Unassociated Document


    EXHIBIT 10.1

     

    SECURITIES PURCHASE
AGREEMENT

    


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

     

    WITNESSETH

    


    WHEREAS, the Company and the
Buyer(s) are executing and delivering this Agreement in reliance upon an
exemption from securities registration pursuant to Section 4(2) and/or
Rule 506 of Regulation D (“Regulation D”) as
promulgated by the U.S. Securities and Exchange Commission (the “SEC”) under the
Securities Act of 1933, as amended (the “Securities
Act”);

     

    WHEREAS, the parties desire
that, upon the terms and subject to the conditions contained herein, the Company
shall issue and sell to the Buyer(s), as provided herein, and the Buyer(s) shall
purchase (i) up to Three Million Five Hundred Thousand Dollars ($3,500,000) of
secured convertible debentures in the form attached hereto as “Exhibit A” (the
“Convertible
Debentures”), which shall be convertible into shares of the Company’s
common stock, par value $0.001 (the “Common Stock”) (as
converted, the “Conversion Shares”),
and (ii) warrants substantially in the form attached hereto as “Exhibit B” (the
“Warrants”), to
acquire up to that number of additional shares of Common Stock set forth
opposite such Buyer’s name on Schedule I (as exercised, the “Warrant Shares”) of
which One Million Five Hundred Thousand Dollars ($1,500,000) shall be funded
within five (5) business days following the date hereof (the “First Closing”); One
Million Dollars ($1,000,000) shall be funded within five business days of
satisfaction of each of the conditions set forth in Sections 6(b) and 7(b)
hereof  (the “Second Closing”); and
One Million Dollars ($1,000,000) shall be funded within five business days of
satisfaction of each of the conditions set forth in Sections 6(c) and 7(c)
hereof (the “Third
Closing”) (individually referred to as a “Closing” collectively
referred to as the “Closings”), for a
total purchase price of up to Three Million Five Hundred Thousand Dollars
($3,500,000) (the “Purchase Price”), in
the respective amounts set forth opposite each Buyer(s) name on Schedule I (the
“Subscription
Amount”);

     

    WHEREAS, contemporaneously
with the execution and delivery of this Agreement, the parties hereto are
executing and delivering a Registration Rights Agreement (the “Registration Rights
Agreement”) pursuant to which the Company has agreed to provide certain
registration rights under the Securities Act and the rules and regulations
promulgated thereunder, and applicable state securities laws;

     

    WHEREAS, contemporaneously
with the execution and delivery of this Agreement, (i) the Buyer, the Company,
and each subsidiary of the Company are executing and delivering a Security
Agreement (all such security agreements shall be referred to as the “Security Agreement”)
pursuant to which the Company and its wholly owned subsidiaries agree to provide
the Buyer a security interest in Pledged Property (as this term is defined in
the Security Agreement), and (ii) each subsidiary of the Company is executing
and delivering a Guaranty dated the date hereof (the “Guaranty” and
collectively with the Security Agreement, the “Security Documents”)
in favor of the Buyer;

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    WHEREAS, contemporaneously
with the execution and delivery of this Agreement, the parties hereto are
executing and delivering Irrevocable Transfer Agent Instructions (the “Irrevocable Transfer Agent
Instructions”); and

     

    WHEREAS, the Convertible
Debentures, the Conversion Shares, the Warrants, and the Warrant Shares
collectively are referred to herein as the “Securities”).

     

    NOW, THEREFORE, in
consideration of the mutual covenants and other agreements contained in this
Agreement, the Company and the Buyer(s) hereby agree as follows:

     

    1.    PURCHASE AND SALE OF
CONVERTIBLE DEBENTURES.

     

    (a)    Purchase of Convertible
Debentures.  Subject to the satisfaction (or waiver) of the
terms and conditions of this Agreement, each Buyer agrees, severally and not
jointly, to purchase at each Closing and the Company agrees to sell and issue to
each Buyer, severally and not jointly, at each Closing, Convertible Debentures
in amounts corresponding with the Subscription Amount set forth opposite each
Buyer’s name on Schedule I hereto and the Warrants to acquire up that number of
Warrant Shares as set forth opposite such Buyer’s name on Schedule I
..

     

    (b)    Closing
Dates.  The First Closing of the purchase and sale of the
Convertible Debentures and Warrants shall take place at 10:00 a.m. Eastern
Standard Time on the fifth (5th)
business day following the date hereof, subject to notification of satisfaction
of the conditions to the First Closing set forth herein and in Sections 6 and 7
below (or such other date as is mutually agreed to by the Company and the
Buyer(s)) (the “First
Closing Date”).  The Second Closing of the purchase and sale of
the Convertible Debentures shall take place at 4:00 p.m. Eastern Standard Time
on the business day immediately following the date the conditions to the Second
Closing set forth in Sections 6 and 7 below have been satisfied (or such later
date as is mutually agreed to by the Company and the Buyer(s)) (the “Second Closing
Date”).  The Third Closing of the purchase and sale of the
Convertible Debentures shall take place at 4:00 p.m. Eastern Standard Time on
the business day immediately following the date the conditions to the Third
Closing set forth in Sections 6 and 7 below have been satisfied (or such later
date as is mutually agreed to by the Company and the Buyer(s)) (the “Third Closing Date,”
together with the First Closing Date and the Second Closing Date, the “Closing
Dates”).  The Closings shall occur on the respective Closing
Dates at the offices of Yorkville Advisors, LLC, 3700 Hudson Street, Suite 3700,
Jersey City, New Jersey 07302 (or such other place as is mutually agreed to by
the Company and the Buyer(s)).

     

    (c)    Form of
Payment.  Subject to the satisfaction of the terms and
conditions of this Agreement, on each Closing Date, (i) the Buyers shall deliver
to the Company such aggregate proceeds for the Convertible Debentures and
Warrants to be issued and sold to such Buyer at such Closing, minus the fees to
be paid directly from the proceeds of such Closing as set forth herein, and
(ii) the Company shall deliver to each Buyer, Convertible Debentures and
Warrants which such Buyer is purchasing at such Closing in amounts indicated
opposite such Buyer’s name on Schedule I, duly executed on behalf of the
Company.

     

    2.    BUYER’S REPRESENTATIONS AND
WARRANTIES.

     

    
      
         

      

      
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    Each
Buyer represents and warrants, severally and not jointly, that:

     

    (a)    Investment
Purpose.  Each Buyer is acquiring the Securities for its own
account for investment only and not with a view towards, or for resale in
connection with, the public sale or distribution thereof, except pursuant to
sales registered or exempted under the Securities Act; provided, however, that
by making the representations herein, such Buyer reserves the right to dispose
of the Securities at any time in accordance with or pursuant to an effective
registration statement covering such Securities or an available exemption under
the Securities Act.  Such Buyer does not presently have any agreement
or understanding, directly or indirectly, with any Person to distribute any of
the Securities.

     

    (b)    Accredited Investor
Status.  At the time each Buyer was offered the Securities it
was, and at the date hereof, and on each date it exercises the Warrants and
converts the Convertible Debentures it will be, an “Accredited Investor”
as that term is defined in Rule 501(a)(3) of Regulation D.  Such Buyer
is not a registered broker-dealer under Section 15 of the Exchange
Act.

     

    (c)    Reliance on
Exemptions.  Each Buyer understands that the Securities are
being offered and sold to it in reliance on specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying in part upon the truth and accuracy of, and such
Buyer’s compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire the Securities.

     

    (d)    Information.  Each
Buyer and its advisors (and his or, its counsel), if any, have been furnished
with all materials relating to the business, finances and operations of the
Company and information such Buyer and/or its advisors, if any, deemed material
to making an informed investment decision regarding the purchase of the
Securities, which have been requested by such Buyer.  Each Buyer and
its advisors, if any, have been afforded the opportunity to ask questions of the
Company and its management.  Neither such inquiries nor any other due
diligence investigations conducted by such Buyer or its advisors, if any, or its
representatives shall modify, amend or affect such Buyer’s right to rely on the
Company’s representations and warranties contained in Section 3
below.  Each Buyer understands that its investment in the Securities
involves a high degree of risk and represents that it is able to bear the
economic risk of an investment in the Securities and, as of the date of this
Agreement, is able to afford a complete loss of such investment.  Each
Buyer, either alone or together with its representatives, has such knowledge,
sophistication and experience in business and financial matters so as to be
capable of evaluating the merits and risks of an investment in the securities
and has so evaluated the merits and risks of such investment.  Each
Buyer has sought such accounting, legal and tax advice, as it has considered
necessary to make an informed investment decision with respect to its
acquisition of the Securities.

     

    (e)    No Governmental
Review.  Each Buyer understands that no United States federal
or state agency or any other government or governmental agency has passed on or
made any recommendation or endorsement of the Securities, or the fairness or
suitability of the investment in the Securities, nor have such authorities
passed upon or endorsed the merits of the offering of the
Securities.

     

    
      
         

      

      
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    (f)    Transfer or
Resale.  Each Buyer understands that except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are not
being registered under the Securities Act or any state securities laws, and may
not be offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) such Buyer shall have delivered to the Company an
opinion of counsel, in a generally acceptable form, to the effect that such
Securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration requirements, or (C)
such Buyer provides the Company with reasonable assurances (in the form of
seller and broker representation letters) that such Securities can be sold,
assigned or transferred pursuant to Rule 144, Rule 144(k), or Rule 144A
promulgated under the Securities Act, as amended (or a successor rule thereto)
(collectively, “Rule
144”), in each case following the applicable holding period set forth
therein; (ii) any sale of the Securities made in reliance on Rule 144 may be
made only in accordance with the terms of Rule 144 and further, if Rule 144 is
not applicable, any resale of the Securities under circumstances in which the
seller (or the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the Securities Act) may require
compliance with some other exemption under the Securities Act or the rules and
regulations of the SEC thereunder; and (iii) neither the Company nor any other
person is under any obligation to register the Securities under the Securities
Act or any state securities laws or to comply with the terms and conditions of
any exemption thereunder.

     

    (g)    Legends.  Each
Buyer agrees to the imprinting, so long as is required by this Section 2(g), of
a restrictive legend in substantially the following form:

     

    THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS.  THE SECURITIES HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT
PURPOSES AND NOT WITH A VIEW TOWARD RESALE AND MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE
STATE SECURITIES LAWS.

     

    Certificates
evidencing the Conversion Shares or Warrant Shares shall not contain any legend
(including the legend set forth above), (i) while a registration statement
(including the Registration Statement) covering the resale of such security is
effective under the Securities Act, (ii) following any sale of such Conversion
Shares or Warrant Shares pursuant to Rule 144, (iii) if such Conversion Shares
or Warrant Shares are eligible for sale under Rule 144(k), or (iv) if such
legend is not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the staff of
the SEC).  The Company shall cause its counsel to issue a legal
opinion to the Company’s transfer agent

     

    
      
         

      

      
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    promptly
after the effective date (the “Effective Date”) of a
Registration Statement if required by the Company’s transfer agent to effect the
removal of the legend hereunder.  If all or any portion of the
Convertible Debentures or Warrants are exercised by a Buyer that is not an
Affiliate of the Company (a “Non-Affiliated
Buyer”) at a time when there is an effective registration statement to
cover the resale of the Conversion Shares or the Warrant Shares, such Conversion
Shares or Warrant Shares shall be issued free of all legends.  The
Company agrees that following the Effective Date or at such time as such legend
is no longer required under this Section 2(g), it will, no later than three (3)
Trading Days following the delivery by a Non-Affiliated Buyer to the Company or
the Company’s transfer agent of a certificate representing Conversion Shares or
Warrant Shares, as the case may be, issued with a restrictive legend (such third
Trading Day, the “Legend Removal
Date”), deliver or cause to be delivered to such Non-Affiliated Buyer a
certificate representing such shares that is free from all restrictive and other
legends.  The Company may not make any notation on its records or give
instructions to any transfer agent of the Company that enlarge the restrictions
on transfer set forth in this Section.  Each Buyer acknowledges that
the Company’s agreement hereunder to remove all legends from Conversion Shares
or Warrant Shares is not an affirmative statement or representation that such
Conversion Shares or Warrant Shares are freely tradable.  Each Buyer,
severally and not jointly with the other Buyers, agrees that the removal of the
restrictive legend from certificates representing Securities as set forth in
this Section 3(g) is predicated upon the Company’s reliance that the Buyer will
sell any Securities pursuant to either the registration requirements of the
Securities Act, including any applicable prospectus delivery requirements, or an
exemption therefrom, and that if Securities are sold pursuant to a Registration
Statement, they will be sold in compliance with the plan of distribution set
forth therein.

     

    (h)    Authorization,
Enforcement.  This Agreement has been duly and validly
authorized, executed and delivered on behalf of such Buyer and is a valid and
binding agreement of such Buyer enforceable in accordance with its terms, except
as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and
other similar laws relating to, or affecting generally, the enforcement of
applicable creditors’ rights and remedies.

     

    (i)    Receipt of
Documents.  Each Buyer and his or its counsel has received and
read in their entirety:  (i) this Agreement and each representation,
warranty and covenant set forth herein and the Transaction Documents (as defined
herein); (ii) all due diligence and other information necessary to verify the
accuracy and completeness of such representations, warranties and covenants;
(iii) the Company’s Form 10-K for the fiscal year ended December 31, 2007, and
(iv) answers to all questions each Buyer submitted to the Company regarding an
investment in the Company; and each Buyer has relied on the information
contained therein and has not been furnished any other documents, literature,
memorandum or prospectus.

     

    (j)    Due Formation of Corporate
and Other Buyers.  If the Buyer(s) is a corporation, trust,
partnership or other entity that is not an individual person, it has been formed
and validly exists and has not been organized for the specific purpose of
purchasing the Securities and is not prohibited from doing so.

     

    
      
         

      

      
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    (k)    No Legal Advice From the
Company.  Each Buyer acknowledges, that it had the opportunity
to review this Agreement and the transactions contemplated by this Agreement
with his or its own legal counsel and investment and tax
advisors.  Each Buyer is relying solely on such counsel and advisors
and not on any statements or representations of the Company or any of its
representatives or agents for legal, tax or investment advice with respect to
this investment, the transactions contemplated by this Agreement or the
securities laws of any jurisdiction.

     

    (l)    No
Conflicts.  The execution, delivery and performance by such
Buyer of this Agreement and the Registration Rights Agreement and the
consummation by such Buyer of the transactions contemplated hereby and thereby
will not (i) result in a violation of the organizational documents of such
Buyer, or (ii) conflict with, or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which such Buyer is a party, or (iii)
result in a violation of any law, rule, regulation, order,
judgment  or decree applicable to such Buyer, except in the case of
clauses (ii) and (iii) above, for such conflicts, defaults, rights or violations
which would not, individually or in the aggregate, reasonably be expected to
have a material adverse effect on the ability of such Buyer to perform its
obligations hereunder.

     

    (m)    Limited
Ownership.  The purchase by Buyers of the Securities issuable
to them at the Closing will not result in such Buyers (in the aggregate or
together with other persons with whom such Buyers have identified, or will have
identified, themselves as part of a “group” in a public filing made with the SEC
involving the Company’s securities) acquiring, or obtaining the right to
acquire, in excess of 19.99% of the outstanding shares of Common Stock or the
voting power of the Company on a post transaction basis that assumes that the
Closings shall have occurred. No Buyer presently intends to, alone or together
with others, make a public filing with the SEC to disclose that it has (or that
it together with such other persons have) acquired, or obtained the right to
acquire, as a result of the Closings (when added to any other securities of the
Company that it or they then own or have the right to acquire), in excess of
19.99% of the outstanding shares of Common Stock or the voting power of the
Company on a post transaction basis that assumes that the Closings shall have
occurred.

     

    3.    REPRESENTATIONS AND
WARRANTIES OF THE COMPANY.

     

    Except as
set forth under the corresponding section of the Disclosure Schedules which
Disclosure Schedules shall be deemed a part hereof and to qualify any
representation or warranty otherwise made herein to the extent of such
disclosure, the Company hereby makes the representations and warranties set
forth below to each Buyer:

     

    (a)    Subsidiaries.  All
of the direct and indirect subsidiaries of the Company are set forth on Schedule
3(a).  The Company owns, directly or indirectly, all of the
capital stock or other equity interests of each subsidiary free and clear of any
liens, and all the issued and outstanding shares of capital stock of each
subsidiary are validly issued and are fully paid, non-assessable and free of
preemptive and similar rights to subscribe for or purchase
securities.

     

    
      
         

      

      
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    (b)    Organization and
Qualification.  The Company and its subsidiaries are
corporations duly organized, validly existing and in good standing under the
laws of the jurisdiction in which they are incorporated, and have the requisite
corporate power to own their properties and to carry on their business as now
being conducted.  Each of the Company and its subsidiaries is duly
qualified as a foreign corporation to do business and is in good standing in
every jurisdiction in which the nature of the business conducted by it makes
such qualification necessary, except to the extent that the failure to be so
qualified or be in good standing would not have or reasonably be expected to
result in (i) a material adverse effect on the legality, validity or
enforceability of any Transaction Document, (ii) a material adverse effect on
the results of operations, assets, business or condition (financial or
otherwise) of the Company and the subsidiaries, taken as a whole, or (iii) a
material adverse effect on the Company’s ability to perform in any material
respect on a timely basis its obligations under any Transaction Document (any of
(i), (ii) or (iii), a “Material Adverse
Effect”) and no proceeding has been instituted in any such jurisdiction
revoking, limiting or curtailing or seeking to revoke, limit or curtail such
power and authority or qualification.

     

    (c)    Authorization, Enforcement,
Compliance with Other Instruments.  (i) The Company has
the requisite corporate power and authority to enter into and perform its
obligations under this Agreement, the Convertible Debentures, the Warrants, the
Security Documents, the Registration Rights Agreement, the Irrevocable Transfer
Agent Instructions, and each of the other agreements entered into by the parties
hereto in connection with the transactions contemplated by this Agreement
(collectively the “Transaction
Documents”) and to issue the Securities in accordance with the terms
hereof and thereof, (ii) the execution and delivery of the Transaction Documents
by the Company and the consummation by it of the transactions contemplated
hereby and thereby, including, without limitation, the issuance of the
Securities, the reservation for issuance and the issuance of the Conversion
Shares, and the reservation for issuance and the issuance of the Warrant Shares,
have been duly authorized by the Company’s Board of Directors and no further
consent or authorization is required by the Company, its Board of Directors or
its stockholders, (iii) the Transaction Documents have been duly executed and
delivered by the Company, (iv) the Transaction Documents constitute the valid
and binding obligations of the Company enforceable against the Company in
accordance with their terms, except as such enforceability may be limited by
general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of creditors’ rights and
remedies.  The authorized officer of the Company executing the
Transaction Documents knows of no reason why the Company cannot file the
Registration Statement as required under the Registration Rights Agreement or
perform any of the Company’s other obligations under the Transaction
Documents.

     

    (d)    Capitalization.  The
authorized capital stock of the Company consists of 100,000,000 shares of Common
Stock and 15,000,000 shares of Preferred Stock, par value $0.001 (“Preferred Stock”) of
which 77,885,880 shares of Common Stock and zero shares of Preferred Stock are
issued and outstanding.  All of the outstanding shares of capital
stock of the Company are validly issued, fully paid and nonassessable, have been
issued in compliance with all federal and state securities laws, and none of
such outstanding shares was issued in violation of any preemptive rights or
similar rights to subscribe for or purchase securities.  Except as
disclosed in Schedule 3(d): (i) none of the Company's capital stock is subject
to preemptive rights or any other similar rights or any liens or encumbrances
suffered or permitted by the Company; (ii) there are no outstanding options,
warrants,

     

    
      
         

      

      
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      scrip,
rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, or exercisable or
exchangeable for, any capital stock of the Company or any of its subsidiaries,
or contracts, commitments, understandings or arrangements by which the Company
or any of its subsidiaries is or may become bound to issue additional capital
stock of the Company or any of its subsidiaries or options, warrants, scrip,
rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, or exercisable or
exchangeable for, any capital stock of the Company or any of its subsidiaries;
(iii) there are no outstanding debt securities, notes, credit agreements, credit
facilities or other agreements, documents or instruments evidencing indebtedness
of the Company or any of its subsidiaries or by which the Company or any of its
subsidiaries is or may become bound; (iv) there are no financing statements
securing obligations in any material amounts, either singly or in the aggregate,
filed in connection with the Company or any of its subsidiaries; (v) there are
no outstanding securities or instruments of the Company or any of its
subsidiaries which contain any redemption or similar provisions, and there are
no contracts, commitments, understandings or arrangements by which the Company
or any of its subsidiaries is or may become bound to redeem a security of the
Company or any of its subsidiaries; (vi) there are no securities or instruments
containing anti-dilution or similar provisions that will be triggered by the
issuance of the Securities; (vii) the Company does not have any stock
appreciation rights or "phantom stock" plans or agreements or any similar plan
or agreement; and (viii) the Company and its subsidiaries have no liabilities or
obligations required to be disclosed in the SEC Documents but not so disclosed
in the SEC Documents, other than those incurred in the ordinary course of the
Company's or its subsidiaries' respective businesses and which, individually or
in the aggregate, do not or would not result in a Material Adverse
Effect.  The Company has furnished to the Buyers true, correct and
complete copies of the Company's Certificate of Incorporation, as amended and as
in effect on the date hereof (the “Certificate of
Incorporation”), and the Company's Bylaws, as amended and as in effect on
the date hereof (the “Bylaws”), and the
terms of all securities convertible into, or exercisable or exchangeable for,
shares of Common Stock and the material rights of the holders thereof in respect
thereto.  No further approval or authorization of any stockholder, the
Board of Directors of the Company or others is required for the issuance and
sale of the Securities.  There are no stockholders agreements, voting
agreements or other similar agreements with respect to the Company’s capital
stock to which the Company is a party or, to the knowledge of the Company,
between or among any of the Company’s stockholders.

    

     

    (e)    Issuance of
Securities.  The Convertible Debentures and the Warrants when
issued in accordance with this Agreement will be duly authorized and free from
all taxes, liens and charges with respect to the issue thereof.  The
issuance of the Conversion Shares and the Warrant Shares, upon conversion in
accordance with the terms of the Convertible Debentures or exercise in
accordance with the Warrants, as the case may be, will be validly issued, fully
paid and nonassessable, free from all taxes, liens and charges with respect to
the issue thereof.

     

    (f)    No
Conflicts.   The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by the Company of
the transactions contemplated hereby and thereby (including, without limitation,
the issuance of the Convertible Debentures and the Warrants, and reservation for
issuance and issuance of the Conversion Shares and the Warrant Shares in
accordance with the terms of this Agreement) will not (i) result in a violation
of any certificate of incorporation, certificate

     

    
      
         

      

      
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    of
formation, any certificate of designations or other constituent documents of the
Company or any of its subsidiaries, any capital stock of the Company or any of
its subsidiaries or bylaws of the Company or any of its subsidiaries or (ii)
conflict with, or constitute a default (or an event which with notice or lapse
of time or both would become a default) in any respect under, or give to others
any rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Company or any of its
subsidiaries is a party, or (iii) result in a violation of any law, rule,
regulation, order, judgment or decree (including foreign, federal and state
securities laws and regulations and the rules and regulations of the American
Stock Exchange (AMEX)) applicable to the Company or any of its subsidiaries or
by which any property or asset of the Company or any of its subsidiaries is
bound or affected; except in the case of each of clauses (ii) and (iii), such as
could not, individually or in the aggregate, have or reasonably be expected to
result in a Material Adverse Effect.  The business of the Company and
its subsidiaries is not being conducted, and shall not be conducted in violation
of any material law, ordinance, or regulation of any governmental
entity.  Except as specifically contemplated by this Agreement and as
required under the Securities Act, any applicable state securities laws and the
rules and regulations of the AMEX, the Company is not required to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency in order for it to execute, deliver or perform any
of its obligations under or contemplated by this Agreement or the Registration
Rights Agreement in accordance with the terms hereof or thereof.  All
consents, authorizations, orders, filings and registrations which the Company is
required to obtain pursuant to the preceding sentence have been obtained or
effected on or prior to the date hereof.  The Company and its
subsidiaries are unaware of any facts or circumstance, which might give rise to
any of the foregoing.

     

    (g)    SEC Documents; Financial
Statements.  Except as set forth in Schedule 3(g), the Company
has filed all reports, schedules, forms, statements and other documents required
to be filed by it with the SEC under the Securities Exchange Act of 1934, as
amended (the “Exchange
Act”), for the two years preceding the date hereof (or such shorter
period as the Company was required by law or regulation to file such material)
(all of the foregoing filed prior to the date hereof or amended after the date
hereof and all exhibits included therein and financial statements and schedules
thereto and documents incorporated by reference therein, being hereinafter
referred to as the “SEC Documents”) on
timely basis or has received a valid extension of such time of filing and has
filed any such SEC Document prior to the expiration of any such
extension.  The Company has delivered to the Buyers or their
representatives, or made available through the SEC’s website at
http://www.sec.gov, true and complete copies of the SEC Documents.  As
of their respective dates, the SEC Documents complied in all material respects
with the requirements of the Exchange Act and the rules and regulations of the
SEC promulgated thereunder applicable to the SEC Documents.  As of
their respective dates, the financial statements of the Company included in the
SEC Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto.  Such financial statements have been prepared in
accordance with generally accepted accounting principles, consistently applied,
during the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto, or (ii) in the case of unaudited
interim statements, to the extent they may exclude footnotes or may be condensed
or summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments).  No other
information provided by or on behalf of the Company to the Buyers which is not
included in the SEC Documents, including, without limitation, information
referred to in Section 2(i) of this Agreement, contains any untrue statement of
a material fact or omits to state any material fact necessary in order to make
the statements therein, in the light of the circumstance under which they are or
were made and not misleading.

     

    
      
         

      

      
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    (h)    10(b)-5.  The
SEC Documents do not, and did not at the time of their filing, include any
untrue statements of material fact, nor do they, nor did they at the time of
their filing, omit to state any material fact required to be stated therein
necessary to make the statements made, in light of the circumstances under which
they were made, not misleading.

     

    (i)    Absence of
Litigation.  Except as set forth in Schedule 3(i), there is no
action, suit, proceeding, inquiry or investigation before or by any court,
public board, government agency, self-regulatory organization or body pending
against or affecting the Company, the Common Stock or any of the Company’s
subsidiaries, wherein an unfavorable decision, ruling or finding would result in
a Material Adverse Effect.

     

    (j)    Acknowledgment Regarding
Buyer’s Purchase of the Convertible Debentures.  The Company
acknowledges and agrees that each Buyer is acting solely in the capacity of an
arm’s length purchaser with respect to this Agreement and the transactions
contemplated hereby.  The Company further acknowledges that each Buyer
is not acting as a financial advisor or fiduciary of the Company (or in any
similar capacity) with respect to this Agreement and the transactions
contemplated hereby and any advice given by each Buyer or any of their
respective representatives or agents in connection with this Agreement and the
transactions contemplated hereby is merely incidental to such Buyer’s purchase
of the Securities.  The Company further represents to each Buyer that
the Company’s decision to enter into this Agreement has been based solely on the
independent evaluation by the Company and its representatives.

     

    (k)    No General
Solicitation.  Neither the Company, nor any of its affiliates,
nor any person acting on its or their behalf, has engaged in any form of general
solicitation or general advertising (within the meaning of Regulation D under
the Securities Act) in connection with the offer or sale of the
Securities.

     

    (l)    No Integrated
Offering.  Neither the Company, nor any of its affiliates, nor
any person acting on its or their behalf has, directly or indirectly, made any
offers or sales of any security or solicited any offers to buy any security,
under circumstances that would require registration of the Securities under the
Securities Act or cause this offering of the Securities to be integrated with
prior offerings by the Company for purposes of the Securities Act.

     

    (m)    Employee
Relations.  Neither the Company nor any of its subsidiaries is
involved in any labor dispute or, to the knowledge of the Company or any of its
subsidiaries, is any such dispute threatened.  None of the Company’s
or its subsidiaries’ employees is a member of a union and the Company and its
subsidiaries believe that their relations with their employees are
good.

     

    
      
         

      

      
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    (n)    Intellectual Property
Rights.  The Company and its subsidiaries own or possess
adequate rights or licenses to use all trademarks, trade names, service marks,
service mark registrations, service names, patents, patent rights, copyrights,
inventions, licenses, approvals, governmental authorizations, trade secrets and
rights necessary to conduct their respective businesses as now conducted, except
as would not result in a Material Adverse Effect.  The Company and its
subsidiaries do not have any knowledge of any infringement by the Company or its
subsidiaries of trademark, trade name rights, patents, patent rights,
copyrights, inventions, licenses, service names, service marks, service mark
registrations, trade secret or other similar rights of others, and, to the
knowledge of the Company there is no claim, action or proceeding being made or
brought against, or to the Company’s knowledge, being threatened against, the
Company or its subsidiaries regarding trademark, trade name, patents, patent
rights, invention, copyright, license, service names, service marks, service
mark registrations, trade secret or other infringement; and the Company and its
subsidiaries are unaware of any facts or circumstances which might give rise to
any of the foregoing.

     

    (o)    Environmental
Laws.  The Company and its subsidiaries are (i) in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants (“Environmental Laws”),
(ii) have received all permits, licenses or other approvals required of them
under applicable Environmental Laws to conduct their respective businesses and
(iii) are in compliance with all terms and conditions of any such permit,
license or approval.

     

    (p)    Title.  All
real property and facilities held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
subsidiaries.

     

    (q)    Insurance.  The
Company and each of its subsidiaries is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
management of the Company believes to be prudent and customary in the businesses
in which the Company and its subsidiaries are engaged.  Neither the
Company nor any such subsidiary has been refused any insurance coverage sought
or applied for and neither the Company nor any such subsidiary has any reason to
believe that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not materially
and adversely affect the condition, financial or otherwise, or the earnings,
business or operations of the Company and its subsidiaries, taken as a
whole.

     

    (r)    Regulatory
Permits.  The Company and its subsidiaries possess all material
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses, and neither the Company nor any such subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit.

     

    
      
         

      

      
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    (s)    Internal Accounting
Controls.  The Company and each of its subsidiaries maintains a
system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management’s
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability, and (iii)
the recorded amounts for assets are compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.

     

    (t)    No Material Adverse
Breaches, etc.  Neither the Company nor any of its subsidiaries
is subject to any charter, corporate or other legal restriction, or any
judgment, decree, order, rule or regulation which in the judgment of the
Company’s officers has or is expected in the future to result in a Material
Adverse Effect on the business, properties, operations, financial condition,
results of operations or prospects of the Company or its
subsidiaries.  Neither the Company nor any of its subsidiaries is in
breach of any contract or agreement which breach, in the judgment of the
Company’s officers, has or is expected to result in a Material Adverse Effect on
the business, properties, operations, financial condition, results of operations
or prospects of the Company or its subsidiaries.

     

    (u)    Tax
Status.  The Company and each of its subsidiaries has made and
filed all federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject and (unless and
only to the extent that the Company and each of its subsidiaries has set aside
on its books provisions reasonably adequate for the payment of all unpaid and
unreported taxes) has paid all taxes and other governmental assessments and
charges that are material in amount, shown or determined to be due on such
returns, reports and declarations, except those being contested in good faith
and has set aside on its books provision reasonably adequate for the payment of
all taxes for periods subsequent to the periods to which such returns, reports
or declarations apply.  There are no unpaid taxes in any material
amount claimed to be due by the taxing authority of any jurisdiction, and the
officers of the Company know of no basis for any such claim.

     

    (v)    Certain
Transactions.  Except for arm’s length transactions pursuant to
which the Company makes payments in the ordinary course of business upon terms
no less favorable than the Company could obtain from third parties and other
than the grant of stock options disclosed in the SEC Documents, none of the
officers, directors, or employees of the Company is presently a party to any
transaction with the Company (other than for services as employees, officers and
directors), including any contract, agreement or other arrangement providing for
the furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any corporation,
partnership, trust or other entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner.

     

    (w)    Fees and Rights of First
Refusal.  The Company is not obligated to offer the securities
offered hereunder on a right of first refusal basis or otherwise to any third
parties including, but not limited to, current or former shareholders of the
Company, underwriters, brokers, agents or other third parties.

     

    
      
         

      

      
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    (x)    Investment Company.
The Company is not, and is not an affiliate of, and immediately after receipt of
payment for the Securities, will not be or be an affiliate of, an “investment
company” within the meaning of the Investment Company Act of 1940, as
amended.  The Company shall conduct its business in a manner so that
it will not become subject to the Investment Company Act.

     

    (y)    Registration
Rights.  Except as set forth in Schedule 3(y), other than each
of the Buyers, no Person has any right to cause the Company to effect the
registration under the Securities Act of any securities of the
Company.  Except as set forth in Schedule 3(y), there are no
outstanding registration statements not yet declared effective and there are no
outstanding comment letters from the SEC or any other regulatory
agency.

     

    (z)    Private Placement.
Assuming the accuracy of the Buyers’ representations and warranties set forth in
Section 2, no registration under the Securities Act is required for the offer
and sale of the Securities by the Company to the Buyers as contemplated hereby.
The issuance and sale of the Securities hereunder does not contravene the rules
and regulations of the Primary Market.

     

    (aa)   Listing and Maintenance
Requirements.  The Company’s Common Stock is registered
pursuant to Section 12(b) or 12(g) of the Exchange Act, and the Company has
taken no action designed to terminate, or which to its knowledge is likely to
have the effect of, terminating the registration of the Common Stock under the
Exchange Act nor has the Company received any notification that the SEC is
contemplating terminating such registration.  Except as set forth in
Schedule 3(aa), the Company has not, in the twelve (12) months preceding the
date hereof, received notice from any Primary Market on which the Common Stock
is or has been listed or quoted to the effect that the Company is not in
compliance with the listing or maintenance requirements of such Primary
Market.  The Company is, and has no reason to believe that it will not
in the foreseeable future continue to be, in compliance with all such listing
and maintenance requirements.

     

    (bb)   Manipulation of
Price.  The Company has not, and to its knowledge no one acting on
its behalf has, (i) taken, directly or indirectly, any action designed to cause
or to result in the stabilization or manipulation of the price of any security
of the Company to facilitate the sale or resale of any of the Securities, (ii)
sold, bid for, purchased, or, paid any compensation for soliciting purchases of,
any of the Securities, or (iii) paid or agreed to pay to any Person any
compensation for soliciting another to purchase any other securities of the
Company, other than, in the case of clauses (ii) and (iii), compensation paid to
the Company’s placement agent in connection with the placement of the
Securities.

     

    (cc)   Dilutive
Effect.  The Company understands and acknowledges that the
number of Conversion Shares issuable upon conversion of the Convertible
Debentures and the Warrant Shares issuable upon exercise of the Warrants will
increase in certain circumstances.  The Company further acknowledges
that its obligation to issue Conversion Shares upon conversion of the
Convertible Debentures in accordance with this Agreement and the Convertible
Debentures and its obligation to issue the Warrant Shares upon exercise of the
Warrants in accordance with this Agreement and the Warrants, in each case, is
absolute and unconditional regardless of the dilutive effect that such issuance
may have on the ownership interests of other stockholders of the
Company.

     

    
      
         

      

      
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    (dd)   Disclosure.  The
Company has made available to the Buyer and its counsel all the information
reasonably available to the Company that the Buyer or its counsel have requested
for deciding whether to acquire the Securities.  No representation or
warranty of the Company contained in this Agreement (as qualified by the
Disclosure Schedule) or any of the other Transaction Documents, and no
certificate furnished or to be furnished to the Buyer at the Closing, or any due
diligence evaluation materials furnished by the Company or on behalf of the
Company, including without limitation, due diligence questionnaires, or any
other documents, presentations, correspondence, or information contains any
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements contained herein or therein not misleading in
light of the circumstances under which they were made.

     

    (ee)   Reporting
Status.  With a view to making available to the Buyer the benefits
of Rule 144 or any similar rule or regulation of the SEC that may at any time
permit the Buyer to sell securities of the Company to the public without
registration, and as a material inducement to the Buyer’s purchase of the
Securities, the Company represents and warrants to the following: (i) the
Company is, and has been for a period of at least 90 days immediately preceding
the date hereof, subject to the reporting requirements of section 13 or 15(d) of
the Exchange Act (ii) the Company has filed all required reports under section
13 or 15(d) of the Exchange, as applicable, during the 12 months preceding the
date hereof (or for such shorter period that the Company was required to file
such reports)

     

    (ff)   Prior Shell Company
Status. The Company previously has been an issuer defined as a
“Shell Company,” but has ceased to be an issuer described as a “Shell Company”
since August 28, 2004, the date that is one year following the filing of the
“Form 10 Information” as described below.  The Company has filed
current “Form 10 Information” with the SEC reflecting its status as an entity
that no longer is a Shell Company in its Registration Statement on Form S-1,
which was filed with the SEC on August 28, 2003.  For the purposes
hereof, the term “Shell Company” shall mean an issuer that meets the description
defined in paragraph (i)(1)(i) of Rule 144 and the term “Form 10 Information”
shall have the meaning set forth in paragraph (i)(3) of Rule 144.

     

    Each
Buyer acknowledges and agrees that the Company has not made and does not make
any representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in his Section 3.

     

    4.    COVENANTS.

     

    (a)    Best
Efforts.  Each party shall use its best efforts to timely
satisfy each of the conditions to be satisfied by it as provided in Sections 6
and 7 of this Agreement.

     

    
      
         

      

      
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    (b)    Form
D.  The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to each
Buyer promptly after such filing.  The Company shall, on or before the
Closing Date, take such action as the Company shall reasonably determine is
necessary to qualify the Securities, or obtain an exemption for the Securities
for sale to the Buyers at the Closing pursuant to this Agreement under
applicable securities or “Blue Sky” laws of the states of the United States, and
shall provide evidence of any such action so taken to the Buyers on or prior to
the Closing Date.

     

    (c)    Reporting
Status.  With a view to making available to the Buyer the
benefits of Rule 144 or any similar rule or regulation of the SEC that may at
any time permit the Buyer to sell securities of the Company to the public
without registration, and as a material inducement to the Buyer’s purchase of
the Securities, the Company represents, warrants, and covenants to the
following:

     

    (i)    The
Company is subject to the reporting requirements of section 13 or 15(d) of the
Exchange Act and has filed all required reports under section 13 or 15(d) of the
Exchange Act during the 12 months prior to the date hereof (or for such shorter
period that the issuer was required to file such reports), other than Form 8-K
reports;

     

    (ii)    from the
date hereof until all the Securities either have been sold by the Buyer, or may
permanently be sold by the Buyer without any restrictions pursuant to Rule 144,
(the “Registration
Period”) the Company shall file with the SEC in a timely manner all
required reports under section 13 or 15(d) of the Exchange Act and such reports
shall conform to the requirement of the Exchange Act and the SEC for filing
thereunder;

     

    (iii)    The
Company shall furnish to the Buyer so long as the Buyer owns Securities,
promptly upon request, (i) a written statement by the Company that it has
complied with the reporting requirements of Rule 144, (ii) a copy of the most
recent annual or quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information as may be
reasonably requested to permit the Buyers to sell such securities pursuant to
Rule 144 without registration; and

     

    (iv)    During
the Registration Period the Company shall not terminate its status as an issuer
required to file reports under the Exchange Act even if the Exchange Act or the
rules and regulations thereunder would otherwise permit such
termination.

     

    (d)    Use of
Proceeds.  The Company will use the proceeds from the sale of
the Convertible Debentures for general corporate and working capital
purposes.

     

    (e)    Reservation of
Shares.  On the date hereof, the Company shall reserve
4,700,000 shares for issuance to the Buyers upon conversion of the Convertible
Debentures and exercise of the Warrants issued in the First Closing
(collectively, the “First Closing Share
Reserve”).  On or before the date of the Second Closing, the
Company shall reserve for issuance 2,125,000 shares for issuance to the Buyers
upon conversion of the Convertible Debentures and exercise of the Warrants
issued in the Second Closing (collectively, the “Second Closing Share
Reserve”).  On or before the date of the Third Closing, the
Company shall reserve for issuance 12,526,000 shares for issuance to
the

     

    
      
         

      

      
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    Buyers
upon conversion of the Convertible Debentures and exercise of the Warrants
issued in the Third Closing (collectively, the “Third Closing Share
Reserve,” together with the First Closing Share Reserve and the Second
Closing Share Reserve, the “Share
Reserve”).  The Company represents that, as of the date of this
Agreement, it has sufficient authorized and unissued shares of Common Stock
available to create the First Closing Share Reserve after considering all other
commitments that may require the issuance of Common Stock.  The
Company shall take all action reasonably necessary to at all times have
authorized, and reserved for the purpose of issuance, such number of shares of
Common Stock as shall be necessary to effect the full conversion of the
Convertible Debentures and the full exercise of the Warrants then
outstanding.  If at any time the Share Reserve is insufficient to
effect the full conversion of the Convertible Debentures or the full exercise of
the Warrants then outstanding, the Company shall increase the Share Reserve
accordingly.  If the Company does not have sufficient authorized and
unissued shares of Common Stock available to increase the Share Reserve, the
Company shall call and hold a special meeting of the shareholders within sixty
(60) days of such occurrence, for the sole purpose of increasing the number of
shares authorized.  The Company’s management shall recommend to the
shareholders to vote in favor of increasing the number of shares of Common Stock
authorized.  Management shall also vote all of its shares in favor of
increasing the number of authorized shares of Common Stock.

     

    (f)    Listings or
Quotation.  The Company’s Common Stock shall be listed or
quoted for trading on any of (a) the American Stock Exchange, (b) New York Stock
Exchange, (c) the Nasdaq Global Market, (d) the Nasdaq Capital Market, or (e)
the Nasdaq OTC Bulletin Board (which does not include the Pink Sheets LLC)
(“OTCBB”)
(each, a “Primary
Market”).  The Company shall promptly secure the listing of all
of the Registrable Securities (as defined in the Registration Rights Agreement)
upon each national securities exchange and automated quotation system, if any,
upon which the Common Stock is then listed (subject to official notice of
issuance) and shall maintain such listing of all Registrable Securities from
time to time issuable under the terms of the Transaction Documents.

     

    (g)    Fees and
Expenses.

     

    (i)    The
Company shall pay all of its costs and expenses incurred by it connection with
the negotiation, investigation, preparation, execution and delivery of the
Transaction Documents.

     

    (ii)    The
Company shall place into escrow an aggregate of $350,000, which shall be
disbursed pursuant to the Escrow Agreement attached hereto as Exhibit D (the
“Escrow
Agreement”). This fee shall be payable at the First Closing directly from
the proceeds thereof (collectively, the “Monitoring Fees,” and
as deposited into escrow as provided herein, the “Escrow Funds”), which
shall be used to compensate Yorkville Advisors LLC (“Investment Manager”)
for monitoring and managing the purchase and investment made by YA Global
Investments, L.P. (“YA
Global”) described herein, pursuant to the Investment Manager’s existing
advisory obligations to YA Global.  The Company, Investment Manager,
and YA Global shall enter into the Escrow Agreement appointing David Gonzalez,
Esq. as escrow agent (the “Escrow Agent”) to
hold the Escrow Funds and to periodically disburse portions of such Escrow Funds
to the Investment Manager from escrow in accordance with the terms of the Escrow
Agreement.  The Investment Manager shall periodically receive portions
of the Escrow Funds in accordance with the Escrow Agreement until either: (1)
the Escrow Funds shall have been fully disbursed pursuant the Escrow Agreement
or (2) the Securities shall have been Fully Retired.  “Fully Retired”
shall mean that the Buyer shall have fully disposed of all the Securities issued
or issuable hereunder, shall no longer have any investment in, or ownership of,
any of the Securities, all amounts owed to YA Global under the Transaction
Documents shall have been paid, and the Transaction Documents shall have been
terminated.  When the Securities are Fully Retired, the remaining
Escrow Funds shall be returned to the Company or otherwise disbursed in
accordance with the Escrow Agreement.

     

    
      
         

      

      
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    (iii)    The
Company shall pay a structuring and due diligence  fee to Yorkville
Advisors LLC of One Hundred Thousand Dollars ($100,000), of which Five Thousand
Dollars ($5,000) has been paid and the remaining Ninety-Five Thousand Dollars
($95,000) shall be paid directly from the proceeds of the First
Closing.  The structuring and due diligence fee shall be nonrefundable
and payable whether or not any Closing occurs.

     

    (h)    Corporate
Existence.  So long as any of the Convertible Debentures remain
outstanding, the Company shall not directly or indirectly consummate any merger,
reorganization, restructuring, reverse stock split consolidation, sale of all or
substantially all of the Company’s assets or any similar transaction or related
transactions (each such transaction, an “Organizational
Change”) unless, prior to the consummation an Organizational Change, the
Company obtains the written consent of each Buyer, which consent shall not be
unreasonably withheld, conditioned or delayed.  In the event an
Organizational Change is consummated, the Company will make appropriate
provision with respect to such holders’ rights and interests to insure that the
provisions of this Section 4(h) will thereafter be applicable to the Convertible
Debentures.

     

    (i)    Transactions With
Affiliates.  So long as any Convertible Debentures are
outstanding, the Company shall not, and shall cause each of its subsidiaries not
to, enter into, amend, modify or supplement, or permit any subsidiary to enter
into, amend, modify or supplement any agreement, transaction, commitment, or
arrangement with any of its or any subsidiary’s officers, directors, person who
were officers or directors at any time during the previous two (2) years,
stockholders who beneficially own five percent (5%) or more of the Common Stock,
or Affiliates (as defined below) or with any individual related by blood,
marriage, or adoption to any such individual or with any entity in which any
such entity or individual owns a five percent (5%) or more beneficial interest
(each a “Related
Party”), except for (a) customary employment arrangements and benefit
programs on commercially reasonable terms, (b) any investment in an Affiliate of
the Company, (c) any agreement, transaction, commitment, or arrangement on an
arms-length basis on terms no less favorable than terms which would have been
obtainable from a person other than such Related Party, (d) any agreement,
transaction, commitment, or arrangement which is approved by a majority of the
disinterested directors of the Company; for purposes hereof, any director who is
also an officer of the Company or any subsidiary of the Company shall not be a
disinterested director with respect to any such agreement, transaction,
commitment, or arrangement.  “Affiliate” for
purposes hereof means, with respect to any person or entity, another person or
entity that, directly or indirectly, (i) controls, (ii) is controlled by, or
(iii) is under common control with that person or entity.  “Control” or “controls” for
purposes hereof means that a person or entity has the power, direct or indirect,
to conduct or govern the policies of another person or entity.

     

    
      
         

      

      
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    (j)    Transfer
Agent.  The Company covenants and agrees that, in the event
that the Company’s agency relationship with the transfer agent should be
terminated for any reason prior to a date which is two (2) years after the
Closing Date, the Company shall immediately appoint a new transfer agent and
shall require that the new transfer agent execute and agree to be bound by the
terms of the Irrevocable Transfer Agent Instructions (as defined
herein).

     

    (k)    Restriction on Issuance of
the Capital Stock. So long as any Convertible Debentures are outstanding,
the Company shall not, without the prior written consent of the Buyer(s), which
shall not be unreasonably withheld, conditioned or delayed, (i) issue or sell
shares of Common Stock or Preferred Stock without consideration or for a
consideration per share less than the bid price of the Common Stock determined
immediately prior to its issuance, (ii) issue any preferred stock, warrant,
option, right, contract, call, or other security or instrument granting the
holder thereof the right to acquire Common Stock without consideration or for a
consideration less than such Common Stock’s Bid Price determined immediately
prior to it’s issuance, or (iii) enter into any security instrument granting the
holder a security interest in any and all assets of the Company, except as
required pursuant to any financing arrangement existing as of the date of this
Agreement, including, but not limited to, a request of additional collateral
pursuant to the Factoring and Security Agreement, dated January 25, 2008, by and
between the Company and Thermo Credit, LLC.

     

    (l)    Neither
the Buyer(s) nor any of its affiliates have an open short position in the Common
Stock of the Company, and the Buyer(s) agrees that it shall not, and that it
will cause its affiliates not to, engage in any short sales of or hedging
transactions with respect to the Common Stock as long as any Convertible
Debentures shall remain outstanding.

     

    (m)    Additional Registration
Statements.  Except as required to fulfill the Company’s
obligations existing on the date of this Agreement, until the effective date of
the initial Registration Statement, the Company will not file a registration
statement under the Securities Act relating to securities that are not the
Securities.

     

    (n)    Review of Public
Disclosures.  All SEC filings (including, without limitation,
all filings required under the Exchange Act, which include Forms 10-Q and
10-QSB, 10-K and 10-KSB, 8-K, etc) and other public disclosures made by the
Company, including, without limitation, all press releases, investor relations
materials, and scripts of analysts meetings and calls, shall be reviewed and
approved for release by the Company’s attorneys and, if containing financial
information, the Company’s independent certified public
accountants.

     

    (o)    Disclosure of
Transaction.  Within four Business Days following the date of
this Agreement, the Company shall file a Current Report on Form 8-K describing
the terms of the transactions contemplated by the Transaction Documents in the
form required by the Exchange Act and attaching the material Transaction
Documents (including, without limitation, this Agreement, the form of the
Convertible Debenture, the form of Warrant and the form of the Registration
Rights Agreement) as exhibits to such filing.

     

    
      
         

      

      
        18

        
          

        

      

      
         

      

    

     

    5.    TRANSFER AGENT
INSTRUCTIONS.

     

    (a)    The
Company shall issue the Irrevocable Transfer Agent Instructions to its transfer
agent, and any subsequent transfer agent, irrevocably appointing David Gonzalez,
Esq. as the Company’s agent for purpose instructing its transfer agent to issue
certificates or credit shares to the applicable balance accounts at The
Depository Trust Company (“DTC”), registered in
the name of each Buyer or its respective nominee(s), for the Conversion Shares
and the Warrant Shares issued upon conversion of the Convertible Debentures or
exercise of the Warrants as specified from time to time by each Buyer to the
Company upon conversion of the Convertible Debentures or exercise of the
Warrants.  The Company shall not change its transfer agent without the
express written consent of the Buyers, which may be withheld by the Buyers in
their sole discretion.  The Company warrants that no instruction other
than the Irrevocable Transfer Agent Instructions referred to in this Section 5
will be given by the Company to its transfer agent, and that the Securities
shall otherwise be freely transferable on the books and records of the Company
as and to the extent provided in this Agreement and the other Transaction
Documents.  If a Buyer effects a sale, assignment or transfer of the
Securities in accordance with Section 2(f), the Company shall promptly instruct
its transfer agent to issue one or more certificates or credit shares to the
applicable balance accounts at DTC in such name and in such denominations as
specified by such Buyer to effect such sale, transfer or assignment and, with
respect to any transfer, shall permit the transfer.  In the event that
such sale, assignment or transfer involves Conversion Shares or Warrant Shares
sold, assigned or transferred pursuant to an effective registration statement or
pursuant to Rule 144, the transfer agent shall issue such Securities to the
Buyer, assignee or transferee, as the case may be, without any restrictive
legend.    Nothing in this Section 5 shall affect in any way
the Buyer’s obligations and agreement to comply with all applicable securities
laws upon resale of Conversion Shares.  The Company acknowledges that
a breach by it of its obligations hereunder will cause irreparable harm to the
Buyer by vitiating the intent and purpose of the transaction contemplated
hereby.  Accordingly, the Company acknowledges that the remedy at law
for a breach of its obligations under this Section 5 will be inadequate and
agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Section 5, that the Buyer(s) shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach and requiring immediate issuance and transfer, without the necessity of
showing economic loss and without any bond or other security being
required.

     

    6.    CONDITIONS TO THE COMPANY’S
OBLIGATION TO SELL.

     

    (a)    The
obligation of the Company hereunder to issue and sell the Convertible Debentures
to the Buyer(s) at the First Closing is subject to the satisfaction, at or
before the First Closing Date, of each of the following conditions, provided
that these conditions are for the Company’s sole benefit and may be waived by
the Company at any time in its sole discretion:

     

    (i)    Each Buyer
shall have executed the Transaction Documents and delivered them to the
Company.

     

    (ii)    The Buyer(s)
shall have delivered to the Company the Purchase Price for the Convertible
Debentures and Warrants issued in the First Closing in the respective amounts as
set forth next to each Buyer on Schedule I attached hereto, minus any fees to be
paid directly from the proceeds of the First Closing as set forth herein, by
wire transfer of immediately available U.S. funds pursuant to the wire
instructions provided by the Company.

     

    
      
         

      

      
        19

        
          

        

      

      
         

      

    

     

    (iii)    The
representations and warranties of the Buyer(s) shall be true and correct in all
material respects as of the date when made and as of the First Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date), and the Buyer(s) shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Buyer(s) at or prior to the First Closing Date.

     

    (b)    The
obligation of the Company hereunder to issue and sell the Convertible Debentures
to the Buyer(s) at the Second Closing is subject to the satisfaction, at or
before the Second Closing Date, of each of the following conditions, provided
that these conditions are for the Company’s sole benefit and may be waived by
the Company at any time in its sole discretion:

     

    (i)    Each Buyer
shall have executed the Transaction Documents and delivered them to the
Company.

     

    (ii)    The Company
shall have received approval from its stockholders of an amendment to the
Company’s Certificate of Incorporation authorizing at least that number of
additional shares as is required for the Company to create the Second Closing
Share Reserve.

     

    (iii)    The Buyer(s)
shall have delivered to the Company the Purchase Price for the Convertible
Debentures and Warrants issued in the Second Closing in the respective amounts
as set forth next to each Buyer on Schedule I attached hereto, minus any fees to
be paid directly from the proceeds the Second Closing as set forth herein, by
wire transfer of immediately available U.S. funds pursuant to the wire
instructions provided by the Company.

     

    (iv)    The
representations and warranties of the Buyer(s) shall be true and correct in all
material respects as of the date when made and as of the Second Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date), and the Buyer(s) shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Buyer(s) at or prior to the Second Closing Date.

     

    (v)    The issuance
of the Securities by the Company to the Buyer(s) at the Second Closing will not
result in such Buyers (in the aggregate or together with other Persons with whom
such Buyers have identified, or will have identified, themselves as part of a
“group” in a public filing made with the SEC involving the Company’s securities)
acquiring, or obtaining the right to acquire, in excess of 19.99% of the
outstanding shares of Common Stock or the voting power of the Company on a post
transaction basis that assumes that the First Closing and the Second Closing
shall have occurred.

     

    (c)    The
obligation of the Company hereunder to issue and sell the Convertible Debentures
to the Buyer(s) at the Third Closing is subject to the satisfaction, at or
before the Third Closing Date, of each of the following conditions, provided
that these conditions are for the Company’s sole benefit and may be waived by
the Company at any time in its sole discretion:

     

    
      
         

      

      
        20

        
          

        

      

      
         

      

    

     

    (i)    Each Buyer
shall have executed the Transaction Documents and delivered them to the
Company.

     

    (ii)    The Company
shall have received approval from its stockholders of an amendment to the
Company’s Certificate of Incorporation authorizing at least that number of
additional shares as is required for the Company to create the Second Closing
Share Reserve and the Third Closing Share Reserve.

     

    (iii)    The Buyer(s)
shall have delivered to the Company the Purchase Price for the Convertible
Debentures and Warrants issued in the Third Closing in the respective amounts as
set forth next to each Buyer on Schedule I attached hereto, minus any fees to be
paid directly from the proceeds the Third Closing as set forth herein, by wire
transfer of immediately available U.S. funds pursuant to the wire instructions
provided by the Company.

     

    (iv)    The
representations and warranties of the Buyer(s) shall be true and correct in all
material respects as of the date when made and as of the Third Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date), and the Buyer(s) shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Buyer(s) at or prior to the Third Closing Date.

     

    (v)    The issuance
of the Securities by the Company to the Buyer(s) at the Third Closing will not
result in such Buyers (in the aggregate or together with other Persons with whom
such Buyers have identified, or will have identified, themselves as part of a
“group” in a public filing made with the SEC involving the Company’s securities)
acquiring, or obtaining the right to acquire, in excess of 19.99% of the
outstanding shares of Common Stock or the voting power of the Company on a post
transaction basis that assumes that the First Closing, the Second Closing and
the Third Closing shall have occurred.

     

    7.    CONDITIONS TO THE BUYER’S
OBLIGATION TO PURCHASE.

     

    (a)    The
obligation of the Buyer(s) hereunder to purchase the Convertible Debentures at
the First Closing is subject to the satisfaction, at or before the First Closing
Date, of each of the following conditions, provided that these conditions are
for the Buyer’s sole benefit and may be waived by the Buyer at any time in its
sole discretion:

     

    (i)    The
Company shall have executed the Transaction Documents and delivered the same to
the Buyers.

     

    (ii)    The
Common Stock shall be authorized for quotation or trading on the Primary Market,
trading in the Common Stock shall not have been suspended for any reason, and
all the Conversion Shares issuable upon the conversion of the Convertible
Debentures shall be approved for listing or trading on the Primary
Market.

     

    
      
         

      

      
        21

        
          

        

      

      
         

      

    

     

    (iii)    The
representations and warranties of the Company shall be true and correct in all
material respects (except to the extent that any of such representations and
warranties is already qualified as to materiality in Section 3 above, in which
case, such representations and warranties shall be true and correct without
further qualification) as of the date when made and as of the First Closing Date
as though made at that time (except for representations and warranties that
speak as of a specific date) and the Company shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to the First Closing Date.

     

    (iv)    The
Company shall have executed and delivered to the Buyer(s) the Convertible
Debentures and Warrants in the respective amounts set forth opposite each
Buyer’s name on Schedule I attached hereto.

     

    (v)    The
Buyers shall have received an opinion of counsel from counsel to the Company in
a form satisfactory to the Buyers.

     

    (vi)    The
Company shall have provided to the Buyers a true copy of a certificate of good
standing evidencing the formation and good standing of the Company from the
secretary of state (or comparable office) from the jurisdiction in which the
Company is incorporated, as of a date within 10 days of the First Closing
Date.

     

    (vii)    The
Company shall have delivered to the Buyers a certificate, executed by the
Secretary of the Company, and dated as of the First Closing Date, as to (i) the
resolutions consistent with Section 3(c) as adopted by the Company's Board of
Directors in a form reasonably acceptable to such Buyer, (ii) the Certificate of
Incorporation and (iii) the Bylaws, each as in effect at the First
Closing.

     

    (viii)   The
Company or the Buyer shall have filed a form UCC-1 or such other forms as may be
required to perfect the Buyer’s interest in the Pledged Property as detailed in
the Security Agreement dated the date hereof and provided proof of such filing
to the Buyer(s).

     

    (ix)    The
Company shall have provided to the Buyer an acknowledgement, to the satisfaction
of the Buyer, from the Company’s independent certified public accountants as to
its ability to provide all consents required in order to file a registration
statement in connection with this transaction.

     

    (x)    The
Company shall have created the First Closing Share Reserve.

     

    (xi)    The
Irrevocable Transfer Agent Instructions, in form and substance satisfactory to
the Buyer, shall have been delivered to and acknowledged in writing by the
Company’s transfer agent.

     

    (xii)    The Buyer
shall have completed its due diligence process and, in its sole discretion,
determined that the results are satisfactory.

     

    
      
         

      

      
        22

        
          

        

      

      
         

      

    

     

    (b)    The
obligation of the Buyer(s) hereunder to purchase the Convertible Debentures at
the Second Closing is subject to the satisfaction, at or before the Second
Closing Date, of each of the following conditions, provided that these
conditions are for the Buyer’s sole benefit and may be waived by the Buyer at
any time in its sole discretion:

     

    (i)    The
Common Stock shall be authorized for quotation or trading on the Primary Market,
trading in the Common Stock shall not have been suspended for any reason, and
all the Conversion Shares issuable upon the conversion of the Convertible
Debentures shall be approved for listing or trading on the Primary
Market.

     

    (ii)    The
representations and warranties of the Company shall be true and correct in all
material respects (except to the extent that any of such representations and
warranties is already qualified as to materiality in Section 3 above, in which
case, such representations and warranties shall be true and correct without
further qualification) as of the date when made and as of the Second Closing
Date as though made at that time (except for representations and warranties that
speak as of a specific date) and the Company shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to the Second Closing Date.

     

    (iii)    The
Company shall have executed and delivered to the Buyers the Convertible
Debentures in the respective amounts set forth opposite each Buyer’s name on
Schedule I attached hereto.

     

    (iv)    The
Company shall have certified, in a certificate executed by two officers of the
Company and dated as of the Second Closing Date, that all conditions to the
Second Closing have been satisfied.

     

    (v)    The
Company shall have created the Second Closing Share Reserve.

     

    (vi)    The Buyer
shall have filed all required periodic reports with the SEC on a timely
basis.

     

    (vii)    The
Company shall have filed a registration covering all of the Registrable
Securities (as that term is defined in the Registration Rights Agreement) within
10 days of the First Closing.

     

    (viii)    No claim
shall have been filed against the Company in any judicial forum or arbitration,
pursuant or related to the Stock Purchase Agreement by and between the Company
and Frank T. Matarazzo dated December 5, 2005.

     

    (ix)    There
shall have been no material adverse change to the Company or its operations
since the First Closing.

     

    (c)    The
obligation of the Buyer(s) hereunder to purchase the Convertible Debentures at
the Third Closing is subject to the satisfaction, at or before the Third Closing
Date, of each of the following conditions, provided that these conditions are
for the Buyer’s sole benefit and may be waived by the Buyer at any time in its
sole discretion:

     

    
      
         

      

      
        23

        
          

        

      

      
         

      

    

     

    (i)    The
Common Stock shall be authorized for quotation or trading on the Primary Market,
trading in the Common Stock shall not have been suspended for any reason, and
all the Conversion Shares issuable upon the conversion of the Convertible
Debentures shall be approved for listing or trading on the Primary
Market.

     

    (ii)    The
representations and warranties of the Company shall be true and correct in all
material respects (except to the extent that any of such representations and
warranties is already qualified as to materiality in Section 3 above, in which
case, such representations and warranties shall be true and correct without
further qualification) as of the date when made and as of the Third Closing Date
as though made at that time (except for representations and warranties that
speak as of a specific date) and the Company shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to the Third Closing Date.

     

    (iii)    The
Company shall have executed and delivered to the Buyers the Convertible
Debentures in the respective amounts set forth opposite each Buyer’s name on
Schedule I attached hereto.

     

    (iv)    The
Company shall have certified, in a certificate executed by two officers of the
Company and dated as of the Third Closing Date, that all conditions to the Third
Closing have been satisfied.

     

    (v)    The
Company shall have created the Third Closing Share Reserve.

     

    (vi)    No claim
shall have been filed against the Company in any judicial forum or arbitration,
pursuant or related to the Stock Purchase Agreement by and between the Company
and Frank T. Matarazzo dated December 5, 2005.

     

    (vii)    The Buyer
shall have filed all required periodic reports with the SEC on a timely
basis.

     

    8.    INDEMNIFICATION.

     

    (a)    In
consideration of the Buyer’s execution and delivery of this Agreement and
acquiring the Convertible Debentures and the Conversion Shares hereunder, and in
addition to all of the Company’s other obligations under this Agreement, the
Company shall defend, protect, indemnify and hold harmless the Buyer(s) and each
other holder of the Convertible Debentures and the Conversion Shares, and all of
their officers, directors, employees and agents (including, without
limitation, those retained in connection with the transactions contemplated by
this Agreement) (collectively, the “Buyer Indemnitees”)
from and against any and all actions, causes of action, suits, claims, losses,
costs,

     

    
      
         

      

      
        24

        
          

        

      

      
         

      

    

     

    penalties,
fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Buyer Indemnitee is a party to the action for
which indemnification hereunder is sought), and including reasonable attorneys’
fees and disbursements (the “Indemnified
Liabilities”), incurred by the Buyer Indemnitees or any of them as a
result of, or arising out of, or relating to (a) any misrepresentation or breach
of any representation or warranty made by the Company in this Agreement, the
Convertible Debentures or the other Transaction Documents or any other
certificate, instrument or document contemplated hereby or thereby, (b) any
breach of any covenant, agreement or obligation of the Company contained in this
Agreement, or the other Transaction Documents or any other certificate,
instrument or document contemplated hereby or thereby, or (c) any cause of
action, suit or claim brought or made against such Buyer Indemnitee and arising
out of or resulting from the execution, delivery, performance or enforcement of
this Agreement or any other instrument, document or agreement executed pursuant
hereto by any of the parties hereto, any transaction financed or to be financed
in whole or in part, directly or indirectly, with the proceeds of the issuance
of the Convertible Debentures or the status of the Buyer or holder of the
Convertible Debentures or the Conversion Shares,  as a Buyer of
Convertible Debentures in the Company.  To the extent that the
foregoing undertaking by the Company may be unenforceable for any reason, the
Company shall make the maximum contribution to the payment and satisfaction of
each of the Indemnified Liabilities, which is permissible under applicable
law.

     

    (b)    In
consideration of the Company’s execution and delivery of this Agreement, and in
addition to all of the Buyer’s other obligations under this Agreement, the Buyer
shall defend, protect, indemnify and hold harmless the Company and all of its
officers, directors, employees and agents (including, without limitation, those
retained in connection with the transactions contemplated by this Agreement)
(collectively, the “Company Indemnitees”)
from and against any and all Indemnified Liabilities incurred by the Indemnitees
or any of them as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the
Buyer(s) in this Agreement or the other Transaction Documents, or any other
certificate, instrument or document contemplated hereby or thereby executed by
the Buyer, (b) any breach of any covenant, agreement or obligation of the
Buyer(s) contained in this Agreement,  the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby
executed by the Buyer, or (c) any cause of action, suit or claim brought or made
against such Company Indemnitee based on material misrepresentations or due to a
material breach and arising out of or resulting from the execution, delivery,
performance or enforcement of this Agreement, the Transaction Documents or any
other instrument, document or agreement executed pursuant hereto by any of the
parties hereto.  To the extent that the foregoing undertaking by each
Buyer may be unenforceable for any reason, each Buyer shall make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities, which is permissible under applicable law.

     

    9.    GOVERNING LAW:
MISCELLANEOUS.

     

    (a)    Governing
Law.  This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New Jersey without regard to the
principles of conflict of laws.  The parties further agree that any
action between them shall be heard in Hudson County, New Jersey, and expressly
consent to the jurisdiction and venue of the Superior Court of New Jersey,
sitting in Hudson County and the United States District Court for the District
of New Jersey sitting in Newark, New Jersey for the adjudication of any civil
action asserted pursuant to this Paragraph.

     

    
      
         

      

      
        25

        
          

        

      

      
         

      

    

     

    (b)    Counterparts.  This
Agreement may be executed in two or more identical counterparts, all of which
shall be considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other
party.  In the event any signature page is delivered by facsimile
transmission, the party using such means of delivery shall cause four (4)
additional original executed signature pages to be physically delivered to the
other party within five (5) days of the execution and delivery
hereof.

     

    (c)    Headings.  The
headings of this Agreement are for convenience of reference and shall not form
part of, or affect the interpretation of, this Agreement.

     

    (d)    Severability.  If
any provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of any provision of this Agreement in any other
jurisdiction.

     

    (e)    Entire Agreement,
Amendments.  This Agreement supersedes all other prior oral or
written agreements between the Buyer(s), the Company, their affiliates and
persons acting on their behalf with respect to the matters discussed herein, and
this Agreement and the instruments referenced herein contain the entire
understanding of the parties with respect to the matters covered herein and
therein and, except as specifically set forth herein or therein, neither the
Company nor any Buyer makes any representation, warranty, covenant or
undertaking with respect to such matters.  No provision of this
Agreement may be waived or amended other than by an instrument in writing signed
by the party to be charged with enforcement.

     

    (f)    Notices.  Any
notices, consents, waivers, or other communications required or permitted to be
given under the terms of this Agreement must be in writing and will be deemed to
have been delivered (i) upon receipt, when delivered personally; (ii) upon
confirmation of receipt, when sent by facsimile; (iii) three (3) days after
being sent by U.S. certified mail, return receipt requested, or (iv) one (1) day
after deposit with a nationally recognized overnight delivery service, in each
case properly addressed to the party to receive the same.  The
addresses and facsimile numbers for such communications shall be:

     

    
      
         

      

      
        26

        
          

        

      

      
         

      

    

     

    
      	
              If
      to the Company, to:

            	
              Telkonet,
      Inc.

            
	 
      	
              20374
      Seneca Meadows Parkway

            
	 
      	
              Germantown,
      Maryland 20876

            
	 
      	
              Attn:
      Richard J. Leimbach

            
	 
      	
              Telephone:
      240-912-1800

            
	 
      	
              Facsimile:

            
	 
      	 
      
	
              With
      a copy to:

            	
              Baker
      & Hostetler LLP

            
	 
      	
              1050
      Connecticut Avenue, NW

            
	 
      	
              Suite
      1100

            
	 
      	
              Washington,
      DC 20036

            
	 
      	
              Attn:
      William J. Conti, Esq.

            
	 
      	
              Telephone:
      202-861-1726

            
	 
      	
              Facsimile:
      202-861-1783

            


    

     

    If to the
Buyer(s), to its address and facsimile number on Schedule I, with copies to the
Buyer’s counsel as set forth on Schedule I.  Each party shall provide
five (5) days’ prior written notice to the other party of any change in address
or facsimile number.

     

    (g)    Successors and
Assigns.  This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and
assigns.  Neither the Company nor any Buyer shall assign this
Agreement or any rights or obligations hereunder without the prior written
consent of the other party hereto.

     

    (h)    No Third Party
Beneficiaries.  This Agreement is intended for the benefit of
the parties hereto and their respective permitted successors and assigns, and is
not for the benefit of, nor may any provision hereof be enforced by, any other
person.

     

    (i)    Survival.  Unless
this Agreement is terminated under Section 9(l), the representations and
warranties of the Company and the Buyer(s) contained in Sections 2 and 3, the
agreements and covenants set forth in Sections 4, 5 and 9, and the
indemnification provisions set forth in Section 8, shall survive the Closing for
a period of two (2) years following the date on which the Convertible Debentures
are converted in full.  The Buyer(s) shall be responsible only for its
own representations, warranties, agreements and covenants
hereunder.

     

    (j)    Publicity.  The
Company and the Buyer(s) shall have the right to approve, before issuance any
press release or any other public statement with respect to the transactions
contemplated hereby made by any party; provided, however, that the Company shall
be entitled, without the prior approval of the Buyer(s), to issue any press
release or other public disclosure with respect to such transactions required
under applicable securities or other laws or regulations (the Company shall use
its best efforts to consult the Buyer(s) in connection with any such press
release or other public disclosure prior to its release and Buyer(s) shall be
provided with a copy thereof upon release thereof).

     

    
      
         

      

      
        27

        
          

        

      

      
         

      

    

     

    (k)    Further
Assurances.  Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

     

    (l)    Termination.  In
the event that the First Closing shall not have occurred with respect to the
Buyers on or before five (5) business days from the date hereof due to the
Company’s or the Buyer’s failure to satisfy the conditions set forth in Sections
6 and 7 above (and the non-breaching party’s failure to waive such unsatisfied
condition(s)), the non-breaching party shall have the option to terminate this
Agreement with respect to such breaching party at the close of business on such
date without liability of any party to any other party; provided, however, that
if this Agreement is terminated by the Company pursuant to this Section 9(l),
the Company shall remain obligated to reimburse the Buyer(s) for the fees and
expenses of Yorkville Advisors LLC described in Section 4(g) above (other than
the amounts set forth in Section 4(g)(ii)).

     

    (m)    Brokerage.  The
Company represents that no broker, agent, finder or other party has been
retained by it in connection with the transactions contemplated hereby and that
no other fee or commission has been agreed by the Company to be paid for or on
account of the transactions contemplated hereby.

     

    (n)    No Strict
Construction.  The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any
party.

     

    10.    LIMITATIONS
ON ISSUANCE OF COMMON STOCK.

     

    (a)    Principal Market
Regulation.  The Company shall not be obligated to issue any
shares of Common Stock upon conversion of the Debentures or exercise of the
Warrants if the issuance of such shares of Common Stock would cause the Company
to breach its obligations under the rules or regulations of the American Stock
Exchange (the “Exchange Cap”),
except that such limitation shall not apply in the event that the Company (A)
obtains the approval of its stockholders as required by the applicable rules of
the American Stock Exchange for issuances of Common Stock in excess of such
amount or (B) obtains a written opinion from outside counsel to the Company that
such approval is not required, which opinion shall be reasonably satisfactory to
the Buyer.  Until such approval or written opinion is obtained, the
Company shall not issue to the Buyer in the aggregate, upon conversion or
exercise or otherwise, as applicable, of Debentures or Warrants, shares of
Common Stock in an amount greater than the Exchange Cap.

     

    (b)    Stockholders
Approval.  The Buyer shall provide written notice (“Exchange Cap Notice”)
to the Company if at any time the total number of shares issuable upon full
conversion of the Debentures and full exercise of the Warrants would exceed the
Exchange Cap.  Within sixty (60) days of receipt of an Exchange Cap
Notice, the Company shall use its best efforts to call and hold a special
meeting of the shareholders, for the purpose of approving the transactions
contemplated herein (such affirmative approval being referred to herein as the
“Stockholder
Approval”).  The Company’s Board shall recommend to the
shareholders to vote in favor of approving the transactions contemplated
herein.

     

    
      
         

      

      
        28

        
          

        

      

      
         

      

    

     

     

    [REMAINDER
PAGE INTENTIONALLY LEFT BLANK]

     

     

    
      
         

      

      
        29

        
          

        

      

      
         

      

    

     

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

     

    


    
      	 
      	
              COMPANY:

            
	 
      	
              TELKONET,
      INC.

            
	 
      	 
      
	 
      	
              By:      
      /s/ Richard J.
      Leimbach                   

            
	 
      	
              Name: Richard
      J. Leimbach

            
	 
      	
              Title: Chief
      Financial Officer

            
	 
      	 
      


    

     

    
      
         

      

      
        30

        
          

        

      

      
         

      

    

     

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

     

    


    
      	 
      	
              BUYERS:

            
	 
      	
              YA
      GLOBAL INVESTMENTS, L.P.

            
	 
      	 
      
	 
      	
              By: Yorkville
      Advisors, LLC

            
	 
      	
              Its: Investment
      Manager

            
	 
      	 
      
	 
      	 
      
	 
      	
              By:      /s/ Mark
      Angelo                                  

            
	 
      	
              Name: Mark
      Angelo

            
	 
      	
              Its: Portfolio
      Manager

            


    

     

    
      
         

      

      
        31

        
          

        

      

      
         

      

    

    
 

    SCHEDULE
I

     

    SCHEDULE OF
BUYERS

     

    


    
      	
              (1)

            	
              (2)

            	
              (3)

            	
              (4)

            	
              (5)

            	
              (6)

            	
              (7)

            	
              (8)

            
	
              Buyer

            	
              Subscription
      Amount

            	
              Number
      of Warrant Shares

            	 
      	 
      	
              Legal
      Representative’s Address and Facsimile Number

            
	 	 	 	 	 	 
	 
      	
              First
      Closing

            	
              Second
      Closing

            	
              Third
      Closing

            	
              First
      Closing

            	
              Second
      Closing

            	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	
              YA
      Global Investments, L.P.

               

              101
      Hudson Street, Suite 3700

              Jersey
      City, NJ  07303

              Attention:
      Mark Angelo

              Telephone:
      (201) 985-8300

              Facsimile:
      (201) 985-8266

              Residence:  Cayman
      Islands

            	
              $1,500,000

            	
              $1,000,000

            	
              $1,000,000

            	
              2,100,000

            	
              400,000

            	 
      	
              Troy
      Rillo or David Gonzalez, Esq.

              101
      Hudson Street, Suite 3700

              Jersey
      City, New Jersey 07302

              Telephone:
      (201) 985-8300

              Facsimile:
      (201) 985-8266

               

            


    

    


    
      
         

      

      
         

        
          

        

      

      
         

      

    

    


    LIST OF
EXHIBITS:

    


    Disclosure
Schedule

    


    Exhibit A
– Form of Convertible Debentures

    


    Exhibit B
– Form of Warrant

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    
 

    DISCLOSURE
SCHEDULE