Exhibit 10.1
 
 
SECURITIES PURCHASE AGREEMENT
 
This Securities Purchase Agreement (this “Agreement”) is dated as of August 31,
2006, by and among Telkonet, Inc., a Utah corporation (the “Company”), and the
purchasers identified on the signature pages hereto (each, a “Purchaser” and
collectively, the “Purchasers”).
 
RECITALS
 
A. The Company and each Purchaser are executing and delivering this agreement in
reliance upon the exemption from securities registration afforded by Section
4(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule
506 of Regulation D (“Regulation D”) as promulgated by the United States
Securities and Exchange Commission under the Securities Act.

B. Each Purchaser, severally and not jointly, wishes to purchase, and the
Company wishes to sell, upon the terms and conditions stated in this Agreement,
(i) an aggregate of 2,400,000 shares of the Company’s Common Stock, par value
$0.001 per share (the “Common Stock”), at a purchase price of $2.50 per
share(the “Per Share Purchase Price”) (collectively referred to herein as the
“Shares”), and (ii) warrants, in substantially the form attached hereto as
Exhibit A (the “Warrants”) to acquire up to that number of additional shares of
Common Stock set forth below such Purchaser’s name on the signature page hereto
(as exercised, collectively, the “Warrant Shares”)

C. The Shares, the Warrants and the Warrant Shares issued pursuant to this
Agreement are collectively referred to herein as the “Securities”.

D. Contemporaneous with the sale of the Shares and the Warrants, the parties
hereto will enter into a Registration Rights Agreement, in the form attached
hereto as Exhibit B (the “Registration Rights Agreement”), pursuant to which,
among other things, the Company will agree to provide certain registration
rights under the Securities Act and applicable state securities laws.

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and the Purchasers agree
as follows:
 
ARTICLE I.
DEFINITIONS
 
1.1 Definitions. In addition to the terms defined elsewhere in this Agreement,
for all purposes of this Agreement, the following terms shall have the meanings
indicated in this Section 1.1:
 

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“Affiliate” means, with respect to any Person, any other Person that, directly
or indirectly through one or more intermediaries, Controls, is controlled by or
is under common control with such Person. With respect to a Purchaser, any
investment fund or managed account that is managed on a discretionary basis by
the same investment manager as such Purchaser will be deemed to be an Affiliate
of such Purchaser.
 
“Business Day” means a day, other than a Saturday or Sunday, on which banks in
New York City are open for the general transaction of business.
 
“Buy-In” has the meaning set forth in Section 4.1(c).
 
“Buy-In Price” has the meaning set forth in Section 4.1(c).
 
“Closing” means the closing of the purchase and sale of the Shares and the
Warrants pursuant to this Agreement.
 
“Closing Date” means the Business Day on which all of the conditions set forth
in Sections 2.1 and 2.2 hereof are satisfied, or such other date as the parties
may agree.
 
"Commission" means the United States Securities and Exchange Commission.
 
“Common Stock” has the meaning set forth in the Recitals, and also includes any
securities into which the Common Stock may hereafter be reclassified.
 
“Common Stock Equivalents” means any securities of the Company or any Subsidiary
which would entitle the holder thereof to acquire at any time Common Stock,
including without limitation, any debt, preferred stock, rights, options,
warrants or other instrument that is at any time convertible into or
exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock or other securities that entitle the holder to receive, directly or
indirectly, Common Stock.
 
“Company Counsel” means Baker & Hostetler LLP.

   “Company Deliverables” has the meaning set forth in Section 2.2(a).

   “Company’s Knowledge” means with respect to any statement made to the
knowledge of a party, that the statement is based upon the actual knowledge of
the officers of such party having responsibility for the matter or matters that
are the subject of the statement.

“Control” (including the terms “controlling”, “controlled by” or “under common
control with”) means the possession, direct or indirect, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise.
 
“Convertible Notes” means those certain Senior Convertible Notes, dated on or
about October 28, 2005 issued by the Company to each of the investors party to
the Settlement Agreements.
 
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“Disclosure Materials” has the meaning set forth in Section 3.1(h).
 
“Effective Date” means the date on which the initial Registration Statement
required by Section 2(a) of the Registration Rights Agreement is first declared
effective by the Commission.
 
“Effectiveness Deadline” means the date on which the initial Registration
Statement is required to be declared effective by the Commission under the terms
of the Registration Rights Agreement.
 
“Environmental Laws” has the meaning set forth in Section 3.1(l).
 
“Evaluation Date” has the meaning set forth in Section 3.1(v).
 
“Exchange Act” means the Securities Exchange Act of 1934, as amended, or any
successor statute, and the rules and regulations promulgated thereunder.
 
“GAAP” means U.S. generally accepted accounting principles, as applied by the
Company.
 
“Indemnified Person” has the meaning set forth in Section 4.7(b).
 
“Intellectual Property Rights” has the meaning set forth in Section 3.1(r).
 
“Lead Investors” means those Purchasers which are managed by __________.
 
“Lien” means any lien, charge, encumbrance, security interest, right of first
refusal, preemptive right or other restrictions of any kind.
 
“Losses” has the meaning set forth in Section 4.7(a).
 
“Material Adverse Effect” means any of (i) a material and adverse effect on the
legality, validity or enforceability of any Transaction Document, (ii) a
material and adverse effect on the results of operations, assets, prospects,
business or condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole, or (iii) a material adverse impairment to the
Company's ability to perform on a timely basis its obligations under any
Transaction Document.
 
“Material Contract” means any contract of the Company that was filed as an
exhibit to the SEC Filings pursuant to Item 601(b)(4) or Item 601(b)(10) of
Regulation S-K.

“New York Courts” means the state and federal courts sitting in the City of New
York, Borough of Manhattan.
 
“Person” means an individual, corporation, partnership, limited liability
company, trust, business trust, association, joint stock company, joint venture,
sole proprietorship, unincorporated organization, governmental authority or any
other form of entity not specifically listed herein.
 
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“Proceeding” means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened in writing.
 
“Purchaser Deliverables” has the meaning set forth in Section 2.2(b).
 
“Purchaser Party” has the meaning set forth in Section 4.7.
 
“Registration Statement” means a registration statement meeting the requirements
set forth in the Registration Rights Agreement and covering the resale by the
Purchasers of the Registrable Securities (as defined in the Registration Rights
Agreement).
 
“Rule 144” means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
 
“SEC Reports” has the meaning set forth in Section 3.1(h).
 
“Secretary’s Certificate” has the meaning set forth in Section 2.2(a)(vi).
 
“Settlement Agreements” means those certain Settlement Agreements, dated as of
August 14, 2006, between the Company and each of the investors party thereto.
 
“Short Sales” include, without limitation, all “short sales” as defined in Rule
3b-3 of the Exchange Act and Rule 200 promulgated under Regulation SHO under the
Exchange Act, whether or not against the box, and all types of direct and
indirect stock pledges, forward sale contracts, options, puts, calls, short
sales, swaps, “put equivalent positions” (as defined in Rule 16a-1(h) under the
Exchange Act) and similar arrangements (including on a total return basis), and
sales and other transactions through non-US broker dealers or foreign regulated
brokers having the effect of hedging the securities or investment made under
this Agreement.
 
“Subscription Amount” means with respect to each Purchaser, the Subscription
Amount indicated on such Purchaser’s signature page to this Agreement.
 
“Subsidiary” means any “significant subsidiary” as defined in Rule 1-02(w) of
the Regulation S-X promulgated by the Commission under the Exchange Act.
 
“Trading Affiliate” has the meaning set forth in Section 3.2(g).
 
“Trading Day” means (i) a day on which the Common Stock is listed or quoted and
traded on its primary Trading Market (other than the OTC Bulletin Board), or
(ii) if the Common Stock is not listed on a Trading Market (other than the OTC
Bulletin Board), a day on which the Common Stock is traded in the
over-the-counter market, as reported by the OTC Bulletin Board, or (iii) if the
Common Stock is not quoted on any Trading Market, a day on which the Common
Stock is quoted in the over-the-counter market as reported by the National
Quotation Bureau Incorporated (or any similar organization or agency succeeding
to its functions of reporting prices); provided, that in the event that the
Common Stock is not listed or quoted as set forth in (i), (ii) and (iii) hereof,
then Trading Day shall mean a Business Day.
 
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“Trading Market” means whichever of the New York Stock Exchange, the American
Stock Exchange, the NASDAQ Global Market, the NASDAQ Capital Market or OTC
Bulletin Board on which the Common Stock is listed or quoted for trading on the
date in question.
 
“Transaction Documents” means this Agreement, the schedules and exhibits
attached hereto, the Warrants, the Registration Rights Agreement, and any other
documents or agreements executed in connection with the transactions
contemplated hereunder.
 
“Transfer Agent” means StockTrans.
 
ARTICLE II.
PURCHASE AND SALE
 
2.1 Closing. Subject to the terms and conditions set forth in this Agreement, at
the Closing, the Company shall issue and sell to each Purchaser, and each
Purchaser shall, severally and not jointly, purchase from the Company, the
Shares and Warrants representing such Purchaser’s Subscription Amount. The
Closing shall take place at the offices of Lowenstein Sandler PC, 1251 Avenue of
the Americas, 18th Floor, New York, New York 10020, on the Closing Date or at
such other location or time as the parties may agree.
 
2.2 Closing Deliveries.   (a) At the Closing, the Company shall issue, deliver
or cause to be delivered to each Purchaser the following (the “Company
Deliverables”):
 
(i) this Agreement, duly executed by the Company;
 
(ii) one or more stock certificates, free and clear of all restrictive and other
legends (except as expressly provided in Section 4.1(b) hereof), evidencing a
number of Shares equal to the quotient obtained by dividing (a) such Purchaser’s
Subscription Amount by (b) the Per Share Purchase Price;
 
(iii) a Warrant, executed by the Company and registered in the name of such
Purchaser, pursuant to which such Purchaser shall have the right to acquire such
number of Warrant Shares equal to65% of the number of Shares issuable to such
Purchaser pursuant to this Agreement;
 
(iv) a legal opinion of Company Counsel, in the form set forth in Exhibit C
hereto, executed by such counsel and addressed to the Purchasers;
 
(v) the Registration Rights Agreement, duly executed by the Company;
 
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(vi) a certificate of the Secretary of the Company (the “Secretary’s
Certificate”), dated as of the Closing Date, certifying the resolutions adopted
by the Board of Directors of the Company approving the transactions contemplated
by this Agreement and the other Transaction Documents and the issuance of the
Securities, certifying the current versions of the Articles of Incorporation and
by-laws of the Company and certifying as to the signatures and authority of
persons signing the Transaction Documents and related documents on behalf of the
Company; and
 
(b) At the Closing, each Purchaser shall deliver or cause to be delivered to the
Company the following (the “Purchaser Deliverables”):
 
(i) this Agreement, duly executed by such Purchaser;
 
(ii) its Subscription Amount, in United States dollars and in immediately
available funds;
 
(iii) the Registration Rights Agreement, duly executed by such Purchaser;
 
(iv) a fully completed and duly executed Selling Stockholder Questionnaire in
the form attached as Annex B to the Registration Rights Agreement; and
 
(v) a fully completed and duly executed Accredited Investor Questionnaire and
Stock Certificate Questionnaire in the forms attached hereto as Exhibits D-1 and
D-2, respectively.
 
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
 
3.1 Representations and Warranties of the Company. The Company hereby represents
and warrants to the Purchasers that, except as set forth in the Schedules
delivered herewith:
 
(a) Subsidiaries. The Company has no direct or indirect Subsidiaries other than
those listed in the Company’s Form 10-K Report for the year ended December 31,
2005. Except as disclosed therein, the Company owns, directly or indirectly, all
of the capital stock or comparable equity interests of each Subsidiary free and
clear of any and all Liens and all the issued and outstanding shares of capital
stock or comparable equity interest of each Subsidiary are validly issued and
are fully paid, non-assessable and free of preemptive and similar rights.
 
(b) Organization and Qualification. The Company and each Subsidiary is an entity
duly incorporated or otherwise organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or organization (as
applicable), with the requisite power and authority to own or lease and use its
properties and assets and to carry on its business as currently conducted.
Neither the Company nor any Subsidiary is in violation of any of the provisions
of its respective certificate or articles of incorporation, bylaws or other
organizational or charter documents. Each of the Company and the Subsidiaries is
duly qualified to conduct business and is in good standing as a foreign
corporation or other entity in each jurisdiction in which the nature of the
business conducted or property owned by it makes such qualification necessary or
appropriate, except where the failure to be so qualified or in good standing, as
the case may be, could not, individually or in the aggregate, have or reasonably
be expected to result in a Material Adverse Effect.
 
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(c) Authorization; Enforcement. The Company has the requisite corporate power
and authority to enter into and to consummate the transactions contemplated by
each of the Transaction Documents to which it is a party and otherwise to carry
out its obligations hereunder and thereunder. The execution and delivery of each
of the Transaction Documents to which it is a party by the Company and the
consummation by it of the transactions contemplated hereby and thereby
(including, but not limited to, the sale and delivery of the Shares and the
Warrants and the subsequent issuance of the Warrant Shares upon exercise of the
Warrants have been duly authorized by all necessary corporate action on the part
of the Company and no further corporate action is required by the Company, its
Board of Directors or its stockholders. Each Transaction Document to which it is
a party has been (or upon delivery will have been) duly executed by the Company
and, when delivered in accordance with the terms hereof, will constitute the
valid and binding obligation of the Company enforceable against the Company in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally the enforcement of, creditors’
rights and remedies or by other equitable principles of general application.
There are no stockholders agreements, voting agreements, or other similar
arrangements with respect to the Company’s capital stock to which the Company is
a party or, to the Company’s Knowledge, between or among any of the Company’s
stockholders.
 
(d) No Conflicts. The execution, delivery and performance of the Transaction
Documents and the consummation by the Company of the transactions contemplated
hereby or thereby (including without limitation, the issuance of the Shares,
pursuant to Sections 2.2 and, if any, Section 4.12, and the issuance of the
Warrants pursuant to this Agreement and the registration of the Registrable
Securities under the Registration Rights Agreement) do not and will not (i)
conflict with or violate any provision of the Company’s or any Subsidiary’s
certificate or articles of incorporation, bylaws or other organizational or
charter documents, (ii) except as set forth on Schedule 3.1(d), conflict with,
or constitute a default (or an event that 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 (with or without notice, lapse of time
or both) of, any agreement, credit facility, debt, equity or other instrument
(evidencing a Company or Subsidiary debt, equity issuance obligation or
otherwise) or other understanding to which the Company or any Subsidiary is a
party or by which any property or asset of the Company or any Subsidiary is
bound, or affected, except to the extent that such conflict, default,
termination, amendment, acceleration or cancellation right could not reasonably
be expected to have a Material Adverse Effect, or (iii) result in a violation of
any law, rule, regulation, order, judgment, injunction, decree or other
restriction of any court or governmental authority to which the Company or a
Subsidiary is subject (including federal and state securities laws and
regulations and the rules and regulations, assuming the correctness of the
representations and warranties made by the Purchasers herein, of any
self-regulatory organization to which the Company or its securities are subject,
including all applicable Trading Markets), or by which any property or asset of
the Company or a Subsidiary is bound or affected, except to the extent that such
violation described in this clause (iii) could not, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse
Effect.
 
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(e) Filings, Consents and Approvals. The Company is not required to obtain any
consent, waiver, authorization or order of, give any notice to, or make any
filing or registration with, any court or other federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents, other than
(i) the filing with the Commission of one or more Registration Statements in
accordance with the requirements of the Registration Rights Agreement, (ii)
filings required by applicable state securities laws, (iii) the filing of a
Notice of Sale of Securities on Form D with the Commission under Regulation D of
the Securities Act, (iv) the filing of any requisite notices and/or
application(s) to each applicable Trading Market for the issuance and sale of
the Common Stock and the Warrants and the listing of the Common Stock for
trading or quotation, as the case may be, thereon in the time and manner
required thereby, (v) the filings required in accordance with Section 4.5 and
(vi) those that have been made or obtained prior to the date of this Agreement.
 
(f) Issuance of the Securities. The Shares and the Warrant Shares have been duly
authorized and, when issued and paid for in accordance with the terms of the
Transaction Documents, will be duly and validly issued, fully paid and
nonassessable, free and clear of all Liens other than restrictions on transfer
provided for in the Transaction Documents or imposed by applicable securities
laws and shall not be subject to preemptive or similar rights of stockholders.
Assuming the accuracy of the representations and warranties of the Purchasers,
the Shares and the Warrant Shares will be issued in compliance with all
applicable federal and state securities laws.
 
(g) No Anti-dilution Trigger. Except as set forth in Schedule 3.1(g), the
issuance and sale of the Securities whether pursuant to Section 2.2 or Section
4.12, and the issuance of the Warrant Shares upon exercise of the Warrants in
accordance with their terms, will not, immediately or with the passage of time
or the giving of notice or both, obligate the Company to issue shares of Common
Stock or other securities to any Person (other than the Purchasers) and will not
result in a right of any holder of Company securities to adjust the exercise,
conversion, exchange or reset price under such securities.
 
(h) Capitalization. The number of shares and type of all authorized, issued and
outstanding capital stock, options and other securities of the Company (whether
or not presently convertible into or exercisable or exchangeable for shares of
capital stock of the Company) is specified in the SEC Reports. No securities of
the Company are entitled to preemptive or similar rights, and no Person has any
right of first refusal, preemptive right, right of participation, or any similar
right to participate in the transactions contemplated by the Transaction
Documents. Except as set forth on Schedule 3.1(h), there are no outstanding
options, warrants or scrip rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities, rights or obligations
convertible into or exchangeable for, or giving any Person any right to
subscribe for or acquire, any shares of the Company’s capital stock, or
contracts, commitments, understandings or arrangements by which the Company or
any Subsidiary is or may become bound to issue additional shares of capital
stock of the Company, or options, securities or rights convertible or
exchangeable into shares of capital stock. Except as set forth on Schedule
3.1(h) and customary adjustments resulting from stock dividends, stock splits,
combination of shares, reorganizations, recapitalizations, reclassifications or
other similar events, there are no anti-dilution or price adjustment provisions
contained in any security issued by the Company (or in any agreement providing
rights to security holders). All of the outstanding shares of capital stock of
the Company are duly authorized, validly issued, fully paid and non-assessable,
have been issued in compliance with all applicable federal and state security
laws, and none of such outstanding shares was issued in violation of any
preemptive rights or similar rights to subscribe for or purchase any capital
stock of the Company.
 
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(i) SEC Reports. The Company has filed all reports required to be filed by it
under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof,
for the two years preceding the date hereof (or such shorter period as the
Company was required by law to file such reports) (the foregoing materials being
collectively referred to herein as the “SEC Reports” and together with this
Agreement and the Schedules to this Agreement (if any), the“Disclosure
Materials”) on a timely basis or has received a valid extension of such time of
filing and has filed any such SEC Reports prior to the expiration of any such
extension. As of their respective dates, or to the extent corrected by a
subsequent restatement, the SEC Reports complied in all material respects with
the requirements of the Securities Act and the Exchange Act and the rules and
regulations of the Commission promulgated thereunder, and none of the SEC
Reports, when filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
 
(j) Financial Statements. The financial statements of the Company included in
the SEC Reports comply in all material respects with applicable accounting
requirements and the rules and regulations of the Commission with respect
thereto as in effect at the time of filing (or to the extent corrected by a
subsequent restatement). Such financial statements have been prepared in
accordance with GAAP applied on a consistent basis during the periods involved,
except as may be otherwise specified in such financial statements or the notes
thereto and except that unaudited financial statements may not contain all
footnotes required by GAAP, and fairly present in all material respects the
financial position of the Company and its consolidated subsidiaries as of and
for the dates thereof and the results of operations and cash flows for the
periods then ended, subject, in the case of unaudited statements, to normal,
year-end audit adjustments.
 
(k) Tax Matters. Each of the Company and its Subsidiaries (i) has accurately and
timely prepared and filed all foreign, federal and state income and all other
tax returns, reports and declarations required by any jurisdiction to which it
is subject, (ii) has paid all material 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,
with respect to which adequate reserves have been set aside on the books of the
Company and (iii) 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 such claim.
 
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(l) Material Changes. Since the date of the latest audited financial statements
included within the SEC Reports, except as specifically disclosed in the SEC
Reports, (i) there has been no event, occurrence or development that has had or
that could reasonably be expected to result in a Material Adverse Effect, (ii)
the Company has not incurred any liabilities (contingent or otherwise) other
than (A) trade payables, accrued expenses and other liabilities incurred in the
ordinary course of business consistent with past practice and (B) liabilities
not required to be reflected in the Company's financial statements pursuant to
GAAP or required to be disclosed in filings made with the Commission, (iii) the
Company has not altered its method of accounting or the manner in which it keeps
its accounting books and records, or changed its auditors, (iv) the Company has
not declared or made any dividend or distribution of cash or other property to
its stockholders or purchased, redeemed or made any agreements to purchase or
redeem any shares of its capital stock (other than in connection with
repurchases of unvested stock issued to employees of the Company) and (v) the
Company has not issued any equity securities to any officer, director or
Affiliate, except Common Stock issued in the ordinary course as dividends on
outstanding preferred stock and pursuant to existing Company stock option or
stock purchase plans or executive and director corporate arrangements disclosed
in the SEC Reports and (vi) there has not been any material change or amendment
to, or any waiver of any material right under, any contract under which the
Company, any subsidiary thereof, or any of their assets is bound or subject. The
Company does not have pending before the Commission any request for confidential
treatment of information.
 
(m) Environmental Matters. To the Company’s Knowledge, neither the Company nor
any Subsidiary (i) is in violation of any statute, rule, regulation, decision or
order of any governmental agency or body or any court, domestic or foreign,
relating to the use, disposal or release of hazardous or toxic substances or
relating to the protection or restoration of the environment or human exposure
to hazardous or toxic substances (collectively, “Environmental Laws”), (ii) owns
or operates any real property contaminated with any substance that is in
violation of any Environmental Laws, (iii) is liable for any off-site disposal
or contamination pursuant to any Environmental Laws, and (iv) is subject to any
claim relating to any Environmental Laws; which violation, contamination,
liability or claim has had or could reasonably be expected to have a Material
Adverse Effect, individually or in the aggregate; and there is no pending or, to
the Company’s Knowledge, threatened investigation that might lead to such a
claim.
 
(n) Litigation. There is no Proceeding which (i) adversely affects or challenges
the legality, validity or enforceability of any of the Transaction Documents or
the issuance of the Securities or (ii) except as specifically disclosed in the
SEC Reports, could, if there were an unfavorable decision, individually or in
the aggregate, have or reasonably be expected to result in a Material Adverse
Effect. Neither the Company nor any Subsidiary, nor any director or officer
thereof (in his or her capacity thereof), is or has been during the ten-year
period prior to the closing Date the subject of any Proceeding involving a claim
of violation of or liability under federal or state securities laws or a claim
of breach of fiduciary duty. There has not been and to the Company’s Knowledge,
there is not pending or contemplated, any investigation by the Commission
involving the Company or any current or former director or officer of the
Company (in his or her capacity as such). The Commission has not issued any stop
order or other order suspending the effectiveness of any registration statement
filed by the Company or any subsidiary under the Exchange Act or the Securities
Act.
 
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(o) Employment Matters. The Company and its Subsidiaries are in compliance with
all federal, state, local and foreign laws and regulations respecting labor,
employment and employment practices and benefits, terms and conditions of
employment and wages and hours, except where the failure to be in compliance
would not, either individually or in the aggregate, reasonably be expected to
result in a Material Adverse Effect. Neither the Company nor any of its
Subsidiaries is a party to any collective bargaining agreement. The Company and
its Subsidiaries believe that their relations with their employees are
satisfactory. No executive officer of the Company or any of its Subsidiaries (as
defined in Rule 501(f) of the Securities Act) has notified the Company or any
such Subsidiary that such officer intends to leave the Company or any such
Subsidiary or otherwise terminate such officer’s employment with the Company or
any such Subsidiary.
 
(p) Compliance. Neither the Company nor any Subsidiary, except in each case as
could not, individually or in the aggregate, have or reasonably be expected to
result in a Material Adverse Effect (i) is in default under or in violation of
(and no event has occurred that has not been waived that, with notice or lapse
of time or both, would result in a default by the Company or any Subsidiary
under), nor has the Company or any Subsidiary received notice of a claim that it
is in default under or that it is in violation of, any indenture, loan or credit
agreement or any other agreement or instrument to which it is a party or by
which it or any of its properties is bound (whether or not such default or
violation has been waived), (ii) is in violation of any order of any court,
arbitrator or governmental body having jurisdiction over the Company or its
properties or assets, or (iii) is or has been in violation of, or in receipt of
notice that it is in violation of, any statute, rule or regulation of any
governmental authority applicable to the Company.
 
(q) Regulatory Permits. The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Reports, except where the failure
to possess such permits, individually or in the aggregate, has not resulted and
could not reasonably be expected to result in a Material Adverse Effect, and
neither the Company nor any Subsidiary has received any notice of proceedings
relating to the revocation or modification of any such permits.
 
(r) Title to Assets. The Company and the Subsidiaries have good and marketable
title in fee simple to all real property owned by them that is material to their
respective businesses and good and marketable title in all personal property
owned by them that is material to their respective businesses, in each case free
and clear of all Liens, except for Liens that do not, individually or in the
aggregate, have or result in a Material Adverse Effect. Any real property and
facilities held under lease by the Company and the Subsidiaries are held by them
under valid, subsisting and enforceable leases of which the Company and the
Subsidiaries are in material compliance.
 
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(s) Patents and Trademarks. The Company and its subsidiaries own, possess,
license or have other rights to use all foreign and domestic patents, patent
applications, trade and service marks, trade and service mark registrations,
trade names, copyrights, licenses, inventions, trade secrets, technology,
Internet domain names, know-how and other intellectual property (collectively,
the “Intellectual Property”) necessary for the conduct of their respective
businesses as now conducted or as proposed to be conducted. Except as set forth
in the SEC Reports and except where such violations or infringements would not
reasonably be expected to result in a Material Adverse Effect, (a) to the
Company’s Knowledge, there are no rights of third parties to any such
Intellectual Property; (b) to the Company’s Knowledge, there is no infringement
by third parties of any such Intellectual Property; (c) there is no pending or,
to the Company’s Knowledge, threatened action, suit, proceeding or claim by
others challenging the Company’s and its Subsidiaries’ rights in or to any such
Intellectual Property, and the Company is unaware of any facts which would form
a reasonable basis for any such claim; (d) there is no pending or, to the
Company’s Knowledge, threatened action, suit, proceeding or claim by others
challenging the validity or scope of any such Intellectual Property; and (e)
there is no pending or, to the Company’s Knowledge, threatened action, suit,
proceeding or claim by others that the Company and its Subsidiaries infringe or
otherwise violate any patent, trademark, copyright, trade secret or other
proprietary rights of others, and the Company is unaware of any other fact which
would form a reasonable basis for any such claim.
 
(t) Insurance. The Company and the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which the Company and
the Subsidiaries are engaged. Neither the Company nor any Subsidiary has any
Knowledge that it will be unable to renew its existing insurance coverage for
the Company and the Subsidiaries as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business without a significant increase in cost.
 
(u) Transactions With Affiliates and Employees. Except as set forth in the SEC
Reports made on or prior to the date hereof, none of the officers or directors
of the Company and, to the Company’s Knowledge, none of the employees of the
Company is presently a party to any transaction with the Company or any
Subsidiary or to a presently contemplated transaction (other than for services
as employees, officers and directors) that would be required to be disclosed
pursuant to Item 404 of Regulation S-K promulgated under the Securities Act. The
Company is in compliance with applicable requirements of the Sarbanes Oxley Act
of 2002 and applicable rules and regulations promulgated by the Commission
thereunder, except where such noncompliance would not result in, individually or
in the aggregate, a Material Adverse Effect.
 
(v) Internal Accounting Controls. The Company and the Subsidiaries maintain 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 GAAP and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
 
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(w) Internal Controls. The Company has established disclosure controls and
procedures (as defined in 1934 Act Rules 13a-15 and 15d-15) for the Company and
designed such disclosure controls and procedures to ensure that material
information relating to the Company is made known to the certifying officers by
others within those entities, particularly during the period in which the
Company’s most recently filed periodic report under the Exchange Act was being
prepared. The Company's certifying officers have evaluated the effectiveness of
the Company's disclosure controls and procedures as of the end of the most
recent periodic reporting period under the Exchange Act (such date, the
“Evaluation Date”). The Company presented in its most recently filed periodic
report under the Exchange Act the conclusions of the certifying officers about
the effectiveness of the disclosure controls and procedures based on their
evaluations as of the Evaluation Date. Since the Evaluation Date, except with
respect to the remediation of the material weakness in internal control over
financial reporting and the ineffectiveness of disclosure controls and
procedures as described in the SEC Filings, there have been no significant
changes in the Company's internal control over financial reporting (as such term
is defined in Item 308(c) of Regulation S-K) or, to the Company's Knowledge, in
other factors that could significantly affect the Company's internal control
over financial reporting. The Company maintains and will continue to maintain a
standard system of accounting established and administered in accordance with
GAAP and the applicable requirements of the Exchange Act.
 
(x) Certain Fees. No brokerage or finder’s fees or commissions are or will be
payable by the Company to any broker, financial advisor or consultant, finder,
placement agent, investment banker, bank or other Person with respect to the
transactions contemplated by this Agreement. The Purchasers shall have no
obligation with respect to any fees or with respect to any claims (other than
such fees or commissions owed by a Purchaser pursuant to agreements (whether
written or oral) between such Purchaser and any third party which fees or
commissions shall be the sole responsibility of such Purchaser) made by or on
behalf of other Persons for fees of a type contemplated in this Section that may
be due in connection with the transactions contemplated by this Agreement.
 
(y) Private Placement. Assuming the accuracy of the Purchasers’ representations
and warranties set forth in Section 3.2(b)-(e), no registration under the
Securities Act is required for the offer and sale of the Shares and Warrant
Shares by the Company to the Purchasers under the Transaction Documents. The
Company is eligible to register the Shares and the Warrant Shares for resale by
the Purchasers using Form S-3 promulgated under the Securities Act. Except as
specified in Schedule 3.1(y), the Company has not granted or agreed to grant to
any Person any rights (including “piggy-back” registration rights) to have any
securities of the Company registered with the Commission or any other
governmental authority that have not been satisfied or waived.
 
(z) No Directed Selling Efforts or General Solicitation. Neither the Company,
nor any of its Affiliates, nor any Person acting on its or their behalf has
conducted any “general solicitation” or “general advertising” (as those terms
are used in Regulation D) in connection with the offer or sale of any of the
Securities.
 
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(aa) No Integrated Offering. Neither the Company nor any of its Affiliates, nor
any Person acting on its or their behalf has, directly or indirectly, at any
time within the past six months made any offers or sales of any Company security
or solicited any offers to buy any security, under circumstances that would (i)
eliminate the availability of the exemption from registration under Regulation D
under the Securities Act in connection with the offer and sale by the Company of
the Securities as contemplated hereby or (ii) cause the offering of the
Securities pursuant to the Transaction Documents to be integrated with prior
offerings by the Company for purposes of any applicable law, regulation or
stockholder approval provisions, including, without limitation, under the rules
and regulations of any Trading Market.
 
(bb) Listing and Maintenance Requirements. The Company’s Common Stock is
registered pursuant to Section 12(g) of the Exchange Act, and the Company has
taken no action designed to terminate the registration of the Common Stock under
the Exchange Act nor has the Company received any notification that the
Commission is contemplating terminating such registration. Except as specified
in the SEC Reports, the Company has not, in the two years preceding the date
hereof, received notice (written or oral) from any Trading Market to the effect
that the Company is not in compliance with the listing or maintenance
requirements thereof. The Company is in compliance in all material respects with
the listing and maintenance requirements for continued listing of the Common
Stock on the Trading Market on which the Common Stock is currently listed or
quoted. The issuance and sale of the Securities under the Transaction Documents
does not contravene the rules and regulations of the Trading Market on which the
Common Stock is currently listed or quoted, and no approval of the shareholders
of the Company thereunder is required for the Company to issue and deliver to
the Purchasers the maximum number of Securities contemplated by Transaction
Documents.
 
(cc) Investment Company. Neither the Company nor any of its Subsidiaries is
required to be registered as, and is not an Affiliate of, and immediately
following the Closing will not be required to register as, an “investment
company” within the meaning of the Investment Company Act of 1940, as amended.
 
(dd) Questionable Payments. Neither the Company nor any of its Subsidiaries,
nor, to the Company’s Knowledge, directors, officers, employees, agents or other
Persons acting on behalf of the Company or any of its Subsidiaries has, in the
course of its actions for, or on behalf of, the Company: (a) used any corporate
funds for unlawful contributions, gifts, entertainment or other unlawful
expenses relating to foreign or domestic political activity; (b) made any direct
or indirect unlawful payments to any foreign or domestic governmental officials
or employees from corporate funds; (c) violated in any material respect any
provision of the Foreign Corrupt Practices Act of 1977, as amended or (d) made
any other unlawful bribe, rebate, payoff, influence payment, kickback or other
unlawful payment to any foreign or domestic government official or employee.
 
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(ee) Application of Takeover Protections. There is no control share acquisition,
business combination, poison pill (including any distribution under a rights
agreement) or other similar anti-takeover provision under the Company's charter
documents or the laws of its state of incorporation that is or could reasonably
be expected to become applicable to any of the Purchasers as a result of the
Purchasers and the Company fulfilling their obligations or exercising their
rights under the Transaction Documents, including without limitation the
Company's issuance of the Securities and the Purchasers' ownership of the
Securities.
 
(ff) Disclosure. The Company confirms that neither it nor any Person acting on
its behalf has provided any Purchaser or its respective agents or counsel with
any information that constitutes or might constitute material, non-public
information except insofar as the existence, provisions and terms of the
Transaction Documents and the proposed transactions hereunder may constitute
such information. The Company understands and confirms that the Purchasers will
rely on the foregoing representations in effecting transactions in securities of
the Company. All disclosure provided to the Purchasers regarding the Company,
its business and the transactions contemplated hereby, furnished by or on behalf
of the Company in the Transaction Documents (including the Company’s
representations and warranties set forth in this Agreement) are true and correct
in all material respects and do not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.
 
(gg) Manipulation of Price. The Company has not, and to its Knowledge no Person
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
Company security to facilitate the sale or resale of any such securities, (ii)
sold, bid for, purchased, or, paid any compensation for soliciting purchases of,
any of the Company securities, or (iii) paid or agreed to pay to any Person any
compensation for soliciting another to purchaser any Company securities.
 
(hh) No Disagreements with Accountants and Lawyers. There are no disagreements
of any kind presently existing, or reasonably anticipated by the Company to
arise, between the Company and the accountants and lawyers formerly or presently
employed by the Company, and the Company is current with respect to any fees
owed to its accountants and lawyers.
 
Each Purchaser acknowledges and agrees that the Company has not made or does not
make any representations or warranties with respect to the transactions
contemplated hereby other than those specifically set forth in this Section 3.1.

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3.2 Representations and Warranties of the Purchasers. Each Purchaser hereby, for
itself and for no other Purchaser, represents and warrants to the Company as
follows:
 
(a) Organization; Authority. Such Purchaser is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization with the requisite corporate or partnership power and authority to
enter into and to consummate the transactions contemplated by the applicable
Transaction Documents and otherwise to carry out its obligations hereunder and
thereunder. The execution, delivery and performance by such Purchaser of the
transactions contemplated by this Agreement has been duly authorized by all
necessary corporate and shareholder or, if such Purchaser is not a corporation,
such partnership and partner, limited liability company and member or other
applicable like action, on the part of such Purchaser and no further action is
required by such Purchaser or its board or directors, shareholders, partners or
members, as applicable. Each of this Agreement and the Registration Rights
Agreement has been duly executed by such Purchaser, and when delivered by such
Purchaser in accordance with terms hereof, will constitute the valid and legally
binding obligation of such Purchaser, enforceable against it in accordance with
its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally the enforcement of, creditors’ rights and
remedies or by other equitable principles of general application.
 
(b) Investment Intent. Such Purchaser understands that the Securities are
“restricted securities” and have not been registered under the Securities Act or
any applicable state securities law and is acquiring the Securities and, upon
exercise of the Warrants will acquire the Warrant Shares issuable upon exercise
thereof, as principal for its own account for investment purposes only and not
with a view to or for distributing or reselling such Securities or any part
thereof, without prejudice, however, to such Purchaser's right, subject to the
provisions of this Agreement and the Registration Rights Agreement, at all times
to sell or otherwise dispose of all or any part of such Securities or Warrant
Shares pursuant to an effective registration statement under the Securities Act
or under an exemption from such registration and in compliance with applicable
federal and state securities laws. Subject to the immediately preceding
sentence, nothing contained herein shall be deemed a representation or warranty
by such Purchaser to hold the Securities for any period of time. Such Purchaser
is acquiring the Securities hereunder in the ordinary course of its business.
Such Purchaser does not have any agreement, plan or understanding, directly or
indirectly, with any Person to distribute any of the Securities.
 
(c) Purchaser Status. At the time such Purchaser was offered the Securities, it
was, and at the date hereof it is, and on each date on which it exercises the
Warrants it will be, an “accredited investor” as defined in Rule 501(a) under
the Securities Act. Such Purchaser is not a registered broker-dealer under
Section 15 of the Exchange Act.
 
(d) Experience of Such Purchaser. Such Purchaser, 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 the prospective investment in the Securities, and has so evaluated the
merits and risks of such investment. Such Purchaser is able to bear the economic
risk of an investment in the Securities and, at the present time, is able to
afford a complete loss of such investment.
 
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(e) Access to Information. Such Purchaser acknowledges that it reviewed the
Disclosure Materials and has been afforded (i) the opportunity to ask such
questions as it has deemed necessary of, and to receive answers from,
representatives of the Company concerning the terms and conditions of the
offering of the Securities and the merits and risks of investing in the
Securities; (ii) access to information (other than material non-public
information) about the Company and the Subsidiaries and their respective
financial condition, results of operations, business, properties, management and
prospects sufficient to enable it to evaluate its investment; and (iii) the
opportunity to obtain such additional information that the Company possesses or
can acquire without unreasonable effort or expense that is necessary to make an
informed investment decision with respect to the investment. Neither such
inquiries nor any other investigation conducted by or on behalf of such
Purchaser or its representatives or counsel shall modify, amend or affect such
Purchaser's right to rely on the truth, accuracy and completeness of the
Disclosure Materials and the Company's representations and warranties contained
in the Transaction Documents.
 
(f) Residency. Such Purchaser has, if an entity, its principal place of business
or, if an individual, its primary residence in the jurisdiction set forth
immediately below such Purchaser’s name on the signature pages hereto.
 
(g) Certain Trading Activities. Since the earlier to occur of (1) the time that
such Purchaser was first contacted by the Company, or any other Person regarding
an investment in the Company and (2) the 10th day prior to the date of this
Agreement, neither the Purchaser nor any Affiliate of such Purchaser which (x)
had knowledge of the transactions contemplated hereby, (y) has or shares
discretion relating to such Purchaser’s investments or trading or information
concerning such Purchaser’s investments, including in respect of the Securities,
or (z) is subject to such Purchaser’s review or input concerning such
Affiliate’s investments or trading (collectively, “Trading Affiliates”) has
directly or indirectly, nor has any Person acting on behalf of or pursuant to
any understanding with such Purchaser or Trading Affiliate, effected or agreed
to effect any transactions in the securities of the Company (including, without
limitation, any Short Sales involving the Company’s securities), except for the
transactions contemplated by this Agreement. Prior to the Effective Date, such
Purchaser shall not, and shall cause its Trading Affiliates not to, engage,
directly or indirectly, in any Short Sales in the securities of the Company,
except in compliance with all applicable law. Each Purchaser agrees that it will
not use any of the Shares or Warrant Shares acquired pursuant to this Agreement
to cover any short position in the Common Stock if doing so would be in
violation of applicable securities laws. Each Purchaser acknowledges that it is
aware that the Commission has published its position that covering a short
position established prior to effectiveness of a resale registration statement
with shares included in such registration statement would be a violation of
Section 5 of the Securities Act.
 
(h) Brokers and Finders. No Person will have, as a result of the transactions
contemplated by this Agreement, any valid right, interest or claim against or
upon the Company, or any Purchaser for any commission, fee or other compensation
pursuant to any agreement, arrangement or understanding entered into by or on
behalf of the Purchaser.
 
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(i) Limited Ownership. The purchase by such Purchaser of the Securities issuable
to it at the Closing will not result in such Purchaser (individually or together
with other Person with whom such Purchaser has identified, or will have
identified, itself as part of a “group” in a public filing made with the
Commission 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
Closing shall have occurred. Such Purchaser does not presently intend to, alone
or together with others, make a public filing with the Commission 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 Closing (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
Closing shall have occurred.
 
(j) Independent Investment Decision. Such Purchaser has independently evaluated
the merits of its decision to purchase Securities pursuant to the Transaction
Documents, and such Purchaser confirms that it has not relied on the advice of
any other Purchaser’s business and/or legal counsel in making such decision.
Such Purchaser understands that nothing in this Agreement or any other materials
presented by or on behalf of the Company to the Purchaser in connection with the
purchase of the Securities constitutes legal, tax or investment advice. Such
Purchaser has consulted such legal, tax and investment advisors as it, in its
sole discretion, has deemed necessary or appropriate in connection with its
purchase of the Securities.
 
(k) Reliance on Exemptions. Such Purchaser 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
Purchaser's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Purchaser set forth herein in order
to determine the availability of such exemptions and the eligibility of such
Purchaser to acquire the Securities.
 
(l) No Governmental Review. Such Purchaser 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.
 
(m) No Conflicts. The execution, delivery and performance by such Purchaser of
this Agreement and the Registration Rights Agreement and the consummation by
such Purchaser of the transactions contemplated hereby and thereby will not (i)
result in a violation of the organizational documents of such Purchaser 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 Purchaser is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree applicable to
such Purchaser, 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 Purchaser to perform its obligations hereunder.
 
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The Company acknowledges and agrees that no Purchaser has made or makes any
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 3.2.
 
ARTICLE IV.
OTHER AGREEMENTS OF THE PARTIES
 
4.1 (a) Compliance with Laws. Notwithstanding any other provision of this
Article IV, each Purchaser covenants that the Securities may only be disposed of
pursuant to an effective registration statement under, and in compliance with
the requirements of, the Securities Act, or pursuant to an available exemption
from, or in a transaction not subject to, the registration requirements of the
Securities Act, and in compliance with any applicable state and federal
securities laws. In connection with any transfer of the Securities other than
pursuant to an effective registration statement, pursuant to Rule 144(k) or in
connection with a pledge as contemplated in Section 4.1(b), except as otherwise
provided herein, the transferor will provide to the Company an opinion of
counsel selected by the transferor, which counsel and the form and substance of
which opinion shall be reasonably satisfactory to the Company and its legal
counsel, to the effect that such transfer does not require registration of such
transferred Securities under the Securities Act.
 
(b) Legends. Certificates evidencing the Securities will contain the following
legend, until such time as they are not required under Section 4.1(c):
 
NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THESE
SECURITIES HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS OR BLUE SKY LAWS.
 
The Company acknowledges and agrees that a Purchaser may from time to time
pledge, and/or grant a security interest in some or all of the legended
Securities, in connection with applicable securities laws, pursuant to a bona
fide margin agreement in compliance with a bona fide margin loan. Such a pledge
would not be subject to approval or consent of the Company and no legal opinion
of legal counsel to the pledgee, secured party or pledgor shall be required in
connection with the pledge, but such legal opinion shall be required in
connection with a subsequent transfer or foreclosure following default by the
Purchaser transferee of the pledge. No notice shall be required of such pledge
but Purchaser’s transferee shall promptly notify the Company of the pledge. Each
Purchaser acknowledges that the Company shall not be responsible for any pledges
relating to, or the grant of any security interest in, any of the Securities or
for any agreement, understanding or arrangement between any Purchaser and its
pledgee or secured party. Provided that the Company is in compliance with the
terms of this Section 4.1(b), the Company’s indemnification obligations pursuant
to this Agreement shall not extend to any Proceeding or Losses arising out of or
related to this Section 4.1(b).
 
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(c) Removal of Legends. Certificates evidencing Securities shall not be required
to contain such legend or any other legend (i) while a registration statement
(including the Registration Statement) covering the resale of such Securities is
effective under the Securities Act, (ii) following any sale of such Securities
pursuant to Rule 144 (assuming the transferor is not an affiliate of the
Company), (iii) if such Securities are eligible for sale under Rule 144(k) (to
the extent that the applicable Purchaser provides a certification or legal
opinion to the Company to that effect), or (iv) if such legend is not required
under applicable requirements of the Securities Act (including controlling
judicial interpretations and pronouncements issued by the Commission). The
Company shall cause its counsel to issue a standing legal opinion to the
Transfer Agent promptly after the Effective Date, if required by the Company’s
transfer agent to effect the removal of the legends hereunder. Any fees (with
respect to the transfer agent, counsel to the Company or otherwise) associated
with the issuance of such opinion or the removal of such legend shall be borne
by the Company. If any portion of the Warrant is exercised at a time when there
is an effective registration statement to cover the resale of the Warrant
Shares, or if such Warrant Shares may be sold under Rule 144(k), then such
Warrant Shares shall be issued free of all legends. Following the Effective Date
or at such earlier time as a legend is no longer required for certain
Securities, the Company will no later than three Trading Days following the
delivery by a Purchaser to the Company or the Transfer Agent (with notice to the
Company) of (i) a legended certificate representing such Shares or Warrant
Shares (endorsed or with stock powers attached, signatures guaranteed, and
otherwise in form necessary to affect the reissuance and/or transfer) or (ii) an
Exercise Notice in the manner stated in the Warrants to affect the exercise of
such Warrant in accordance with its terms and an opinion of counsel to the
extent required by Section 4.1(a), deliver or cause to be delivered to such
Purchaser a certificate representing such Securities that is free from all
restrictive and other legends. The Company may not make any notation on its
records or give instructions to the Transfer Agent that enlarge the restrictions
on transfer set forth in this Section. If within three (3) Trading Days after
the Company’s receipt of a legended certificate representing such Securities
(the “Delivery Date”), the Company shall fail to issue and deliver to such
Purchaser a certificate representing such Securities that is free from all
restrictive and other legends, and if on or after such Delivery Date the
Purchaser purchases (in an open market transaction or otherwise) shares of
Common Stock to deliver in satisfaction of a sale by the Purchaser of shares of
Common Stock that the Purchaser anticipated receiving from the Company without
any restrictive legend (a “Buy-In”), then the Company shall, within three (3)
Trading Days after the Purchaser’s request and in the Purchaser’s sole
discretion, either (i) pay cash to the Purchaser in an amount equal to the
Purchaser’s total purchase price (including brokerage commissions, if any) for
the shares of Common Stock so purchased (the “Buy-In Price”), at which point the
Company’s obligation to deliver such certificate shall terminate and such shares
shall be cancelled, or (ii) promptly honor its obligation to deliver to the
Purchaser a certificate or certificates representing such number of shares of
Common Stock that would have been issued if the Company timely complied with its
obligations hereunder and pay cash to the Purchaser in an amount equal to the
excess (if any) of the Buy-In Price over the product of (a) such number of
shares of Common Stock that the Company was required to deliver to the Purchaser
on the Delivery Date, times (b) the closing bid price of the Common Stock on the
Delivery Date.

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(d) In addition to the rights and remedies provided for in Section 4.1(c)
regarding failing to issue or deliver certificates, the Purchaser shall be
entitled to such other remedies at law and in equity as may be available
including without limitation specific performance and injunctive relief, and, in
any event, the Company shall pay to such Purchaser, in cash, as partial
liquidated damages and not as a penalty, an amount equal to 1.0% of the
aggregate Buy-In Price (increasing to 2.0% of the aggregate Buy-In Price five
Trading Days after such damages have begun to accrue) of the securities that
were required to be delivered, for each Trading Day after the Delivery Date
until all such certificates have been received by such Purchaser. The amounts
payable under Sections 4.1(c) and (d) shall be payable by the Company to such
Purchaser upon Purchaser’s demand therefore, and shall accrue interest at the
rate of 10% per annum after such demand until paid.

4.2 Reservation of Common Stock. The Company shall maintain a reserve from its
duly authorized shares of Common Stock for issuance pursuant to the Transaction
Documents in such amount as may be required to fulfill its obligations in full
under the Transaction Documents. In the event that at any time the then
authorized shares of Common Stock are insufficient for the Company to satisfy
its obligations in full under the Transaction Documents, the Company shall
promptly take such actions as may be required to increase the number of
authorized shares.
 
4.3 Furnishing of Information. As long as any Purchaser owns the Securities, the
Company covenants to timely file (or obtain extensions in respect thereof and
file within the applicable grace period) all reports required to be filed by the
Company after the date hereof pursuant to the Exchange Act. As long as any
Purchaser owns Securities, if the Company is not required to file reports
pursuant to such laws, it will prepare and furnish to the Purchasers and make
publicly available in accordance with Rule 144(c) such information as is
required for the Purchasers to sell the Shares and Warrant Shares under Rule
144. The Company further covenants that it will take such further action as any
holder of Securities may reasonably request, all to the extent required from
time to time to enable such Person to sell the Shares and Warrant Shares without
registration under the Securities Act within the limitation of the exemptions
provided by Rule 144.
 
4.4 No Integration. The Company shall not, and shall use its best efforts to
ensure that no Affiliate of the Company shall, sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that will be integrated with the offer or sale
of the Securities in a manner that would require the registration under the
Securities Act of the sale of the Securities to the Purchasers, or that will be
integrated with the offer or sale of the Securities for purposes of the rules
and regulations of any Trading Market.
 
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4.5 Subsequent Registrations. Other than pursuant to the Registration Statement
or as required to satisfy its obligations under the Settlement Agreement and the
Warrants held by the parties to the Settlement Agreements, prior to the
Effective Date, the Company shall not file any registration statement (other
than on Form S-8) with the Commission with respect to any securities of the
Company.
 
4.6 Securities Laws Disclosure; Publicity. By 9:00 a.m. (New York City time) on
the Trading Day immediately following the execution of this Agreement and, if
the Agreement is executed on a day other than the Closing Date, then also by
9:00 a.m. (New York City time) on the Trading Day following the Closing Date,
the Company shall issue press releases disclosing the transactions contemplated
hereby and the Closing. On the trading day following the execution of this
Agreement, the Company will file a Current Report on Form 8-K with the
Commission describing the material terms of the Transaction Documents (and
including as exhibits to such Current Report on Form 8-K the Transaction
Documents), and on the Trading Day following the Closing Date, the Company will
file an additional Current Report on Form 8-K to disclose the Closing.
Thereafter, the Company shall timely file any filings and notices required by
the Commission and the Trading Market on which the Common Stock is listed.
Notwithstanding the foregoing, the Company shall not publicly disclose the name
of any Purchaser, or include the name of any Purchaser in any press release or
filing with the Commission (other than the Registration Statement) or any
regulatory agency or Trading Market, without the prior written consent of such
Purchaser, except to the extent such disclosure is required by law or Trading
Market regulations, in which case the Company shall promptly provide the
Purchasers with prior notice of such disclosure.
 
4.7 Indemnification.
 
(a) Indemnification of Purchasers. In addition to the indemnity provided in the
Registration Rights Agreement, the Company will indemnify and hold the
Purchasers and their directors, officers, shareholders, partners, employees and
agents (each, a “Purchaser Party”) harmless from any and all losses,
liabilities, obligations, claims, contingencies, damages, costs and expenses,
including all judgments, amounts paid in settlements, court costs and reasonable
attorneys' fees and costs of investigation (collectively, “Losses”) that any
such Purchaser Party may suffer or incur as a result of or relating to any
misrepresentation, breach or inaccuracy of any representation, warranty,
covenant or agreement made by the Company in any Transaction Document. In
addition to the indemnity contained herein, the Company will reimburse each
Purchaser Party for its reasonable legal and other expenses (including the cost
of any investigation, preparation and travel in connection therewith) incurred
in connection therewith, as such expenses are incurred. If and to the extent
that such indemnification is unenforceable for any reason, the Company shall
make the maximum contribution to the payment and satisfaction of such losses
permissible under applicable law.
 
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(b) Conduct of Indemnification Proceedings. Promptly after receipt by any Person
(the “Indemnified Person”) of notice of any demand, claim or circumstances which
would or might give rise to a claim or the commencement of any action,
proceeding or investigation in respect of which indemnity may be sought pursuant
to Section 4.7(a), such Indemnified Person shall promptly notify the Company in
writing and the Company shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to such Indemnified Person, and
shall assume the payment of all fees and expenses; provided, however, that the
failure of any Indemnified Person so to notify the Company shall not relieve the
Company of its obligations hereunder except to the extent that the Company is
actually and materially prejudiced by such failure to notify. In any such
proceeding, any Indemnified Person shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Person unless: (i) the Company and the Indemnified Person shall
have mutually agreed to the retention of such counsel; or (ii) in the reasonable
judgment of counsel to such Indemnified Person representation of both parties by
the same counsel would be inappropriate due to actual or potential differing
interests between them. The Company shall not be liable for any settlement of
any proceeding effected without its written consent, which consent shall not be
unreasonably withheld, delayed or conditioned, but if settled without such
consent, or if there is a final judgment for the plaintiff, the Company shall
indemnify and hold harmless such Indemnified Person from and against any Losses
by reason of such settlement or judgment. Without the prior written consent of
the Indemnified Person, the Company shall not effect any settlement of any
pending or threatened proceeding in respect of which any Indemnified Person is
or could have been a party and indemnity could have been sought hereunder by
such Indemnified Party, unless such settlement includes an unconditional release
of such Indemnified Person from all liability arising out of such proceeding.
 
4.8 Non-Public Information. The Company covenants and agrees that neither it nor
any other Person acting on its behalf will provide or has provided any Purchaser
or its agents or counsel with any information that the Company believes
constitutes material non-public information (other than the contemplated
Transaction Documents and the transactions contemplated thereby), unless prior
thereto such Purchaser shall have executed a written agreement regarding the
confidentiality and use of such information. The Company understands and
confirms that each Purchaser shall be relying on the foregoing representations
in effecting transactions in securities of the Company.
 
4.9 Listing of Securities. Promptly following the date hereof, the Company shall
take all necessary action to cause the Shares and the Warrant Shares to be
approved for trading on the American Stock Exchange. Further, if the Company
applies to have its Common Stock or other securities listed on any other Trading
Market, it shall include in such application the Shares and the Warrant Shares
and will take such other action as is necessary to cause the Shares and the
Warrant Shares to be listed on such other Trading Market as promptly as
practicable. The Company will use commercially reasonable efforts to continue
the listing and trading of its Common Stock on a Trading Market and, in
accordance, therewith, will use commercially reasonable efforts to comply in all
respects with the Company’s reporting, filing and other obligations applicable
to issuers whose securities are listed on such Trading Market.
 
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4.10 Use of Proceeds. The Company intends to use the net proceeds from the sale
of the Securities hereunder for working capital and general corporate purposes;
provided, however, such proceeds shall not be used (x) to redeem any Common
Stock or Common Stock Equivalents, (y) to settle any outstanding Proceeding, or
(z) to pay any indebtedness for borrowed money or amounts owing to any
directors, officers, employees, consultants or other Affiliates.
 
4.11 Trading Restrictions. In addition to the restrictions set forth in this
Agreement, the Lead Investors hereby agree to, and shall cause their Trading
Affiliates to, not effect any transactions in any securities of the Company
listed on any Trading Market before September 13, 2006.
 
4.12 Anti-dilution Adjustment. If (x) the “Company Conversion Price” determined
pursuant to Section 1(b) of the Settlement Agreements is less than, or (y) any
Common Stock or other securities of the Company are issued pursuant to the
Convertible Notes based on a per share price of the Common Stock that is less
than, the Per Share Purchase Price in effect on the Closing Date (the “Lower Per
Share Purchase Price”), then (each, a “Trigger Issuance”), on September 14, 2006
(and on each such later date as the Company Conversion Price is determined or
such securities are issued), the Company shall issue a number of additional
shares of Common Stock to each Purchaser equal to the difference of (A) the
number of Shares that would have been issued to such Investor, based on such
Purchaser’s Subscription Amount, if the Per Share Purchase Price on the Closing
Date was equal to the Lower Per Share Purchase Price, minus (B) the number of
Shares initially issued to such Purchaser upon payment of its Subscription
Amount. Promptly following the occurrence of any event giving rise to the
issuance of additional Shares to the Purchasers in accordance with this Section
4.12 (but in no event more than two (2) Business Days thereafter), the Company
shall issue irrevocable instructions authorizing the Transfer Agent to issue
such additional Shares to each Purchaser in the amounts set forth in the
immediately preceding sentence. Until the Company issues the securities
described in Section 1(b)(i) and 1(b)(ii) of the Settlement Agreements, the
Company shall not amend, modify or alter the Settlement Agreements in any way,
or waive or suffer to exist any waiver of any provisions thereof, in each case,
without the Purchasers’ prior written consent.
 
ARTICLE V.
CONDITIONS PRECEDENT TO CLOSING

5.1 Conditions Precedent to the Obligations of the Purchasers to Purchase
Securities. The obligation of each Purchaser to acquire Securities at the
Closing is subject to the fulfillment to such Purchase’s satisfaction, on or
prior to the Closing Date, of each of the following conditions, any of which may
be waived by such Purchaser (as to itself only):
 
(a) Representations and Warranties. The representations and warranties of the
Company contained herein shall be true and correct in all material respects as
of the date when made and as of the Closing Date, as though made on and as of
such date.
 
(b) Performance. The Company and each other Purchaser shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by the Transaction Documents to be performed, satisfied
or complied with by it at or prior to the Closing.
 
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(c) No Injunction. No statute, rule, regulation, executive order, decree, ruling
or injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction that prohibits the
consummation of any of the transactions contemplated by the Transaction
Documents.
 
(d) Consents. The Company shall have obtained in a timely fashion any and all
consents, permits, approvals, registrations and waivers necessary or appropriate
for consummation of the purchase and sale of the Securities, and all of which
shall be and remain so long as necessary in full force and effect.
 
(e) Adverse Changes. Since the date of execution of this Agreement, no event or
series of events shall have occurred that reasonably could have or result in a
Material Adverse Effect;
 
(f) No Suspensions of Trading in Common Stock; Listing. Trading in the Common
Stock shall not have been suspended by the Commission or any Trading Market
(except for any suspensions of trading of not more than one Trading Day solely
to permit dissemination of material information regarding the Company) at any
time since the date of execution of this Agreement, and the Common Stock shall
have been at all times since such date listed for trading on a Trading Market;
 
(g) Settlement Agreements. The Settlement Agreements (x) shall not have been,
amended, modified or altered in any way, and no provision thereof shall have
been waived by any party thereto, and (y) the Company shall have performed all
of its obligations thereunder and as contemplated thereby, unless, in any such
case, the Purchasers’ shall have consented thereto in writing;
 
(h) Company Deliverables. The Company shall have delivered the Company
Deliverables in accordance with Section 2.2(a); and
 
(i) Compliance Certificate. The Company shall have delivered to each Purchaser a
certificate, dated as of the Closing Date and signed by its Chief Executive
Officer or its Chief Financial Officer, dated as of the Closing Date, certifying
to the fulfillment of the conditions specified in Sections 5.1(a), (b), (c), (d)
and (f).
 
5.2 Conditions Precedent to the Obligations of the Company to sell Securities.
The Company's obligation to sell and issue the Securities at the Closing is
subject to the fulfillment to the satisfaction of the Company on or prior to the
Closing Date of the following conditions, any of which may be waived by the
Company:
 
(a) Representations and Warranties. The representations and warranties made by
the Purchasers in Section 3.2 hereof shall be true and correct in all material
respects as of the date when made, and as of the Closing Date as though made on
and as of such date.
 
(b) Performance. The Purchasers shall have performed, satisfied and complied in
all material respects with all covenants, agreements and conditions required by
the Transaction Documents to be performed, satisfied or complied with by the
Purchasers at or prior to the Closing;
 
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(c) No Injunction. No statute, rule, regulation, executive order, decree, ruling
or injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction that prohibits the
consummation of any of the transactions contemplated by the Transaction
Documents; and
 
(d) Purchasers Deliverables. Each Purchaser shall have delivered its Purchaser
Deliverables in accordance with Section 2.2(b).
 
ARTICLE VI.
MISCELLANEOUS
 
6.1 Fees and Expenses. At Closing, the Company shall reimburse the reasonable
fees and expenses of the Lead Investors in an amount of $25,000 in connection
with the transactions contemplated by this Agreement, which fees shall include,
without limitation, the fees and expenses associated with the negotiation,
preparation and execution and delivery of this Agreement and the other
Transaction Documents and any amendments, modifications or waivers thereto. The
Company and the Purchasers shall each pay the fees and expenses of their
respective advisers, counsel, accountants and other experts, if any and all
other expenses incurred by such party in connection with the negotiation,
preparation, execution, delivery and performance of this Agreement. The Company
shall pay all Transfer Agent fees, stamp taxes and other taxes and duties levied
in connection with the sale and issuance of the Securities. Each party
acknowledges that Lowenstein Sandler PC has rendered legal advice to the Lead
Investors, and not to such party in connection with the transactions
contemplated hereby, and that such party has relied for such matters on the
advice of its own respective counsel.
 
6.2 Entire Agreement. The Transaction Documents, together with the Exhibits and
Schedules thereto, contain the entire understanding of the parties with respect
to the subject matter hereof and supersede all prior agreements, understandings,
discussions and representations, oral or written, with respect to such matters,
which the parties acknowledge have been merged into such documents, exhibits and
schedules. At or after the Closing, and without further consideration, the
Company and the Purchasers will execute and deliver to the other such further
documents as may be reasonably requested in order to give practical effect to
the intention of the parties under the Transaction Documents.
 
6.3 Notices. Any and all notices or other communications or deliveries required
or permitted to be provided hereunder shall be in writing and shall be deemed
given and effective on the earliest of (a) the date of transmission, if such
notice or communication is delivered via facsimile or e-mail (provided the
sender receives a machine-generated confirmation of successful transmission) at
the facsimile number specified in this Section prior to 5:00 p.m. (New York City
time) on a Trading Day, (b) the next Trading Day after the date of transmission,
if such notice or communication is delivered via facsimile at the facsimile
number specified in this Section on a day that is not a Trading Day or later
than 5:00 p.m. (New York City time) on any Trading Day, (c) the Trading Day
following the date of mailing, if sent by U.S. nationally recognized overnight
courier service, or (d) upon actual receipt by the party to whom such notice is
required to be given. The address for such notices and communications shall be
as follows:
 
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If to the Company:
Telkonet, Inc.

20374 Seneca Meadows Parkway
Germantown, Maryland 20876
Telephone No.: (240) 912-1800
Facsimile No.: (240) 912-1939
Attention: Chief Financial Officer

With a copy to:
Baker & Hostetler LLP

1050 Connecticut Avenue, NW
Suite 1100
Washington, D.C. 20036
Telephone No.: (202) 861-1500
Facsimile No.: (202) 861-1783
Attention: William J. Conti, Esq.

If to a Purchaser:
To the address set forth under such Purchaser’s name on the signature page
hereof;

or such other address as may be designated in writing hereafter, in the same
manner, by such Person.

6.4 Amendments; Waivers; No Additional Consideration. No provision of this
Agreement may be waived or amended except in a written instrument signed, in the
case of an amendment, by the Company and each of the Purchasers or, in the case
of a waiver, by the party against whom enforcement of any such waiver is sought.
No waiver of any default with respect to any provision, condition or requirement
of this Agreement shall be deemed to be a continuing waiver in the future or a
waiver of any subsequent default or a waiver of any other provision, condition
or requirement hereof, nor shall any delay or omission of either party to
exercise any right hereunder in any manner impair the exercise of any such
right. No consideration shall be offered or paid to any Purchaser to amend or
consent to a waiver or modification of any provision of any Transaction Document
unless the same consideration is also offered to all Purchasers who then hold
Shares.
 
6.5 Construction. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof. 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. This Agreement
shall be construed as if drafted jointly by the parties, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any provisions of this Agreement or any of the Transaction
Documents.
 
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6.6 Successors and Assigns. The provisions of this Agreement shall inure to the
benefit of and be binding upon the parties and their successors and permitted
assigns. This Agreement, or any rights or obligations hereunder, may not be
assigned by the Company without the prior written consent of the Purchasers. Any
Purchaser may assign its rights hereunder in whole or in part to any Person to
whom such Purchaser assigns or transfers any Securities in compliance with this
agreement and applicable law, provided such transferee shall agree in writing to
be bound, with respect to the transferred Securities, by the terms and
conditions of this Agreement that apply to the “Purchasers”.
 
6.7  No Third-Party Beneficiaries. This Agreement is intended for the benefit of
the parties hereto and their respective successors and permitted assigns and is
not for the benefit of, nor may any provision hereof be enforced by, any other
Person, except each Purchaser Party is an intended third party beneficiary of
Section 4.7 and may enforce the provisions of such Section directly against the
parties with obligations thereunder .
 
6.8 Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. Each party
agrees that all Proceedings concerning the interpretations, enforcement and
defense of the transactions contemplated by this Agreement and any other
Transaction Documents (whether brought against a party hereto or its respective
Affiliates, employees or agents) shall be commenced exclusively in the New York
Courts. Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the New York Courts for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein (including with respect to the enforcement of the any of the
Transaction Documents), and hereby irrevocably waives, and agrees not to assert
in any Proceeding, any claim that it is not personally subject to the
jurisdiction of any such New York Court, or that such Proceeding has been
commenced in an improper or inconvenient forum. Each party hereto hereby
irrevocably waives personal service of process and consents to process being
served in any such Proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the address in effect for notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. Each party hereto hereby
irrevocably waives, to the fullest extent permitted by applicable law, any and
all right to trial by jury in any legal proceeding arising out of or relating to
this Agreement or the transactions contemplated hereby. If either party shall
commence a Proceeding to enforce any provisions of a Transaction Document, then
the prevailing party in such Proceeding shall be reimbursed by the other party
for its reasonable attorney’s fees and other costs and expenses incurred with
the investigation, preparation and prosecution of such Proceeding.
 
6.9 Survival. Subject to applicable statute of limitations, the representations,
warranties, agreements and covenants contained herein shall survive the Closing
and the delivery of the Securities.
 
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6.10 Execution. This Agreement may be executed in two or more counterparts, all
of which when taken together 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, it being understood that both parties need not
sign the same counterpart. In the event that any signature is delivered by
facsimile transmission, such signature shall create a valid and binding
obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.
 
6.11 Severability. If any provision of this Agreement is held to be invalid or
unenforceable in any respect, the validity and enforceability of the remaining
terms and provisions of this Agreement shall not in any way be affected or
impaired thereby and the parties will attempt to agree upon a valid and
enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.
 
6.12 Rescission and Withdrawal Right. Notwithstanding anything to the contrary
contained in (and without limiting any similar provisions of) the Transaction
Documents, whenever any Purchaser exercises a right, election, demand or option
under a Transaction Document and the Company does not timely perform its related
obligations within the periods therein provided, then such Purchaser may rescind
or withdraw, in its sole discretion from time to time upon written notice to the
Company, any relevant notice, demand or election in whole or in part without
prejudice to its future actions and rights
 
6.13 Replacement of Securities. If any certificate or instrument evidencing any
Securities is mutilated, lost, stolen or destroyed, the Company shall issue or
cause to be issued in exchange and substitution for and upon cancellation
thereof, or in lieu of and substitution therefor, a new certificate or
instrument, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction and the execution by the holder
thereof of a customary lost certificate affidavit of that fact and an agreement
to indemnify and hold harmless the Company for any reasonable losses in
connection therewith. The applicants for a new certificate or instrument under
such circumstances shall also pay any reasonable third-party costs associated
with the issuance of such replacement Securities. If a replacement certificate
or instrument evidencing any Securities is requested due to a mutilation
thereof, the Company may require delivery of such mutilated certificate or
instrument as a condition precedent to any issuance of a replacement.
 
6.14 Remedies. In addition to being entitled to exercise all rights provided
herein or granted by law, including recovery of damages, each of the Purchasers
and the Company will be entitled to specific performance under the Transaction
Documents. The parties agree that monetary damages may not be adequate
compensation for any loss incurred by reason of any breach of obligations
described in the foregoing sentence and hereby agrees to waive in any action for
specific performance of any such obligation (other than in connection with any
action for a temporary restraining order) the defense that a remedy at law would
be adequate.
 
6.15 Payment Set Aside. To the extent that the Company makes a payment or
payments to any Purchaser pursuant to any Transaction Document or a Purchaser
enforces or exercises its rights thereunder, and such payment or payments or the
proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered
from, disgorged by or are required to be refunded, repaid or otherwise restored
to the Company, a trustee, receiver or any other person under any law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.
 
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6.16 Independent Nature of Purchasers' Obligations and Rights. The obligations
of each Purchaser under any Transaction Document are several and not joint with
the obligations of any other Purchaser, and no Purchaser shall be responsible in
any way for the performance of the obligations of any other Purchaser under any
Transaction Document. The decision of each Purchaser to purchase Securities
pursuant to the Transaction Documents has been made by such Purchaser
independently of any other Purchaser and independently of any information,
materials, statements or opinions as to the business, affairs, operations,
assets, properties, liabilities, results of operations, condition (financial or
otherwise) or prospects of the Company or any Subsidiary which may have been
made or given by any other Purchaser or by any agent or employee of any other
Purchaser, and no Purchaser and any of its agents or employees shall have any
liability to any other Purchaser (or any other Person) relating to or arising
from any such information, materials, statement or opinions. Nothing contained
herein or in any Transaction Document, and no action taken by any Purchaser
pursuant thereto, shall be deemed to constitute the Purchasers as a partnership,
an association, a joint venture or any other kind of entity, or create a
presumption that the Purchasers are in any way acting in concert or as a group
with respect to such obligations or the transactions contemplated by the
Transaction Documents. Each Purchaser acknowledges that no other Purchaser has
acted as agent for such Purchaser in connection with making its investment
hereunder and that no Purchaser will be acting as agent of such Purchaser in
connection with monitoring its investment in the Securities or enforcing its
rights under the Transaction Documents. Each Purchaser shall be entitled to
independently protect and enforce its rights, including without limitation the
rights arising out of this Agreement or out of the other Transaction Documents,
and it shall not be necessary for any other Purchaser to be joined as an
additional party in any proceeding for such purpose. The Company acknowledges
that each of the Purchasers has been provided with the same Transaction
Documents for the purpose of closing a transaction with multiple Purchasers and
not because it was required or requested to do so by any Purchaser. The
Company’s obligations to each Purchaser under this Agreement are identical to
its obligations to each other Purchaser other than such differences resulting
solely from the number of Securities purchased by such Purchaser, but regardless
of whether such obligations are memorialized herein or in another agreement
between the Company and a Purchaser.

 
[Signatures on next page]
 
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IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.
 
TELKONET, INC.
 
By:_______________________________________ 
Name: 
Title: 
 
 
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGES FOR PURCHASERS FOLLOW]
 

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NAME OF PURCHASER

By:_______________________________________
Name:
Title:
 
Subscription Amount $______________
Tax ID No. ____________________
 
ADDRESS FOR NOTICE

c/o:_______________________________________

Street:_____________________________________

City/State/Zip:_______________________________

Attention:__________________________________

Telephone No.:______________________________

Facsimile No.:_______________________________

Deliver Instructions
(if different than above)

c/o _______________________________

Street: ____________________________

City/State/Zip: ______________________

Attention: _________________________

Tel No.: ___________________________ 

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Exhibit A
 
FORM OF WARRANT
 

 
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Exhibit B
 
FORM OF REGISTRATION RIGHTS AGREEMENT
 

 

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Exhibit C
 
INSTRUCTION SHEET FOR PURCHASER
 
(to be read in conjunction with the entire
Securities Purchase Agreement)
 

A.
Complete the following items in the Securities Purchase Agreement:

 
1. Complete and execute the Purchaser Signature Page. The Agreement must be
executed by an individual authorized to bind the Purchaser.
 
2. Exhibit D-1 - Stock Certificate Questionnaire:
 
Provide the information requested by the Stock Certificate Questionnaire;
 
3. Exhibit D-2 - Purchaser Certificate:
 
Provide the information requested by the Certificate for Corporate, Partnership,
Trust, Foundation and Joint Purchasers, as applicable.
 
4. Return, via facsimile, the signed Share Purchase Agreement including the
properly completed Exhibits D-1 and D-2, to:
 
Baker & Hostetler LLP
1050 Connecticut Avenue, NW
Suite 1100
Washington, D.C. 20036
Telephone No.: (202) 861-1500
Facsimile No.: (202) 861-1783
Attention: William J. Conti, Esq.

 
5. After completing instruction number five (5) above, deliver the original
signed Share Purchase Agreement including the properly completed Exhibits D-1
and D-2 to:
 
B.
Instructions regarding the transfer of funds for the purchase of Shares will be
telecopied to the Purchaser by the Company at a later date.

 
C.
Upon the resale of any Shares by the Purchaser after the Registration Statement
covering any Shares is effective, as described in the Purchase Agreement, the
Purchaser must deliver a current prospectus, and annual and quarterly reports of
the Company to the buyer.

 
 
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Exhibit C
 
OPINION OF COMPANY COUNSEL
 
1. The Company is a corporation duly incorporated and validly existing under,
and by virtue of, the laws of the State of Utah and is in good standing under
such laws. The Company has requisite corporate power to own and operate its
properties and assets, and to carry on its business as presently conducted. The
Company is qualified to do business as a foreign corporation in the state of
Maryland.
 
2. The Company has all requisite legal and corporate power to execute and
deliver the Agreement, to sell and issue the Common Stock and the Warrants under
the Agreement, to issue the Warrant Shares issuable upon exercise of the
Warrants and to carry out and perform its obligations under the terms of the
Agreement.
 
3. The shares of Common Stock have been duly authorized and when issued,
delivered and paid for in accordance with the terms of the Agreement, will be
validly issued, fully paid and nonassessable. The Warrants have been duly
authorized and when issued, delivered and paid for in accordance with the terms
of the Agreement, will be validly issued. The Warrant Shares have been duly and
validly reserved, and, when issued in accordance with the terms of the
Agreement, the Warrant and the Company’s Certificate of Incorporation, will be
validly issued, fully paid and nonassessable.
 
4. All corporate action on the part of the Company necessary for the
authorization, execution and delivery of the Agreement by the Company, the
authorization, sale, issuance and delivery of the Common Stock, the Warrants and
the Warrant Shares and the performance by the Company of its obligations under
the Agreement has been taken. The Agreement has been duly and validly executed
and delivered by the Company and constitutes a valid and binding obligation of
the Company, enforceable against the Company in accordance with its terms.
 
5. The execution and delivery by the Company of the Agreement, the performance
by the Company of its obligations under the Agreement, and the issuance of the
Common Stock and the Warrants do not violate any provision of the Certificate of
Incorporation or Bylaws, or any provision of the [Utah Corporations Law], any
applicable federal or Maryland state law, or rule or regulation known to us to
be customarily applicable to transactions of this nature. The execution and
delivery by the Company of the Agreement, the performance by the Company of its
obligations under the Agreement, and the issuance of the Common Stock, the
Warrants and the Warrant Shares do not violate, or constitute a default under,
any contract or agreement filed as an exhibit to the Company’s Form 10-K for the
fiscal year ended December 31, 2005 or the Company’s Form 10-Q for the fiscal
quarters ended March 31, 2006 and June 30, 2006 with the Securities and Exchange
Commission pursuant to Item 601(b)(10) of Regulation S-K to which the Company is
a party or by which the Company is bound.
 
6. Except as identified in the Agreement, to our knowledge, there are no
actions, suits, proceedings or investigations pending against the Company or its
properties before any court or governmental agency nor, to our knowledge, has
the Company received any written threat thereof.
 
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7. No consent, approval or authorization of or designation, declaration or
filing with any governmental authority on the part of the Company is required in
connection with the valid execution and delivery of the Agreement, the offer,
sale or issuance of the Common Stock or the Warrants or the consummation by the
Company of any other transaction contemplated by the Agreement except the filing
of a Form D pursuant to Regulation D under the Securities Act of 1933, as
amended.

8. Subject to the accuracy of the Investors’ representations in Section 3.2 of
the Agreement, the offer, sale and issuance of the Common Stock and the Warrants
in conformity with the terms of the Agreement constitute transactions exempt
from the registration requirements of Section 5 of the Securities Act of 1933,
as amended.
 

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Exhibit D-1
 
Telkonet, Inc.
 
STOCK CERTIFICATE QUESTIONNAIRE
 
Please provide us with the following information:
 
1.
The exact name that the Shares are to be registered in (this is the name that
will appear on the stock certificate(s)). You may use a nominee name if
appropriate:
   
2.
The relationship between the Purchaser of the Shares and the Registered Holder
listed in response to item 1 above:
   
3.
The mailing address, telephone and telecopy number of the Registered Holder
listed in response to item 1 above:
                                   
4.
The Tax Identification Number of the Registered Holder listed in response to
item 1 above:
   

 
 
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Exhibit D-2

Telkonet, Inc.

CERTIFICATE FOR CORPORATE, PARTNERSHIP,
TRUST, FOUNDATION AND JOINT PURCHASERS

If the investor is a corporation, partnership, trust, pension plan, foundation,
joint purchaser (other than a married couple) or other entity, an authorized
officer, partner, or trustee must complete, date and sign this Certificate.

CERTIFICATE

The undersigned certifies that the representations and responses below are true
and accurate:

(a) The investor has been duly formed and is validly existing and has full power
and authority to invest in the Company. The person signing on behalf of the
undersigned has the authority to execute and deliver the Share Purchase
Agreement on behalf of the Purchaser and to take other actions with respect
thereto.

(b) Indicate the form of entity of the undersigned:

____ Limited Partnership

____ General Partnership

____ Corporation

____ Revocable Trust (identify each grantor and indicate under what
circumstances the trust is revocable by the grantor):

(Continue on a separate piece of paper, if necessary.)

____ Other type of Trust (indicate type of trust and, for trusts other than
pension trusts, name the grantors and beneficiaries):

(Continue on a separate piece of paper, if necessary.)

____ Other form of organization (indicate form of organization)
 

 
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(c) Indicate the approximate date the undersigned entity was formed:

(d) In order for the Company to offer and sell the Shares in conformance with
state and federal securities laws, the following information must be obtained
regarding your investor status. Please initial each category applicable to you
as an investor in the Company.

___ 1. A bank as defined in Section 3(a)(2) of the Securities Act, or any
savings and loan association or other institution as defined in Section
3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary
capacity;

___ 2. A broker or dealer registered pursuant to Section 15 of the Securities
Exchange Act of 1934;

___ 3. An insurance company as defined in Section 2(13) of the Securities Act;

___ 4. An investment company registered under the Investment Company Act of 1940
or a business development company as defined in Section 2(a)(48) of that Act;

___ 5. A Small Business Investment Company licensed by the U.S. Small Business
Administration under Section 301(c) or (d) of the Small Business Investment Act
of 1958;

___ 6. A plan established and maintained by a state, its political subdivisions,
or any agency or instrumentality of a state or its political subdivisions, for
the benefit of its employees, if such plan has total assets in excess of
$5,000,000;

___ 7. An employee benefit plan within the meaning of the Employee Retirement
Income Security Act of 1974, if the investment decision is made by a plan
fiduciary,
as defined in Section 3(21) of such Act, which is either a bank, savings and
loan association, insurance company, or registered investment advisor, or if the
employee benefit plan has total assets in excess of $5,000,000 or, if a
self-directed plan, with investment decisions made solely by persons that are
accredited investors;

___ 8. A private business development company as defined in Section 202(a)(22)
of the Investment Advisers Act of 1940;

___ 9. An organization described in Section 501(c)(3) of the Internal Revenue
Code, corporation, Massachusetts or similar business trust, or partnership, not
formed for the specific purpose of acquiring the Shares, with total assets in
excess of $5,000,000;

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___ 10. A trust, with total assets in excess of $5,000,000, not formed for the
specific purpose of acquiring the Shares, whose purchase is directed by a
sophisticated person as described in Rule 506(b)(2)(ii) of the Exchange Act;

___ 11. An entity in which all of the equity owners qualify under any of the
above subparagraphs. If the undersigned belongs to this investor category only,
list the equity owners of the undersigned, and the investor category which each
such equity owner satisfies:
 
(Continue on a separate piece of paper, if necessary.)

Please set forth in the space provided below the (i) states, if any, in the U.S.
in which you maintained your principal office during the past two years and the
dates during which you maintained your office in each state, (ii) state(s), if
any, in which you are incorporated or otherwise organized and (iii) state(s), if
any, in which you pay income taxes.

Dated: ____________, 2006

___________________________

Name of investor

___________________________

Signature and title of authorized officer, partner or trustee
 
 
 
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