrevocable Transfer Agent Instructions to
its transfer agent, and any subsequent transfer agent, irrevocably appointing
David Gonzalez, Esq. as the Company’s agent for purpose instructing its transfer
agent to issue certificates or credit shares to the applicable balance accounts
at The Depository Trust Company (“DTC”), registered in the name of each Buyer or
its respective nominee(s), for the Conversion Shares and the Warrant Shares
issued upon conversion of the Convertible Debentures or exercise of the Warrants
as specified from time to time by each Buyer to the Company upon conversion of
the Convertible Debentures or exercise of the Warrants.  The Company shall not
change its transfer agent without the express written consent of the Buyers,
which may be withheld by the Buyers in their sole discretion.  The Company
warrants that no instruction other than the Irrevocable Transfer Agent
Instructions referred to in this Section 5 will be given by the Company to its
transfer agent, and that the Securities shall otherwise be freely transferable
on the books and records of the Company as and to the extent provided in this
Agreement and the other Transaction Documents.  If a Buyer effects a sale,
assignment or transfer of the Securities in accordance with Section 2(f), the
Company shall promptly instruct its transfer agent to issue one or more
certificates or credit shares to the applicable balance accounts at DTC in such
name and in such denominations as specified by such Buyer to effect such sale,
transfer or assignment and, with respect to any transfer, shall permit the
transfer.  In the event that such sale, assignment or transfer involves
Conversion Shares or Warrant Shares sold, assigned or transferred pursuant to an
effective registration statement or pursuant to Rule 144, the transfer agent
shall issue such Securities to the Buyer, assignee or transferee, as the case
may be, without any restrictive legend.    Nothing in this Section 5 shall
affect in any way the Buyer’s obligations and agreement to comply with all
applicable securities laws upon resale of Conversion Shares.  The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Buyer by vitiating the intent and purpose of the
transaction contemplated hereby.  Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 5 will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 5, that the Buyer(s) shall be
entitled, in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.
 
6.    CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.
 
(a)    The obligation of the Company hereunder to issue and sell the Convertible
Debentures to the Buyer(s) at the First Closing is subject to the satisfaction,
at or before the First Closing Date, of each of the following conditions,
provided that these conditions are for the Company’s sole benefit and may be
waived by the Company at any time in its sole discretion:
 
(i)    Each Buyer shall have executed the Transaction Documents and delivered
them to the Company.
 
(ii)    The Buyer(s) shall have delivered to the Company the Purchase Price for
the Convertible Debentures and Warrants issued in the First Closing in the
respective amounts as set forth next to each Buyer on Schedule I attached
hereto, minus any fees to be paid directly from the proceeds of the First
Closing as set forth herein, by wire transfer of immediately available U.S.
funds pursuant to the wire instructions provided by the Company.
 
 
19

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(iii)    The representations and warranties of the Buyer(s) shall be true and
correct in all material respects as of the date when made and as of the First
Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date), and the Buyer(s) shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Buyer(s) at or prior to the First Closing Date.
 
(b)    The obligation of the Company hereunder to issue and sell the Convertible
Debentures to the Buyer(s) at the Second Closing is subject to the satisfaction,
at or before the Second Closing Date, of each of the following conditions,
provided that these conditions are for the Company’s sole benefit and may be
waived by the Company at any time in its sole discretion:
 
(i)    Each Buyer shall have executed the Transaction Documents and delivered
them to the Company.
 
(ii)    The Company shall have received approval from its stockholders of an
amendment to the Company’s Certificate of Incorporation authorizing at least
that number of additional shares as is required for the Company to create the
Second Closing Share Reserve.
 
(iii)    The Buyer(s) shall have delivered to the Company the Purchase Price for
the Convertible Debentures and Warrants issued in the Second Closing in the
respective amounts as set forth next to each Buyer on Schedule I attached
hereto, minus any fees to be paid directly from the proceeds the Second Closing
as set forth herein, by wire transfer of immediately available U.S. funds
pursuant to the wire instructions provided by the Company.
 
(iv)    The representations and warranties of the Buyer(s) shall be true and
correct in all material respects as of the date when made and as of the Second
Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date), and the Buyer(s) shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Buyer(s) at or prior to the Second Closing Date.
 
(v)    The issuance of the Securities by the Company to the Buyer(s) at the
Second Closing will not result in such Buyers (in the aggregate or together with
other Persons with whom such Buyers have identified, or will have identified,
themselves as part of a “group” in a public filing made with the SEC involving
the Company’s securities) acquiring, or obtaining the right to acquire, in
excess of 19.99% of the outstanding shares of Common Stock or the voting power
of the Company on a post transaction basis that assumes that the First Closing
and the Second Closing shall have occurred.
 
(c)    The obligation of the Company hereunder to issue and sell the Convertible
Debentures to the Buyer(s) at the Third Closing is subject to the satisfaction,
at or before the Third Closing Date, of each of the following conditions,
provided that these conditions are for the Company’s sole benefit and may be
waived by the Company at any time in its sole discretion:
 
 
20

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(i)    Each Buyer shall have executed the Transaction Documents and delivered
them to the Company.
 
(ii)    The Company shall have received approval from its stockholders of an
amendment to the Company’s Certificate of Incorporation authorizing at least
that number of additional shares as is required for the Company to create the
Second Closing Share Reserve and the Third Closing Share Reserve.
 
(iii)    The Buyer(s) shall have delivered to the Company the Purchase Price for
the Convertible Debentures and Warrants issued in the Third Closing in the
respective amounts as set forth next to each Buyer on Schedule I attached
hereto, minus any fees to be paid directly from the proceeds the Third Closing
as set forth herein, by wire transfer of immediately available U.S. funds
pursuant to the wire instructions provided by the Company.
 
(iv)    The representations and warranties of the Buyer(s) shall be true and
correct in all material respects as of the date when made and as of the Third
Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date), and the Buyer(s) shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Buyer(s) at or prior to the Third Closing Date.
 
(v)    The issuance of the Securities by the Company to the Buyer(s) at the
Third Closing will not result in such Buyers (in the aggregate or together with
other Persons with whom such Buyers have identified, or will have identified,
themselves as part of a “group” in a public filing made with the SEC involving
the Company’s securities) acquiring, or obtaining the right to acquire, in
excess of 19.99% of the outstanding shares of Common Stock or the voting power
of the Company on a post transaction basis that assumes that the First Closing,
the Second Closing and the Third Closing shall have occurred.
 
7.    CONDITIONS TO THE BUYER’S OBLIGATION TO PURCHASE.
 
(a)    The obligation of the Buyer(s) hereunder to purchase the Convertible
Debentures at the First Closing is subject to the satisfaction, at or before the
First Closing Date, of each of the following conditions, provided that these
conditions are for the Buyer’s sole benefit and may be waived by the Buyer at
any time in its sole discretion:
 
(i)    The Company shall have executed the Transaction Documents and delivered
the same to the Buyers.
 
(ii)    The Common Stock shall be authorized for quotation or trading on the
Primary Market, trading in the Common Stock shall not have been suspended for
any reason, and all the Conversion Shares issuable upon the conversion of the
Convertible Debentures shall be approved for listing or trading on the Primary
Market.
 
 
21

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(iii)    The representations and warranties of the Company shall be true and
correct in all material respects (except to the extent that any of such
representations and warranties is already qualified as to materiality in Section
3 above, in which case, such representations and warranties shall be true and
correct without further qualification) as of the date when made and as of the
First Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the First Closing Date.
 
(iv)    The Company shall have executed and delivered to the Buyer(s) the
Convertible Debentures and Warrants in the respective amounts set forth opposite
each Buyer’s name on Schedule I attached hereto.
 
(v)    The Buyers shall have received an opinion of counsel from counsel to the
Company in a form satisfactory to the Buyers.
 
(vi)    The Company shall have provided to the Buyers a true copy of a
certificate of good standing evidencing the formation and good standing of the
Company from the secretary of state (or comparable office) from the jurisdiction
in which the Company is incorporated, as of a date within 10 days of the First
Closing Date.
 
(vii)    The Company shall have delivered to the Buyers a certificate, executed
by the Secretary of the Company, and dated as of the First Closing Date, as to
(i) the resolutions consistent with Section 3(c) as adopted by the Company's
Board of Directors in a form reasonably acceptable to such Buyer, (ii) the
Certificate of Incorporation and (iii) the Bylaws, each as in effect at the
First Closing.
 
(viii)   The Company or the Buyer shall have filed a form UCC-1 or such other
forms as may be required to perfect the Buyer’s interest in the Pledged Property
as detailed in the Security Agreement dated the date hereof and provided proof
of such filing to the Buyer(s).
 
(ix)    The Company shall have provided to the Buyer an acknowledgement, to the
satisfaction of the Buyer, from the Company’s independent certified public
accountants as to its ability to provide all consents required in order to file
a registration statement in connection with this transaction.
 
(x)    The Company shall have created the First Closing Share Reserve.
 
(xi)    The Irrevocable Transfer Agent Instructions, in form and substance
satisfactory to the Buyer, shall have been delivered to and acknowledged in
writing by the Company’s transfer agent.
 
(xii)    The Buyer shall have completed its due diligence process and, in its
sole discretion, determined that the results are satisfactory.
 
 
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(b)    The obligation of the Buyer(s) hereunder to purchase the Convertible
Debentures at the Second Closing is subject to the satisfaction, at or before
the Second Closing Date, of each of the following conditions, provided that
these conditions are for the Buyer’s sole benefit and may be waived by the Buyer
at any time in its sole discretion:
 
(i)    The Common Stock shall be authorized for quotation or trading on the
Primary Market, trading in the Common Stock shall not have been suspended for
any reason, and all the Conversion Shares issuable upon the conversion of the
Convertible Debentures shall be approved for listing or trading on the Primary
Market.
 
(ii)    The representations and warranties of the Company shall be true and
correct in all material respects (except to the extent that any of such
representations and warranties is already qualified as to materiality in Section
3 above, in which case, such representations and warranties shall be true and
correct without further qualification) as of the date when made and as of the
Second Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the Second Closing Date.
 
(iii)    The Company shall have executed and delivered to the Buyers the
Convertible Debentures in the respective amounts set forth opposite each Buyer’s
name on Schedule I attached hereto.
 
(iv)    The Company shall have certified, in a certificate executed by two
officers of the Company and dated as of the Second Closing Date, that all
conditions to the Second Closing have been satisfied.
 
(v)    The Company shall have created the Second Closing Share Reserve.
 
(vi)    The Buyer shall have filed all required periodic reports with the SEC on
a timely basis.
 
(vii)    The Company shall have filed a registration covering all of the
Registrable Securities (as that term is defined in the Registration Rights
Agreement) within 10 days of the First Closing.
 
(viii)    No claim shall have been filed against the Company in any judicial
forum or arbitration, pursuant or related to the Stock Purchase Agreement by and
between the Company and Frank T. Matarazzo dated December 5, 2005.
 
(ix)    There shall have been no material adverse change to the Company or its
operations since the First Closing.
 
(c)    The obligation of the Buyer(s) hereunder to purchase the Convertible
Debentures at the Third Closing is subject to the satisfaction, at or before the
Third Closing Date, of each of the following conditions, provided that these
conditions are for the Buyer’s sole benefit and may be waived by the Buyer at
any time in its sole discretion:
 
 
23

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(i)    The Common Stock shall be authorized for quotation or trading on the
Primary Market, trading in the Common Stock shall not have been suspended for
any reason, and all the Conversion Shares issuable upon the conversion of the
Convertible Debentures shall be approved for listing or trading on the Primary
Market.
 
(ii)    The representations and warranties of the Company shall be true and
correct in all material respects (except to the extent that any of such
representations and warranties is already qualified as to materiality in Section
3 above, in which case, such representations and warranties shall be true and
correct without further qualification) as of the date when made and as of the
Third Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the Third Closing Date.
 
(iii)    The Company shall have executed and delivered to the Buyers the
Convertible Debentures in the respective amounts set forth opposite each Buyer’s
name on Schedule I attached hereto.
 
(iv)    The Company shall have certified, in a certificate executed by two
officers of the Company and dated as of the Third Closing Date, that all
conditions to the Third Closing have been satisfied.
 
(v)    The Company shall have created the Third Closing Share Reserve.
 
(vi)    No claim shall have been filed against the Company in any judicial forum
or arbitration, pursuant or related to the Stock Purchase Agreement by and
between the Company and Frank T. Matarazzo dated December 5, 2005.
 
(vii)    The Buyer shall have filed all required periodic reports with the SEC
on a timely basis.
 
8.    INDEMNIFICATION.
 
(a)    In consideration of the Buyer’s execution and delivery of this Agreement
and acquiring the Convertible Debentures and the Conversion Shares hereunder,
and in addition to all of the Company’s other obligations under this Agreement,
the Company shall defend, protect, indemnify and hold harmless the Buyer(s) and
each other holder of the Convertible Debentures and the Conversion Shares, and
all of their officers, directors, employees and agents (including, without
limitation, those retained in connection with the transactions contemplated by
this Agreement) (collectively, the “Buyer Indemnitees”) from and against any and
all actions, causes of action, suits, claims, losses, costs,
 
 
24

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penalties, fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Buyer Indemnitee is a party to the action for
which indemnification hereunder is sought), and including reasonable attorneys’
fees and disbursements (the “Indemnified Liabilities”), incurred by the Buyer
Indemnitees or any of them as a result of, or arising out of, or relating to (a)
any misrepresentation or breach of any representation or warranty made by the
Company in this Agreement, the Convertible Debentures or the other Transaction
Documents or any other certificate, instrument or document contemplated hereby
or thereby, (b) any breach of any covenant, agreement or obligation of the
Company contained in this Agreement, or the other Transaction Documents or any
other certificate, instrument or document contemplated hereby or thereby, or (c)
any cause of action, suit or claim brought or made against such Buyer Indemnitee
and arising out of or resulting from the execution, delivery, performance or
enforcement of this Agreement or any other instrument, document or agreement
executed pursuant hereto by any of the parties hereto, any transaction financed
or to be financed in whole or in part, directly or indirectly, with the proceeds
of the issuance of the Convertible Debentures or the status of the Buyer or
holder of the Convertible Debentures or the Conversion Shares,  as a Buyer of
Convertible Debentures in the Company.  To the extent that the foregoing
undertaking by the Company may be unenforceable for any reason, the Company
shall make the maximum contribution to the payment and satisfaction of each of
the Indemnified Liabilities, which is permissible under applicable law.
 
(b)    In consideration of the Company’s execution and delivery of this
Agreement, and in addition to all of the Buyer’s other obligations under this
Agreement, the Buyer shall defend, protect, indemnify and hold harmless the
Company and all of its officers, directors, employees and agents (including,
without limitation, those retained in connection with the transactions
contemplated by this Agreement) (collectively, the “Company Indemnitees”) from
and against any and all Indemnified Liabilities incurred by the Indemnitees or
any of them as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the
Buyer(s) in this Agreement or the other Transaction Documents, or any other
certificate, instrument or document contemplated hereby or thereby executed by
the Buyer, (b) any breach of any covenant, agreement or obligation of the
Buyer(s) contained in this Agreement,  the Transaction Documents or any other
certificate, instrument or document contemplated hereby or thereby executed by
the Buyer, or (c) any cause of action, suit or claim brought or made against
such Company Indemnitee based on material misrepresentations or due to a
material breach and arising out of or resulting from the execution, delivery,
performance or enforcement of this Agreement, the Transaction Documents or any
other instrument, document or agreement executed pursuant hereto by any of the
parties hereto.  To the extent that the foregoing undertaking by each Buyer may
be unenforceable for any reason, each Buyer shall make the maximum contribution
to the payment and satisfaction of each of the Indemnified Liabilities, which is
permissible under applicable law.
 
9.    GOVERNING LAW: MISCELLANEOUS.
 
(a)    Governing Law.  This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New Jersey without regard to the
principles of conflict of laws.  The parties further agree that any action
between them shall be heard in Hudson County, New Jersey, and expressly consent
to the jurisdiction and venue of the Superior Court of New Jersey, sitting in
Hudson County and the United States District Court for the District of New
Jersey sitting in Newark, New Jersey for the adjudication of any civil action
asserted pursuant to this Paragraph.
 
 
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(b)    Counterparts.  This Agreement may be executed in two or more identical
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party.  In the event any signature page is delivered by
facsimile transmission, the party using such means of delivery shall cause four
(4) additional original executed signature pages to be physically delivered to
the other party within five (5) days of the execution and delivery hereof.
 
(c)    Headings.  The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
 
(d)    Severability.  If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
 
(e)    Entire Agreement, Amendments.  This Agreement supersedes all other prior
oral or written agreements between the Buyer(s), the Company, their affiliates
and persons acting on their behalf with respect to the matters discussed herein,
and this Agreement and the instruments referenced herein contain the entire
understanding of the parties with respect to the matters covered herein and
therein and, except as specifically set forth herein or therein, neither the
Company nor any Buyer makes any representation, warranty, covenant or
undertaking with respect to such matters.  No provision of this Agreement may be
waived or amended other than by an instrument in writing signed by the party to
be charged with enforcement.
 
(f)    Notices.  Any notices, consents, waivers, or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon confirmation of receipt, when sent by facsimile;
(iii) three (3) days after being sent by U.S. certified mail, return receipt
requested, or (iv) one (1) day after deposit with a nationally recognized
overnight delivery service, in each case properly addressed to the party to
receive the same.  The addresses and facsimile numbers for such communications
shall be:
 
 
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If to the Company, to:
Telkonet, Inc.
 
20374 Seneca Meadows Parkway
 
Germantown, Maryland 20876
 
Attn: Richard J. Leimbach
 
Telephone: 240-912-1800
 
Facsimile:
   
With a copy to:
Baker & Hostetler LLP
 
1050 Connecticut Avenue, NW
 
Suite 1100
 
Washington, DC 20036
 
Attn: William J. Conti, Esq.
 
Telephone: 202-861-1726
 
Facsimile: 202-861-1783

 
If to the Buyer(s), to its address and facsimile number on Schedule I, with
copies to the Buyer’s counsel as set forth on Schedule I.  Each party shall
provide five (5) days’ prior written notice to the other party of any change in
address or facsimile number.
 
(g)    Successors and Assigns.  This Agreement shall be binding upon and inure
to the benefit of the parties and their respective successors and
assigns.  Neither the Company nor any Buyer shall assign this Agreement or any
rights or obligations hereunder without the prior written consent of the other
party hereto.
 
(h)    No Third Party Beneficiaries.  This Agreement is intended for the benefit
of the parties hereto and their respective permitted successors and assigns, and
is not for the benefit of, nor may any provision hereof be enforced by, any
other person.
 
(i)    Survival.  Unless this Agreement is terminated under Section 9(l), the
representations and warranties of the Company and the Buyer(s) contained in
Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and 9,
and the indemnification provisions set forth in Section 8, shall survive the
Closing for a period of two (2) years following the date on which the
Convertible Debentures are converted in full.  The Buyer(s) shall be responsible
only for its own representations, warranties, agreements and covenants
hereunder.
 
(j)    Publicity.  The Company and the Buyer(s) shall have the right to approve,
before issuance any press release or any other public statement with respect to
the transactions contemplated hereby made by any party; provided, however, that
the Company shall be entitled, without the prior approval of the Buyer(s), to
issue any press release or other public disclosure with respect to such
transactions required under applicable securities or other laws or regulations
(the Company shall use its best efforts to consult the Buyer(s) in connection
with any such press release or other public disclosure prior to its release and
Buyer(s) shall be provided with a copy thereof upon release thereof).
 
 
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(k)    Further Assurances.  Each party shall do and perform, or cause to be done
and performed, all such further acts and things, and shall execute and deliver
all such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
 
(l)    Termination.  In the event that the First Closing shall not have occurred
with respect to the Buyers on or before five (5) business days from the date
hereof due to the Company’s or the Buyer’s failure to satisfy the conditions set
forth in Sections 6 and 7 above (and the non-breaching party’s failure to waive
such unsatisfied condition(s)), the non-breaching party shall have the option to
terminate this Agreement with respect to such breaching party at the close of
business on such date without liability of any party to any other party;
provided, however, that if this Agreement is terminated by the Company pursuant
to this Section 9(l), the Company shall remain obligated to reimburse the
Buyer(s) for the fees and expenses of Yorkville Advisors LLC described in
Section 4(g) above (other than the amounts set forth in Section 4(g)(ii)).
 
(m)    Brokerage.  The Company represents that no broker, agent, finder or other
party has been retained by it in connection with the transactions contemplated
hereby and that no other fee or commission has been agreed by the Company to be
paid for or on account of the transactions contemplated hereby.
 
(n)    No Strict Construction.  The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any party.
 
10.    LIMITATIONS ON ISSUANCE OF COMMON STOCK.
 
(a)    Principal Market Regulation.  The Company shall not be obligated to issue
any shares of Common Stock upon conversion of the Debentures or exercise of the
Warrants if the issuance of such shares of Common Stock would cause the Company
to breach its obligations under the rules or regulations of the American Stock
Exchange (the “Exchange Cap”), except that such limitation shall not apply in
the event that the Company (A) obtains the approval of its stockholders as
required by the applicable rules of the American Stock Exchange for issuances of
Common Stock in excess of such amount or (B) obtains a written opinion from
outside counsel to the Company that such approval is not required, which opinion
shall be reasonably satisfactory to the Buyer.  Until such approval or written
opinion is obtained, the Company shall not issue to the Buyer in the aggregate,
upon conversion or exercise or otherwise, as applicable, of Debentures or
Warrants, shares of Common Stock in an amount greater than the Exchange Cap.
 
(b)    Stockholders Approval.  The Buyer shall provide written notice (“Exchange
Cap Notice”) to the Company if at any time the total number of shares issuable
upon full conversion of the Debentures and full exercise of the Warrants would
exceed the Exchange Cap.  Within sixty (60) days of receipt of an Exchange Cap
Notice, the Company shall use its best efforts to call and hold a special
meeting of the shareholders, for the purpose of approving the transactions
contemplated herein (such affirmative approval being referred to herein as the
“Stockholder Approval”).  The Company’s Board shall recommend to the
shareholders to vote in favor of approving the transactions contemplated herein.
 
 
28

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[REMAINDER PAGE INTENTIONALLY LEFT BLANK]
 
 
 
29

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IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.
 

 
COMPANY:
 
TELKONET, INC.
     
By:       /s/ Richard J. Leimbach                   
 
Name: Richard J. Leimbach
 
Title: Chief Financial Officer
   

 
 
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IN WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.
 

 
BUYERS:
 
YA GLOBAL INVESTMENTS, L.P.
     
By: Yorkville Advisors, LLC
 
Its: Investment Manager
         
By:      /s/ Mark Angelo                                  
 
Name: Mark Angelo
 
Its: Portfolio Manager

 
 
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SCHEDULE I
 
SCHEDULE OF BUYERS
 

(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Buyer
Subscription Amount
Number of Warrant Shares
   
Legal Representative’s Address and Facsimile Number
             
First Closing
Second Closing
Third Closing
First Closing
Second Closing
                   
YA Global Investments, L.P.
 
101 Hudson Street, Suite 3700
Jersey City, NJ  07303
Attention: Mark Angelo
Telephone: (201) 985-8300
Facsimile: (201) 985-8266
Residence:  Cayman Islands
$1,500,000
$1,000,000
$1,000,000
2,100,000
400,000
 
Troy Rillo or David Gonzalez, Esq.
101 Hudson Street, Suite 3700
Jersey City, New Jersey 07302
Telephone: (201) 985-8300
Facsimile: (201) 985-8266
 

 
 

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LIST OF EXHIBITS:

Disclosure Schedule

Exhibit A – Form of Convertible Debentures

Exhibit B – Form of Warrant
 
 
 

--------------------------------------------------------------------------------

 

 
DISCLOSURE SCHEDULE