Document:

ex4-1.htm

     

    Exhibit 4.1

     

     

    
 

     

     

     

     

     

     

    RIGHTS
AGREEMENT

     

    dated as
of November 17, 2009

     

    between

     

    BARNES
& NOBLE, INC.

     

    and

     

    MELLON
INVESTOR SERVICES LLC,

     

    as Rights
Agent

     

     

     

     

     

     

    

    

    
      
        
          
             

          

           

        

        
           

          
            

          

        

        
           

        

      

    

    

    Table of
Contents

     

    Page

     

     

     

     

     

    
      	
              SECTION
      1.

            	
              Certain
      Definitions 

            	
              1

            

    

    
      	
              SECTION
      2.

            	
              Appointment
      of Rights Agent 

            	
              11

            

    

    
      	
              SECTION
      3.

            	
              Issue
      of Rights and Right Certificates 

            	
              12

            

    

    
      	
              SECTION
      4.

            	
              Form
      of Right Certificates 

            	
              15

            

    

    
      	
              SECTION
      5.

            	
              Execution,
      Countersignature and Registration 

            	
              16

            

    

    
      	
              SECTION
      6.

            	
              Transfer,
      Split-Up, Combination and Exchange of Right Certificates; Mutilated,
      Destroyed, Lost or Stolen Right Certificates; Uncertificated
      Rights 

            	16

    

    
      	
              SECTION
      7.

            	
              Exercise
      of Rights; Expiration Date of Rights 

            	18

    

    
      	
              SECTION
      8.

            	
              Cancelation
      and Destruction of Right Certificates 

            	21

    

    
      	
              SECTION
      9.

            	
              Reservation
      and Availability of Preferred Shares 

            	21

    

    
      	
              SECTION
      10.

            	
              Preferred
      Shares Record Date 

            	23

    

    
      	
              SECTION
      11.

            	
              Adjustments
      in Rights After There Is an Acquiring Person; Exchange of Rights for
      Shares; Business Combinations 

            	24

    

    
      	
              SECTION
      12.

            	
              Certain
      Adjustments 

            	30

    

    
      	
              SECTION
      13.

            	
              Certificate
      of Adjustment 

            	31

    

    
      	
              SECTION
      14.

            	
              Additional
      Covenants 

            	33

    

    
      	
              SECTION
      15.

            	
              Fractional
      Rights and Fractional Shares 

            	33

    

    
      	
              SECTION
      16.

            	
              Rights
      of Action 

            	35

    

    
      	
              SECTION
      17.

            	
              Transfer
      and Ownership of Rights and Right Certificates 

            	37

    

    
      	
              SECTION
      18.

            	
              Right
      Certificate Holder Not Deemed a Stockholder 

            	37

    

    
      	
              SECTION
      19.

            	
              Concerning
      the Rights Agent 

            	38

    

    
      	
              SECTION
      20.

            	
              Merger
      or Consolidation or Change of Rights Agent 

            	38

    

    
      	
              SECTION
      21.

            	
              Duties
      of Rights Agent 

            	39

    

    
      	
              SECTION
      22.

            	
              Change
      of Rights Agent 

            	44

    

    
      	
              SECTION
      23.

            	
              Issuance
      of Additional Rights and Right Certificates 

            	46

    

    
      	
              SECTION
      24.

            	
              Redemption
      and Termination 

            	47

    

    
      	
              SECTION
      25.

            	
              Notices 

            	47

    

    
      	
              SECTION
      26.

            	
              Supplements
      and Amendments 

            	49

    

    
      	
              SECTION
      27.

            	
              Successors 

            	50

    

    
      	
              SECTION
      28.

            	
              Benefits
      of Rights Agreement; Determinations and Actions by the Board,
      etc 

            	50

    

    
      	
              SECTION
      29.

            	
              Severability 

            	51

    

    
      	
              SECTION
      30.

            	
              Governing
      Law 

            	51

    

    
      	
              SECTION
      31.

            	
              Counterparts;
      Effectiveness 

            	51

    

    
      	
              SECTION
      32.

            	
              Descriptive
      Headings 

            	51

    

     

    Exhibits

     

    A      Certificate
of Designation

    B      Form
of Right Certificate

    C      Summary
of Rights

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

     

    RIGHTS
AGREEMENT dated as of November 17, 2009 (the “Rights Agreement”),
between BARNES & NOBLE, INC., a Delaware corporation (the “Company”), and MELLON
INVESTOR SERVICES LLC, a New Jersey limited liability company, as Rights Agent
(the “Rights
Agent”).

     

    The Board
of Directors of the Company (the “Board”) has
authorized and declared a dividend of one Right (as hereinafter defined) for
each share of Common Stock, par value $0.001 per share, of the Company (the
“Common Stock”)
outstanding at the Close of Business (as hereinafter defined) on November 27,
2009 (the “Record
Date”), and has authorized the issuance of one Right (as such number may
hereafter be adjusted pursuant to the provisions of this Rights Agreement) with
respect to each share of Common Stock that shall become outstanding (whether
originally issued or delivered from the Company’s treasury) between the Record
Date and the earliest of the Distribution Date, the Redemption Date or the
Expiration Date (as such terms are hereinafter defined); provided, however, that Rights
may be issued with respect to shares of Common Stock that shall become
outstanding after the Distribution Date (whether originally issued or delivered
from the Company’s treasury) and prior to the earlier of the Redemption Date or
the Expiration Date only in accordance with the provisions of
Section 23.  Each Right shall initially represent the right to
purchase one one-thousandth (1/1,000th) of a share of Series I Preferred Stock,
par value $0.001 per share, of the Company (the “Preferred Shares”),
having the powers, rights and preferences set forth in the Certificate of
Designation attached hereto as Exhibit A.

     

    Accordingly,
in consideration of the premises and the mutual agreements herein set forth, the
parties hereby agree as follows:

     

    SECTION
1.  Certain
Definitions.  For
purposes of this Rights Agreement, the following terms have the meanings
indicated:

     

    “Acquiring Person”
shall mean any Person who or which, alone or together with all Affiliates and
Associates of such Person, shall be the Beneficial Owner of more than 20% of the
Common Shares then outstanding, but not including (a) the Company, any
Subsidiary of the Company, any employee benefit or compensation plan of the
Company or of any of its Subsidiaries or any Person organized, appointed or
established by the Company and holding Common Shares for or pursuant to the
terms of any such employee benefit or compensation plan, (b) any such
Person who or which, alone or together with all Affiliates and Associates of
such Person, has become and is the Beneficial Owner of more than 20% of the
Common Shares at the time outstanding solely as the result of (i) a change
in the aggregate number of Common Shares outstanding since the last date on
which such Person acquired Beneficial Ownership of any Common Shares or
(ii) the acquisition by such Person or one or more of its Affiliates or
Associates of Beneficial Ownership of additional Common Shares if the Board
determines that such acquisition was made in good faith without the knowledge by
such Person or one or more of its Affiliates or Associates that such Person
would thereby become an Acquiring Person, which determination of the Board shall
be conclusive and binding on such Person, the Rights Agent, the holders of the
Rights and all other Persons, (c) any such Person who would, as of the Close of
Business on the date hereof, be an “Acquiring Person” pursuant to the foregoing
provisions of this definition (an “Excluded Person”),
unless and until such Excluded Person shall acquire after the date hereof,
without the prior approval of the Board, Beneficial Ownership of any additional
Common Shares (other than any such ownership resulting from the exercise of any
options or the vesting of any restricted shares, in each case, granted prior to
or after the date hereof to such Excluded Person under any employee benefit or
compensation plan of the Company or any of its Subsidiaries) and (d) (i) any
Person who is an immediate family member of an Excluded Person and any trust for
the benefit of (or the trustees of which include) such immediate family member
or such Excluded Person, which Person or trust acquires from such Excluded
Person Common Shares (such shares, “Excluded Shares”) and
(ii) any executor or trustee for the estate of an Excluded Person or of such
immediate family member, unless and until, in the case of clause (i) and (ii),
such Person, trust, executor or trustee, together with all Affiliates and
Associates of such Person, trust, executor or trustee, shall become the
Beneficial Owner of 20% or more of the Common Shares not including Excluded
Shares.

     

    

    
      
        
          
             

          

           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    

     

    Notwithstanding
clause (b)(ii) of the prior sentence, if any Person that is not an Acquiring
Person due to such clause (b)(ii) does not reduce its percentage of
Beneficial Ownership of Common Shares to 20% or less by the Close of Business on
the tenth calendar day after notice from the Company (the date of notice being
the first day) that such Person’s Beneficial Ownership of Common Shares would
make it an Acquiring Person, such Person shall, at the end of such ten calendar
day period, become an Acquiring Person (and such clause (b)(ii) shall no longer
apply to such Person).

     

    “Affiliate” and “Associate”, when used
with reference to any Person, shall have the respective meanings ascribed to
such terms in Rule 12b-2 of the General Rules and Regulations under the
Exchange Act, as in effect on the date of this Rights Agreement.

     

    A Person
shall be deemed the “Beneficial Owner” of,
and shall be deemed to “beneficially own”,
and shall be deemed to have “Beneficial Ownership”
of, any securities:

     

    (a)  which
such Person or any of such Person’s Affiliates or Associates is deemed to “beneficially own”
within the meaning of Rule 13d-3 of the General Rules and Regulations under
the Exchange Act, as in effect on the date of this Rights
Agreement;

     

    (b)  which
such Person or any of such Person’s Affiliates or Associates has, directly or
indirectly: (i) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement,
arrangement or understanding (written or oral), or upon the exercise of
conversion rights, exchange rights, rights (other than the Rights), warrants or
options, or otherwise; provided, however, that a
Person shall not be deemed under this clause (i) to be the Beneficial Owner
of, or to beneficially own, or to have Beneficial Ownership of, any securities
tendered pursuant to a tender or exchange offer made by or on behalf of such
Person or any of such Person’s Affiliates or Associates until such tendered
securities are accepted for purchase or exchange thereunder or cease to be
subject to withdrawal by the tendering security holder; or (ii) the right
to vote or dispose of, including pursuant to any agreement, arrangement or
understanding (written or oral); provided, however, that a
Person shall not be deemed under this clause (ii) to be the Beneficial
Owner of, or to beneficially own, or to have Beneficial Ownership of, any
security if (A) the agreement, arrangement or understanding (written or
oral) to vote such security arises solely from a revocable proxy or consent
given to such Person in response to a public proxy or consent solicitation made
generally to all holders of Common Shares of the Company pursuant to, and in
accordance with, the applicable rules and regulations under the Exchange Act and
(B) the beneficial ownership of such security is not also then reportable
on Schedule 13D or 13G under the Exchange Act (or any comparable or
successor report);

     

    

    
      
        
           

        

        
          2

          
            

          

        

        
           

        

      

    

    

    

     

    (c)  which
are beneficially owned, directly or indirectly, by any other Person (or an
Affiliate or Associate thereof) with which such Person (or any of such Person’s
Affiliates or Associates) has (i) any agreement, arrangement or
understanding (written or oral) for the purpose of acquiring, holding, voting
(except pursuant to a revocable proxy as described in the proviso to
clause (b)(ii) of this definition) or disposing of any voting securities of
the Company or (ii) any agreement, arrangement or understanding (written or
oral) to cooperate in obtaining, changing or influencing the control of the
Company; or

     

    (d)  which
are the subject of, or the reference securities for, or that underlie, any
Derivative Interest of such Person or any of such Person’s Affiliates or
Associates, with the number of Common Shares deemed Beneficially Owned being the
notional or other number of Common Shares specified in the documentation
evidencing the Derivative Interest as being subject to be acquired upon the
exercise or settlement of the Derivative Interest or as the basis upon which the
value or settlement amount of such Derivative Interest is to be calculated in
whole or in part or, if no such number of Common Shares is specified in such
documentation, as determined by the Board in its sole discretion to be the
number of Common Shares to which the Derivative Interest relates.

     

    Notwithstanding
the foregoing, nothing contained in this definition shall cause a Person
ordinarily engaged in business as an underwriter of securities to be deemed the
“Beneficial
Owner” of, or to “beneficially own”, or
to have “Beneficial
Ownership” of, any securities acquired in a bona fide firm commitment
underwriting pursuant to an underwriting agreement with the
Company.

     

    “Board” shall have the
meaning set forth in the introductory paragraph of this Rights
Agreement.

     

    “Book Value”, when
used with reference to Common Shares issued by any Person, shall mean the amount
of equity of such Person applicable to each Common Share, determined (a) in
accordance with generally accepted accounting principles in effect on the date
as of which such Book Value is to be determined, (b) using all the
consolidated assets and all the consolidated liabilities of such Person on the
date as of which such Book Value is to be determined, except that no value shall
be included in such assets for goodwill arising from consummation of a business
combination, and (c) after giving effect to (i) the exercise of all
rights, options and warrants to purchase such Common Shares (other than the
Rights), and the conversion of all securities convertible into such Common
Shares, at an exercise or conversion price, per Common Share, which is less than
such Book Value before giving effect to such exercise or conversion (whether or
not exercisability or convertibility is conditioned upon occurrence of a future
event), (ii) all dividends and other distributions on the capital stock of
such Person declared prior to the date as of which such Book Value is to be
determined and to be paid or made after such date, and (iii) any other
agreement, arrangement or understanding (written or oral), or transaction or
other action contemplated prior to the date as of which such Book Value is to be
determined that would have the effect of thereafter reducing such Book
Value.

     

    

    
      
        
           

        

        
          3

          
            

          

        

        
           

        

      

    

    

    

     

    “Business Combination”
shall have the meaning set forth in Section 11(c)(i).

     

    “Business Day” shall
mean each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on
which banking institutions in the Borough of Manhattan, the City of
New York, or the State of New Jersey are authorized or obligated by law or
executive order to close.

     

    “Certificate of
Designation” shall mean the Certificate of Designation of the Preferred
Shares, a copy of which is attached hereto as Exhibit A.

     

    “Close of Business” on
any given date shall mean 5:00 p.m., New York City time, on such date;
provided, however, that, if
such date is not a Business Day, “Close of Business”
shall mean 5:00 p.m., New York City time, on the next succeeding Business
Day.

     

    “Common Shares”, when
used with reference to the Company prior to a Business Combination, shall mean
the shares of Common Stock or any other shares of capital stock of the Company
into which the Common Stock shall be reclassified or changed.  “Common Shares”, when
used with reference to any Person (other than the Company prior to a Business
Combination), shall mean shares of capital stock of such Person (if such Person
is a corporation) of any class or series, or units of equity interests in such
Person (if such Person is not a corporation) of any class or series, the terms
of which do not limit (as a maximum amount and not merely in proportional terms)
the amount of dividends or income payable or distributable on such class or
series or the amount of assets distributable on such class or series upon any
voluntary or involuntary liquidation, dissolution or winding up of such Person
and do not provide that such class or series is subject to redemption at the
option of such Person, or any shares of capital stock or units of equity
interests into which the foregoing shall be reclassified or changed, and if
there shall be more than one class or series of such shares of capital stock or
units of equity interests of such Person, then “Common Shares” of
such Person shall mean the class or series of capital stock of such Person or
units of equity interests in such Person having voting power (being the power
under ordinary circumstances (and not merely upon the happening of a
contingency) to vote in the election of directors of such Person (if such Person
is a corporation) or to participate in the management and control of such Person
(if such Person is not a corporation)), or in the case of multiple classes or
series having voting power, having the greatest voting power.

     

    

    
      
        
           

        

        
          4

          
            

          

        

        
           

        

      

    

    

    

     

    “Common Stock” shall
have the meaning set forth in the introductory paragraph of this Rights
Agreement.

     

    “Company” shall have
the meaning set forth in the heading of this Rights Agreement; provided, however, that if
there is a Business Combination, “Company” shall have
the meaning set forth in Section 11(c)(iii).

     

    The term
“control” with
respect to any Person shall mean the power to direct the management and policies
of such Person, directly or indirectly, by or through stock ownership, agency or
otherwise, or pursuant to or in connection with an agreement, arrangement or
understanding (written or oral) with one or more other Persons by or through
stock ownership, agency or otherwise; and the terms “controlling” and
“controlled”
shall have meanings correlative to the foregoing.

     

    “Distribution Date”
shall have the meaning set forth in Section 3(b).

     

    “Derivative Interest”
shall mean any derivative securities (as defined under Rule 16a-1 under the
Exchange Act) that increase in value as the value of the underlying equity
increases, including, but not limited to, a long convertible security, a long
call option and a short put option position, in each case, regardless of whether
(x) such interest conveys any voting rights in such security, (y) such
interest is required to be, or is capable of being, settled through delivery of
such security or (z) transactions hedge the economic effect of such
interest.

     

    “Exchange Act” shall
mean the Securities Exchange Act of 1934, as in effect on the date in question,
unless otherwise specifically provided.

     

    “Exchange
Consideration” shall have the meaning set forth in
Section 11(b)(i).

     

    “Expiration Date”
shall mean the Close of Business on the third anniversary of the date of
this Rights Agreement.

     

    “including” shall mean
including, without limitation.

     

    “Major Part”, when
used with reference to the assets of the Company and its Subsidiaries as of any
date, shall mean assets (a) having a fair market value aggregating 50% or
more of the total fair market value of all the assets of the Company and its
Subsidiaries (taken as a whole) as of the date in question, (b) accounting
for 50% or more of the total value (net of depreciation and amortization) of all
the assets of the Company and its Subsidiaries (taken as a whole) as would be
shown on a consolidated or combined balance sheet of the Company and its
Subsidiaries as of the date in question, prepared in accordance with generally
accepted accounting principles then in effect, or (c) accounting for 50% or
more of the total amount of earnings before interest, taxes, depreciation and
amortization or of the revenues of the Company and its Subsidiaries (taken as a
whole) as would be shown on, or derived from, a consolidated or combined
statement of income or net earnings of the Company and its Subsidiaries for the
period of 12 months ending on the last day of the Company’s monthly
accounting period next preceding the date in question, prepared in accordance
with generally accepted accounting principles then in effect.

     

    

    
      
        
           

        

        
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    “Market Value”, when
used with reference to Common Shares on any date, shall mean the average of the
daily closing prices, per share, of such Common Shares for the period which is
the shorter of (a) 30 consecutive Trading Days ending on the Trading
Day immediately prior to the date in question or (b) the number of
consecutive Trading Days beginning on the Trading Day immediately after the date
of the first public announcement of the event requiring a determination of the
Market Value of Common Shares and ending on the Trading Day immediately prior to
the record date of such event.  The closing price for each Trading Day
shall be the closing price quoted on the composite tape for securities listed on
the New York Stock Exchange, or, if such securities are not quoted on such
composite tape or if such securities are not listed on such exchange, on the
principal United States securities exchange registered under the Exchange Act
(or any recognized foreign stock exchange) on which such securities are listed,
or, if such securities are not listed on any such exchange, the closing price
(or, if no sale takes place on such Trading Day, the average of the closing bid
and asked prices on such Trading Day) as quoted on any reputable quotations
system specified by the Board, or if no such quotations are available, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in such securities selected by the Board, or if on
any such Trading Day no market maker is making a market in such securities, the
closing price of such securities on such Trading Day shall be deemed to be the
fair value of such securities as determined in good faith by the
Board (whose determination shall be described in a statement filed with the
Rights Agent and shall be binding on the Rights Agent, the holders of Rights and
all other Persons); provided, however, that if a
Trading Day occurs during a period following an announcement of any action of
the type described in Section 12(a) that would require an adjustment
thereunder by the issuer of the securities the closing price of which is to be
determined, then, and in each such case, the closing price of such securities
shall be appropriately adjusted to reflect the effect of such action on the
market price of such securities; and provided further,
however, that
for the purpose of determining the closing price of the Preferred Shares for any
Trading Day on which there is no market maker for the Preferred Shares, the
closing price on such Trading Day shall be deemed to be the Formula Number (as
defined in the Certificate of Designation) multiplied by the closing price of
the Common Shares of the Company on such Trading Day.

     

    “Person” shall mean an
individual, firm, corporation, partnership, limited liability company, joint
venture, association, trust, unincorporated organization or other entity, and
shall include any successor (by merger or otherwise) thereof or
thereto.

     

    

    
      
        
           

        

        
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    “Post Transferee”
shall have the meaning set forth in Section 7(e).

     

    “Preferred Shares”
shall have the meaning set forth in the introductory paragraph of this Rights
Agreement.  Any reference in this Rights Agreement to Preferred Shares
shall be deemed to include any authorized fraction of a Preferred Share, unless
the context otherwise requires.

     

    “Principal Party”
shall mean the Surviving Person in a Business Combination; provided, however, that,
(i) if such Surviving Person is a direct or indirect Subsidiary of any
other Person, “Principal Party”
shall mean the Person which is the ultimate parent of such Surviving Person, and
(ii) in the event ultimate control of such Surviving Person is shared by
two or more Persons, “Principal Party”
shall mean that Person that is immediately controlled by such two or more
Persons.

     

    “Prior Transferee”
shall have the meaning set forth in Section 7(e).

     

    “Purchase Price” with
respect to each Right shall mean $100.00, as such amount may from time to time
be adjusted as provided in this Rights Agreement, and shall be payable in lawful
money of the United States of America.  All references herein to the
Purchase Price shall mean the Purchase Price as in effect at the time in
question.

     

    “Record Date” shall
have the meaning set forth in the introductory paragraph of this Rights
Agreement.

     

    “Redemption Date”
shall have the meaning set forth in Section 24(a).

     

    “Redemption Price”
with respect to each Right shall mean $0.001, as such amount may from time to
time be adjusted in accordance with Section 12.  All references
herein to the Redemption Price shall mean the Redemption Price as in effect at
the time in question.

     

    “Registered Common
Shares” shall mean Common Shares that are, as of the date of consummation
of a Business Combination, and have continuously been for the 12 months
immediately preceding such date, registered under Section 12 of the
Exchange Act, and if a Person has multiple classes or series of Registered
Common Shares outstanding, “Registered Common
Shares” of such Person shall mean the class or series of Registered
Common Shares of such Person having voting power (being the power under ordinary
circumstances (and not merely upon the happening of a contingency) to vote in
the election of directors of such Person (if such Person is a corporation) or to
participate in the management and control of such Person (if such Person is not
a corporation)), or in the case of multiple classes or series having voting
power, having the greatest voting power.

     

    “Right Certificate”
shall mean a certificate evidencing a Right in substantially the form attached
hereto as Exhibit B.

     

    “Rights” shall mean
the rights to purchase Preferred Shares (or other securities) as provided in
this Rights Agreement.

     

    

    
      
        
           

        

        
          7

          
            

          

        

        
           

        

      

    

    

    “Securities Act” shall
mean the Securities Act of 1933, as in effect on the date in question, unless
otherwise specifically provided.

     

    “Subsidiary” shall
mean a Person, at least a majority of the total outstanding voting power (being
the power under ordinary circumstances (and not merely upon the happening of a
contingency) to vote in the election of directors of such Person (if such Person
is a corporation) or to participate in the management and control of such Person
(if such Person is not a corporation)) of which is owned, directly or
indirectly, by another Person or by one or more other Subsidiaries of such other
Person or by such other Person and one or more other Subsidiaries of such other
Person.

     

    “Surviving Person”
shall mean (a) the Person which is the continuing or surviving Person in a
consolidation or merger specified in Section 11(c)(i)(A)
or 11(c)(i)(B) or (b) the Person to which the Major Part of the assets
of the Company and its Subsidiaries is sold, leased, exchanged or otherwise
transferred or disposed of in a transaction specified in
Section 11(c)(i)(C); provided, however, that, if the
Major Part of the assets of the Company and its Subsidiaries is sold, leased,
exchanged or otherwise transferred or disposed of in one or more related
transactions specified in Section 11(c)(i)(C) to more than one Person, the
“Surviving
Person” in such case shall mean the Person that acquired assets of the
Company and/or its Subsidiaries with the greatest fair market value in such
transaction or transactions.

     

    “Trading Day” shall
mean a day on which the principal national securities exchange (or principal
recognized foreign stock exchange, as the case may be) on which any securities
or Rights, as the case may be, are listed or admitted to trading is open for the
transaction of business or, if the securities or Rights in question are not
listed or admitted to trading on any national securities exchange (or recognized
foreign stock exchange, as the case may be), a Business Day.

     

    SECTION
2.  Appointment of Rights
Agent.  The Company hereby appoints the Rights Agent to act as
agent for the Company in accordance with the terms and conditions hereof, and
the Rights Agent hereby accepts such appointment.  The Company may
from time to time appoint one or more co-Rights Agents as it may deem necessary
or desirable (the term “Rights Agent” being
used herein to refer, collectively, to the Rights Agent together with any such
co-Rights Agents).  In the event the Company appoints one or more
co-Rights Agents, the respective duties of the Rights Agent and any co-Rights
Agents shall be as the Company shall determine, and shall be provided in writing
to the Rights Agent and any such co-Rights Agent.  Subject to Section
21(c), the Rights Agent shall have no duty to supervise and shall not be liable
for the acts or omissions of any such co-Rights Agents.

     

    

    
      
        
           

        

        
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    SECTION
3.  Issue of
Rights and Right Certificates.  (a)  One Right shall
be associated with each Common Share outstanding on the Record Date, each
additional Common Share that shall become outstanding between the Record Date
and the earliest of the Distribution Date, the Redemption Date or the Expiration
Date and each additional Common Share with which Rights are issued after the
Distribution Date but prior to the earlier of the Redemption Date or the
Expiration Date as provided in Section 23, subject to adjustment as
provided in this Rights Agreement.

     

    (b)  Until
the earlier of (i) such date on which the Company learns that a Person has
become an Acquiring Person and (ii) such date, if any, as may be designated
by the Board following the commencement of, or first public disclosure of an
intent to commence, a tender or exchange offer by any Person (other than the
Company, any Subsidiary of the Company, any employee benefit or compensation
plan of the Company or of any of its Subsidiaries, or any Person organized,
appointed or established by the Company and holding Common Shares for or
pursuant to the terms of any such employee benefit or compensation plan) for
outstanding Common Shares, if upon consummation of such tender or exchange offer
such Person could be the Beneficial Owner of more than 20% of the outstanding
Common Shares (the Close of Business on the earlier of such dates being the
“Distribution
Date”), (x) the Rights shall, except as otherwise provided in
Section 3(c), be evidenced by the certificates for Common Shares registered
in the names of the holders thereof, or, in the case of Common Shares held in
uncertificated form, by the transaction statement or other record of ownership
of such Common Shares, and not by separate Right Certificates, and (y) the
Rights, including the right to receive Right Certificates, shall be transferable
only in connection with the transfer of the underlying Common
Shares.  As soon as practicable after the Distribution Date, the
Company shall prepare and execute, the Rights Agent shall countersign, and the
Company will send or cause to be sent (and the Rights Agent shall, if requested
and provided with all necessary information, send) by first-class,
postage-prepaid mail, to each record holder of Common Shares as of the Close of
Business on the Distribution Date, at the address of such holder shown on the
records of the Company or the transfer agent or registrar for the Common Shares,
one or more Right Certificates evidencing one whole Right for each Common Share
held by such record holder, subject to the provisions of Section 15 and to
adjustment as provided in this Rights Agreement.  As of and after the
Distribution Date, the Rights shall be evidenced solely by such Right
Certificates.  The Company shall, as promptly as practicable, notify
the Rights Agent in writing upon the occurrence of the Distribution Date and, if
such notification is given orally, the Company shall confirm same in writing on
or prior to the Business Day next following.  Until such notice is
received by the Rights Agent, the Rights Agent may presume conclusively for all
purposes that the Distribution Date has not occurred.

     

    

    
      
        
           

        

        
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    (c)  As
soon as practicable after the Record Date, the Company will send a copy of a
Summary of Rights to Purchase Preferred Shares, in substantially the form
attached hereto as Exhibit C (the “Summary of Rights”),
by first-class, postage-prepaid mail, to each record holder of Common Shares as
of the Close of Business on the Record Date at the address of such holder shown
on the records of the Company or the transfer agent or registrar for the Common
Shares.  With respect to any Common Shares outstanding as of the
Record Date, and until the earliest of the Distribution Date, the Redemption
Date or the Expiration Date, (i) in the case of certificated shares, (A) the
Rights associated with the Common Shares represented by any certificate shall be
evidenced by such certificate for the Common Shares with a copy of the Summary
of Rights attached thereto and the registered holders of the Common Shares shall
also be the registered holders of the associated Rights and (B) the surrender
for transfer of any such certificate, even without a copy of the Summary of
Rights attached thereto, shall also constitute the transfer of the Rights
associated with the Common Shares represented thereby, and (ii) in the case of
Common Shares held in uncertificated form, (A) the Rights associated with the
Common Shares shall be evidenced by the balances indicated in the book-entry
account system of the transfer agent for such Common Shares and the registered
holders of the Common Shares shall also be the registered holders of the
associated Rights and (B) the transfer of any Common Shares in the book-entry
account system of the transfer agent for such Common Shares shall also
constitute the transfer of the Rights associated with such Common
Shares.

     

    (d)  In
the case of certificated Common Shares, certificates issued for Common Shares
after the Record Date (including upon transfer or exchange of outstanding Common
Shares), but prior to the earliest of the Distribution Date, the Redemption Date
or the Expiration Date, shall have printed on, written on or otherwise affixed
to them a legend in substantially the following form:

     

    This
certificate also evidences and entitles the holder hereof to certain Rights as
set forth in a Rights Agreement dated as of November 17, 2009 (as it may be
amended from time to time (the “Rights Agreement”)), between BARNES & NOBLE,
INC. (the “Company”) and MELLON INVESTOR SERVICES LLC, as Rights Agent (the
“Rights Agent”), the terms of which (including restrictions on the transfer of
such Rights) are hereby incorporated herein by reference and a copy of which is
on file at the principal executive offices of the Company.  Under
certain circumstances, as set forth in the Rights Agreement, such Rights shall
be evidenced by separate certificates and shall no longer be evidenced by this
certificate.  The Company shall mail to the holder of this certificate
a copy of the Rights Agreement without charge after receipt of a written request
therefor.  RIGHTS BENEFICIALLY OWNED BY ACQUIRING PERSONS OR THEIR
AFFILIATES OR ASSOCIATES (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND
BY ANY SUBSEQUENT HOLDER OF SUCH RIGHTS ARE NULL AND VOID AND
NONTRANSFERABLE.

     

    Notwithstanding
this Section 3(d), neither the omission of a legend nor the inclusion of a
legend that makes reference to a rights agreement other than the Rights
Agreement shall affect the enforceability of any part of this Rights Agreement
or the rights of any holder of Rights.

     

    

    
      
        
           

        

        
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    (e)  In
the case of Common Shares held in uncertificated form, the Company shall cause
the confirmation and account statements sent to holders of Common Shares in
book-entry form (including upon transfer or exchange of outstanding Common
Shares) prior to the earliest of the Distribution Date, the Redemption Date or
the Expiration Date to bear a legend in substantially the following
form:

     

    Each
share of Common Stock, par value $0.001 per share, of BARNES & NOBLE, INC.
(the “Company”) entitles the holder thereof to certain Rights as set forth in a
Rights Agreement dated as of November 17, 2009 (as it may be amended from
time to time (the “Rights Agreement”)), between the Company and MELLON INVESTOR
SERVICES LLC, as Rights Agent (the “Rights Agent”), the terms of which
(including restrictions on the transfer of such Rights) are hereby incorporated
herein by reference and a copy of which is on file at the principal executive
offices of the Company.  Under certain circumstances, as set forth in
the Rights Agreement, such Rights shall be evidenced by separate certificates
and shall no longer be evidenced by the shares to which this statement
relates.  The Company shall mail to the holder of shares to which this
statement relates a copy of the Rights Agreement without charge after receipt of
a written request therefor.  RIGHTS BENEFICIALLY OWNED BY ACQUIRING
PERSONS OR THEIR AFFILIATES OR ASSOCIATES (AS SUCH TERMS ARE DEFINED IN THE
RIGHTS AGREEMENT) AND BY ANY SUBSEQUENT HOLDER OF SUCH RIGHTS ARE NULL AND VOID
AND NONTRANSFERABLE.

     

    Notwithstanding
this Section 3(e), neither the omission of a legend nor the inclusion of a
legend that makes reference to a rights agreement other than the Rights
Agreement shall affect the enforceability of any part of this Rights Agreement
or the rights of any holder of Rights.

     

    SECTION
4.  Form of
Right Certificates.  The Right Certificates (and the form of
election to purchase and form of assignment to be printed on the reverse side
thereof) shall be in substantially the form set forth as Exhibit B hereto
and may have such marks of identification or designation and such legends,
summaries or endorsements printed thereon as the Company may deem appropriate
(but which do not affect the rights, duties or responsibilities of the Rights
Agent) and as are not inconsistent with the provisions of this Rights Agreement,
or as may be required to comply with any applicable law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Rights may from time to time be listed, or to conform to
usage.  Subject to the other provisions of this Rights Agreement
(including Sections 7, 11 and 23), the Right Certificates, whenever
issued, shall be dated as of the Distribution Date and shall entitle the holders
thereof to purchase such number of Preferred Shares as shall be set forth
therein for the Purchase Price set forth therein, subject to adjustment as
provided in this Rights Agreement.

     

    

    
      
        
           

        

        
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    SECTION
5.  Execution, Countersignature
and Registration.  (a)  The Right Certificates shall
be executed on behalf of the Company by (x) the Chairman, or any Vice
President, and by the Secretary, any Assistant Secretary, the Treasurer or any
Assistant Treasurer or (y) any two officers designated by the Board, either
manually or by facsimile signature, and may have affixed thereto the Company’s
seal or a facsimile thereof.  The Right Certificates shall be
countersigned by the Rights Agent either manually or, at the Company’s option,
by facsimile signature, and shall not be valid or obligatory for any purpose
unless so countersigned.  In the event that any officer of the Company
who shall have signed any of the Right Certificates shall cease to be such an
officer of the Company before countersignature by the Rights Agent and issuance
and delivery by the Company, such Right Certificates may nevertheless be
countersigned by the Rights Agent and issued and delivered by the Company with
the same force and effect as though the person who signed such Right
Certificates had not ceased to be such an officer of the Company; and any Right
Certificate may be signed on behalf of the Company by any person who, at the
actual date of execution of such Right Certificate, shall be a proper officer of
the Company to sign such Right Certificate, although at the date of execution of
this Rights Agreement any such person was not such an officer of the
Company.

     

    (b)  Following
the Distribution Date, the Rights Agent shall keep or cause to be kept, at its
office designated for such purpose, books for registration and transfer of the
Right Certificates issued hereunder.  Such books shall show the names
and addresses of the respective holders of the Right Certificates, the number of
Rights evidenced by each of the Right Certificates, the certificate number of
each of the Right Certificates and the date of each of the Right
Certificates.

     

    SECTION
6.  Transfer, Split-Up,
Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or
Stolen Right Certificates; Uncertificated
Rights.  (a)  Subject to Sections 7(e)
and 15, at any time after the Distribution Date, and at or prior to the
Close of Business on the earlier of the Redemption Date or the Expiration Date,
any Right Certificate or Right Certificates (other than Right Certificates
representing Rights that have become null and void pursuant to Section 7(e)) may
be transferred, split-up, combined or exchanged for another Right Certificate or
Right Certificates representing, in the aggregate, the same number of Rights as
the Right Certificate or Right Certificates surrendered then
represented.  The Right Certificates are transferable only on the
registry books of the Rights Agent.  Any registered holder desiring to
transfer, split-up, combine or exchange any Right Certificate or Right
Certificates shall make such request in writing delivered to the Rights Agent
and shall surrender the Right Certificate or Right Certificates to be
transferred, split-up, combined or exchanged at the office of the Rights Agent
designated for such purpose; provided, however, that neither
the Rights Agent nor the Company shall be obligated to take any action
whatsoever with respect to the transfer of any Right Certificate surrendered for
transfer until the registered holder shall have properly completed and duly
signed the certification contained in the form of assignment on the reverse side
of such Right Certificate and shall have provided such additional evidence of
the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates
or Associates thereof as the Company or the Rights Agent shall reasonably
request.  Thereupon the Rights Agent shall, subject to
Sections 7(e) and 15, countersign and deliver to the Person entitled
thereto a Right Certificate or Right Certificates, as the case may be, as so
requested.  The Company may require payment of a sum sufficient to
cover any tax or governmental charge that may be imposed in connection with any
transfer, split-up, combination or exchange of Right Certificates.  If
and to the extent the Company does require payment of any such taxes or charges,
the Company shall give the Rights Agent prompt written notice thereof and the
Rights Agent shall not deliver any Right Certificate unless and until it is
satisfied that all such payments have been made, and the Rights Agent shall
promptly forward any such sum collected by it to the Company or to such Persons
as the Company may specify by written notice.

     

    

    
      
        
           

        

        
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    (b)  Upon
receipt by the Company and the Rights Agent of evidence reasonably satisfactory
to them of the loss, theft, destruction or mutilation of a valid Right
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company’s request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancelation of
the Right Certificate if mutilated, the Company shall execute a new Right
Certificate of like tenor and deliver such new Right Certificate to the Rights
Agent for countersignature and delivery to the registered owner in lieu of the
Right Certificate so lost, stolen, destroyed or mutilated.

     

    (c)  Notwithstanding
any other provision hereof, the Company and the Rights Agent may amend this
Rights Agreement to provide for uncertificated Rights in addition to or in place
of Rights evidenced by Right Certificates.

     

    SECTION
7.  Exercise
of Rights; Expiration Date of Rights.  (a)  Subject
to the other provisions of this Rights Agreement (including Section 7(e)
and Section 11), each Right shall entitle the registered holder thereof,
upon exercise thereof as provided in this Rights Agreement, to purchase for the
Purchase Price, at any time after the Distribution Date and at or prior to the
earlier of (i) the Expiration Date and (ii) the Redemption Date,
one one-thousandth (1/1,000th) of a Preferred Share, subject to adjustment
as provided in this Rights Agreement.

     

    (b)  Subject
to the other provisions of this Rights Agreement (including Section 7(e)),
the registered holder of any Right Certificate may exercise the Rights evidenced
thereby (except as otherwise provided in this Rights Agreement) in whole or in
part at any time after the Distribution Date, upon surrender of the Right
Certificate, with the form of election to purchase on the reverse side thereof
properly completed and duly executed, to the Rights Agent at the office of the
Rights Agent designated for such purpose, together with payment of the Purchase
Price for each one one-thousandth (1/1,000th) of a Preferred Share (as such
fraction may be adjusted as provided in this Rights Agreement) as to which the
Rights are exercised, at or prior to the earlier of (i) the Expiration Date
and (ii) the Redemption Date.

     

    (c)  Subject
to the other provisions of this Rights Agreement (including Section 7(e)),
upon receipt of a Right Certificate representing exercisable Rights, with the
form of election to purchase properly completed and duly executed, accompanied
by payment of the Purchase Price for the Preferred Shares to be purchased
together with an amount equal to any applicable transfer tax, in lawful money of
the United States of America, in cash or by certified check or money order
payable to the order of the Company, the Rights Agent shall thereupon promptly
(i) either (A) requisition from any transfer agent of the Preferred
Shares (or make available, if the Rights Agent is the transfer agent for such
shares) certificates for the total number of Preferred Shares to be purchased
and the Company hereby irrevocably authorizes its transfer agent to comply with
all such requests or (B) if the Company shall have elected to deposit the
Preferred Shares with a depositary agent under a depositary arrangement,
requisition from the depositary agent depositary receipts representing the
number of one one-thousandths (1/1,000ths) of a Preferred Share (as such
fraction may be adjusted as provided in this Rights Agreement) to be purchased
(in which case certificates for the Preferred Shares to be represented by such
receipts shall be deposited by the transfer agent with the depositary agent) and
the Company shall direct the depositary agent to comply with all such requests,
(ii) when necessary to comply with this Rights Agreement (or otherwise when
appropriate, as determined by the Company with notice to the Rights Agent),
requisition from the Company the amount of cash, if any, to be paid in lieu of
issuance of fractional shares in accordance with Section 15,
(iii) after receipt of such certificates or depositary receipts, cause the
same to be delivered to or, upon the order of the registered holder of such
Right Certificate, registered in such name or names as may be designated by such
holder and (iv) when necessary to comply with this Rights Agreement (or
otherwise when appropriate, as determined by the Company with notice to the
Rights Agent), after receipt thereof, deliver such cash, if any, to or upon the
order of the registered holder of such Right Certificate.

     

    

    
      
        
           

        

        
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    (d)  In
case the registered holder of any Right Certificate shall exercise fewer than
all the Rights evidenced thereby, a new Right Certificate evidencing Rights
equivalent to the Rights remaining unexercised shall be issued by the Rights
Agent and delivered to the registered holder of such Right Certificate or to
such holder’s duly authorized assigns, subject to the provisions of
Section 15.

     

    (e)  Notwithstanding
anything in this Rights Agreement to the contrary, any Rights that are at any
time beneficially owned by (i) an Acquiring Person or an Affiliate or
Associate of an Acquiring Person, (ii) a transferee of an Acquiring Person
(or of any Associate or Affiliate of such Acquiring Person) who becomes a
transferee after the Acquiring Person becomes such (a “Post Transferee”),
(iii) a transferee of an Acquiring Person (or of any Associate or Affiliate
of such Acquiring Person) who becomes a transferee prior to or concurrently with
the Acquiring Person becoming such and receives such Rights pursuant to either
(A) a transfer (whether or not for consideration) from the Acquiring Person
(or from such Affiliate or Associate) to holders of equity interests in such
Acquiring Person or to any Person with whom the Acquiring Person (or such
Affiliate or Associate) has any continuing agreement, arrangement or
understanding regarding the transferred Rights or (B) a transfer which the
Board has determined is part of a plan, arrangement or understanding which has
as a primary purpose or effect the avoidance of this Section 7(e) (a “Prior Transferee”),
or (iv) any subsequent transferee receiving transferred Rights from a Post
Transferee or a Prior Transferee, either directly or through one or more
intermediate transferees, shall become null and void without any further action
and no holder of such Rights shall have any rights whatsoever with respect to
such Rights, whether under any provision of this Rights Agreement or
otherwise.  The Company shall use all reasonable efforts to ensure
that the provisions of this Section 7(e) are complied with, but shall have
no liability to any holder of any Right Certificate or any other Person as a
result of its failure to make any determinations with respect to an Acquiring
Person or its Affiliate or Associate, or any transferee thereof,
hereunder.  The Company shall give the Rights Agent written notice of
the identity of any Acquiring Person, Associate or Affiliate known to it, or the
nominee of any of the foregoing, and the Rights Agent may rely on such notice in
carrying out its duties under this Agreement and shall be deemed not to have any
knowledge of the identity of any such Acquiring Person, Associate or Affiliate,
or the nominee of any of the foregoing unless and until it shall have received
such notice.

     

     

     

    

    
      
        
           

        

        
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    (f) 
Notwithstanding anything in this Rights Agreement to the contrary, neither the
Rights Agent nor the Company shall be obligated to undertake any action with
respect to a registered holder of any Right Certificates upon the occurrence of
any purported exercise as set forth in this Section 7 unless such
registered holder shall have (i) properly completed and duly signed the
certificate contained in the form of election to purchase set forth on the
reverse side of the Right Certificate surrendered for such exercise and
(ii) provided such additional evidence of the identity of the Beneficial
Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the
Company shall reasonably request.

     

    SECTION
8.  Cancelation and Destruction
of Right Certificates.  All Right Certificates surrendered or
presented for the purpose of exercise, transfer, split-up, combination or
exchange shall, and any Right Certificate representing Rights that have become
null and void and nontransferable pursuant to Section 7(e) surrendered or
presented for any purpose shall, if surrendered or presented to the Company or
to any of its agents, be delivered to the Rights Agent for cancelation or in
canceled form, or, if surrendered or presented to the Rights Agent, shall be
canceled by it, and no Right Certificates shall be issued in lieu thereof except
as expressly permitted by this Rights Agreement.  The Company shall
deliver to the Rights Agent for cancelation and retirement, and the Rights Agent
shall so cancel and retire, any Right Certificate purchased or acquired by the
Company.  The Rights Agent shall deliver all canceled Right
Certificates to the Company, or shall, at the written request of the Company,
destroy such canceled Right Certificates, and in such case shall deliver a
certificate of destruction thereof to the Company.

     

    SECTION
9.  Reservation and Availability
of Preferred Shares.  (a)  The Company shall cause to
be reserved and kept available out of its authorized and unissued Preferred
Shares or any authorized and issued Preferred Shares held in its treasury, free
from preemptive rights or any right of first refusal, a number of Preferred
Shares sufficient to permit the exercise in full of all outstanding
Rights.

     

    (b)  If
there are not sufficient Preferred Shares issued but not outstanding or
authorized but unissued to permit the exercise or exchange of Rights in
accordance with this Rights Agreement, the Company shall take all such action as
may be necessary to authorize additional Preferred Shares for issuance upon the
exercise or exchange of Rights pursuant to this Rights Agreement; provided, however, that if the
Company is unable to cause the authorization of additional Preferred Shares,
then the Company shall, or, if action by the Company’s stockholders is necessary
to cause such authorization, in lieu of seeking any such authorization, the
Company may, to the extent necessary and permitted by applicable law and any
agreements or instruments in effect prior to the Distribution Date to which it
is a party, (i) upon surrender of a Right, pay cash equal to the Purchase
Price in lieu of issuing Preferred Shares and requiring payment therefor,
(ii) upon due exercise of a Right and payment of the Purchase Price for
each Preferred Share as to which such Right is exercised, issue common stock or
other equity and/or debt securities having a value equal to the value of the
Preferred Shares that otherwise would have been issuable pursuant to this Rights
Agreement, which value shall be determined by a nationally recognized investment
banking firm selected by the Board, or (iii) upon due exercise of a Right
and payment of the Purchase Price for each Preferred Share as to which such
Right is exercised, distribute a combination of Preferred Shares, cash and/or
other equity and/or debt securities having an aggregate value equal to the value
of the Preferred Shares that otherwise would have been issuable pursuant to this
Rights Agreement, which value shall be determined by a nationally recognized
investment banking firm selected by the Board.  To the extent that any
legal or contractual restrictions (pursuant to agreements or instruments in
effect prior to the Distribution Date to which it is party) prevent the Company
from paying the full amount payable in accordance with the foregoing sentence,
the Company shall pay to holders of the Rights as to which such payments are
being made all amounts that are not then restricted on a pro rata basis as such
payments become permissible under such legal or contractual restrictions until
such payments have been paid in full.

     

    

    
      
        
           

        

        
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    (c)  The
Company shall take all actions as may be necessary to ensure that all Preferred
Shares delivered upon exercise or exchange of Rights shall, at the time of
delivery of the certificates for such Preferred Shares (subject to payment of
the Purchase Price), be duly and validly authorized and issued and fully paid
and nonassessable shares.

     

    (d)  The
Company shall pay when due and payable any and all Federal and state transfer
taxes and charges which may be payable in respect of the issuance or delivery of
Right Certificates or of any Preferred Shares or Common Shares or other
securities upon the exercise or exchange of the Rights.  The Company
shall not, however, be required to pay any transfer tax which may be payable in
respect of any transfer or delivery of Right Certificates to a Person other
than, or in respect of the issuance or delivery of certificates or depositary
receipts for the Preferred Shares or Common Shares or other securities, as the
case may be, in a name other than that of, the registered holder of the Right
Certificate evidencing Rights surrendered for exercise or exchange or to issue
or deliver any certificates or depositary receipts for Preferred Shares or
Common Shares or other securities, as the case may be, upon the exercise or
exchange of any Rights until any such tax shall have been paid (any such tax
being payable by the holder of such Right Certificate at the time of surrender)
or until it has been established to the Company’s satisfaction that no such tax
is due.

     

     

     

    

    
      
        
           

        

        
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    SECTION 10.  Preferred
Shares Record Date.  Each Person in whose name any
certificate for Preferred Shares or Common Shares or other securities is issued
upon the exercise or exchange of Rights shall for all purposes be deemed to have
become the holder of record of the Preferred Shares or Common Shares or other
securities, as the case may be, represented thereby on, and such certificate
shall be dated, the date on which the Right Certificate evidencing such Rights
was duly surrendered and payment of any Purchase Price (and any applicable
transfer taxes) was made; provided, however, that, if the
date of such surrender and payment is a date upon which the transfer books of
the Company for the Preferred Shares or Common Shares or other securities, as
the case may be, are closed, such Person shall be deemed to have become the
record holder of such Preferred Shares or Common Shares or other securities, as
the case may be, on, and such certificate shall be dated, the next succeeding
Business Day on which the transfer books of the Company for the Preferred Shares
or Common Shares or other securities, as the case may be, are open.

     

    SECTION
11.  Adjustments in Rights After
There Is an Acquiring Person; Exchange of Rights for Shares; Business
Combinations.  (a)  Subject to the other provisions
of this Rights Agreement (including the definition of Acquired Person and
Section 7(e)), upon a Person becoming an Acquiring Person, each holder of a
Right shall thereafter have a right to receive, upon exercise thereof for the
Purchase Price in accordance with the terms of this Rights Agreement, such
number of one one-thousandths (1/1,000ths) of a Preferred Share (as such
fraction may be adjusted as provided in this Rights Agreement) as shall equal
the result obtained by multiplying the Purchase Price by a fraction, the
numerator of which is the number of one one-thousandths (1/1,000ths) of a
Preferred Share (as such fraction may be adjusted as provided in this Rights
Agreement) for which such Right is then exercisable and the denominator of which
is 50% of the Market Value of the Common Shares on the date on which such Person
became an Acquiring Person.

     

    (b)  (i)  The
Board may, at its option, at any time after a Person becomes an Acquiring
Person, mandatorily exchange all or part of the then outstanding and exercisable
Rights (which shall not include Rights that shall have become null and void and
nontransferable pursuant to Section 7(e)) for consideration per Right
consisting of either (A) one-half of the securities that would be issuable
at such time upon the exercise of one Right in accordance with
Section 11(a) or, if applicable, Section 9(b)(ii) or 9(b)(iii) or
(B) if applicable, the cash consideration specified in Section 9(b)(i) (the
consideration issuable per Right pursuant to this Section 11(b)(i) being
the “Exchange
Consideration”), provided that the Board shall, subject to applicable
law, elect to exchange all the Rights for Exchange Consideration (payable in the
form of Common Shares) if and to the extent necessary to avoid any default under
any agreements or instruments in effect prior to the Distribution
Date.  The Board may, at its option, issue a number of Common Shares
in lieu of each Preferred Share equal to the Formula Number (as defined in the
Certificate of Designation) if there are sufficient Common Shares issued but not
outstanding or authorized but unissued.  If the Board elects to
exchange all the Rights for Exchange Consideration pursuant to this
Section 11(b)(i) prior to the physical distribution of the Right
Certificates, the Company may distribute the Exchange Consideration in lieu of
distributing Right Certificates, in which case for purposes of this Rights
Agreement holders of Rights shall be deemed to have simultaneously received and
surrendered for exchange Right Certificates on the date of such
distribution.  Notwithstanding the foregoing, the Board may not effect
such exchange at any time after any Person (other than the Company, any
Subsidiary of the Company or any employee benefit plan of the Company or any of
its Subsidiaries or any Person holding Common Shares for or pursuant to the
terms of any such employee benefit or compensation plan), together with all
Affiliates and Associates of such Person, becomes the Beneficial Owner of more
than 50% of the Common Shares then outstanding.

     

    

    
      
        
           

        

        
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    (ii)  Any
action of the Board ordering the exchange of any Rights pursuant to
Section 11(b)(i) shall be irrevocable and, immediately upon the taking of
such action and without any further action and without any notice, the right to
exercise any such Right so exchanged pursuant to Section 11(a) shall
terminate and the only right thereafter of a holder of such Right shall be to
receive the Exchange Consideration in exchange for each such Right held by such
holder or, if the Exchange Consideration shall not have been paid or issued, to
exercise any such Right pursuant to Section 11(c)(i).  The
Company shall promptly give public notice of any such exchange (with prompt
written notice thereof to the Rights Agent); provided, however, that the
failure to give, or any defect in, such notice shall not affect the validity of
such exchange.  The Company shall promptly mail a notice of any such
exchange to all holders of the Rights to be exchanged at their last addresses as
they appear upon the registry books of the Rights Agent.  Any notice
which is mailed in the manner herein provided shall be deemed given, whether or
not the holder receives the notice.  Each such notice of exchange
shall state the method by which the exchange of the Rights for the Exchange
Consideration will be effected and, in the event of any partial exchange, the
number of Rights which will be exchanged.  Any partial exchange shall
be effected pro rata based on the number of Rights (other than Rights which
shall have become null and void and nontransferable pursuant to the provisions
of Section 7(e)) held by each holder of Rights.

     

    (c)  (i)  In
the event that, directly or indirectly, any transactions specified in the
following clause (A), (B) or (C) of this Section 11(c)(i) (each
such transaction being a “Business
Combination”) shall be consummated:

     

    (A)  the
Company shall consolidate with, or merge with and into, any Acquiring Person or
any Affiliate or Associate of an Acquiring Person;

     

    (B)  any
Acquiring Person or any Affiliate or Associate of an Acquiring Person shall
merge with and into the Company and, in connection with such merger, all or part
of the outstanding Common Shares of the Company shall be changed into or
exchanged for capital stock or other securities of the Company or of any
Acquiring Person or Affiliate or Associate of an Acquiring Person or cash or any
other property; or

     

    

    
      
        
           

        

        
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    (C)  the
Company shall sell, lease, exchange or otherwise transfer or dispose of (or one
or more of its Subsidiaries shall sell, lease, exchange or otherwise transfer or
dispose of), in one or more transactions, the Major Part of the assets of the
Company and its Subsidiaries to any Acquiring Person or any Affiliate or
Associate of an Acquiring Person,

     

    then, in
each such case, proper provision shall be made so that each holder of a Right,
except as provided in Section 7(e), shall thereafter have the right to
receive, upon the exercise thereof for the Purchase Price in accordance with the
terms of this Rights Agreement, the securities specified below (or, at such
holder’s option, the securities specified in Section 11(a) if the Company
is the surviving corporation in such Business Combination):

     

    (1)  if
the Principal Party in such Business Combination has Registered Common Shares
outstanding, each Right shall thereafter represent the right to receive, upon
the exercise thereof for the Purchase Price in accordance with the terms of this
Rights Agreement, such number of Registered Common Shares of such Principal
Party, free and clear of all liens, encumbrances or other adverse claims, as
shall have an aggregate Market Value as of the time of exercise thereof equal to
the result obtained by multiplying the Purchase Price by two;

     

    (2)  if
the Principal Party involved in such Business Combination does not have
Registered Common Shares outstanding, each Right shall thereafter represent the
right to receive, upon the exercise thereof for the Purchase Price in accordance
with the terms of this Rights Agreement, at the election of the holder of such
Right at the time of the exercise thereof, any of:

     

    (i)  such
number of Common Shares of the Surviving Person in such Business Combination (if
the Principal Party is also the Surviving Person in such Business Combination)
as shall have an aggregate Book Value immediately after giving effect to such
Business Combination equal to the result obtained by multiplying the Purchase
Price by two;

     

    (ii)  such
number of Common Shares of the Principal Party in such Business Combination (if
the Principal Party is not also the Surviving Person in such Business
Combination) as shall have an aggregate Book Value immediately after giving
effect to such Business Combination equal to the result obtained by multiplying
the Purchase Price by two; or

     

    (iii)  if
the Principal Party in such Business Combination is an Affiliate of one or more
Persons that has Registered Common Shares outstanding, such number of Registered
Common Shares of whichever of such Affiliates of the Principal Party has
Registered Common Shares with the greatest aggregate Market Value on the date of
consummation of such Business Combination as shall have an aggregate Market
Value on the date of such Business Combination equal to the result obtained by
multiplying the Purchase Price by two.

     

    

    
      
        
           

        

        
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    (ii)  The
Company shall not consummate any Business Combination unless each issuer of
Common Shares for which Rights may be exercised, as set forth in this
Section 11(c), shall have sufficient authorized Common Shares that have not
been issued or reserved for issuance (and which shall, when issued upon exercise
thereof in accordance with this Rights Agreement, be validly issued, fully paid
and nonassessable and free of preemptive rights, rights of first refusal or any
other restrictions or limitations on the transfer or ownership thereof) to
permit the exercise in full of the Rights in accordance with this
Section 11(c) and unless prior thereto:

     

    (A)  a
registration statement under the Securities Act on an appropriate form, with
respect to the Rights and the Common Shares of such issuer purchasable upon
exercise of the Rights, shall be effective under the Securities Act;
and

     

    (B)  the
Company and each such issuer shall have:

     

    (1)  executed
and delivered to the Rights Agent a supplemental agreement providing for the
assumption by such issuer of the obligations set forth in this
Section 11(c) (including the obligation of such issuer to issue Common
Shares upon the exercise of Rights in accordance with the terms set forth in
Sections 11(c)(i) and 11(c)(iii)) and further providing that such
issuer, at its own expense, shall use its best efforts to:

     

    (i)  cause
a registration statement under the Securities Act on an appropriate form, with
respect to the Rights and the Common Shares of such issuer purchasable upon
exercise of the Rights, to remain effective (with a prospectus at all times
meeting the requirements of the Securities Act) until the Expiration
Date;

     

    (ii)  qualify
or register the Rights and the Common Shares of such issuer purchasable upon
exercise of the Rights under the blue sky or securities laws of such
jurisdictions as may be necessary or appropriate; and

     

    (iii)  list
the Rights and the Common Shares of such issuer purchasable upon exercise of the
Rights on each national securities exchange on which the Common Shares were
listed prior to the consummation of the Business Combination or, if the Common
Shares were not listed on a national securities exchange prior to the
consummation of the Business Combination, on a national securities
exchange;

     

    

    
      
        
           

        

        
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    (2)  furnished
to the Rights Agent a written opinion of independent counsel stating that such
supplemental agreement is a valid, binding and enforceable agreement of such
issuer; and

     

    (3)  filed
with the Rights Agent a certificate of a nationally recognized firm of
independent accountants setting forth the number of Common Shares of such issuer
that may be purchased upon the exercise of each Right after the consummation of
such Business Combination.

     

    (iii)  After
consummation of any Business Combination and subject to the provisions of
Section 11(c)(ii), (A) each issuer of Common Shares for which Rights
may be exercised as set forth in this Section 11(c) shall be liable for,
and shall assume, by virtue of such Business Combination, all the obligations
and duties of the Company pursuant to this Rights Agreement, (B) the term
“Company” shall
thereafter be deemed to refer to such issuer, (C) each such issuer shall
take such steps in connection with such consummation as may be necessary to
assure that the provisions of this Rights Agreement (including
Sections 11(a) and 11(c)) shall thereafter be applicable, as nearly as
reasonably may be, in relation to its Common Shares thereafter deliverable upon
the exercise of the Rights, (D) the number of Common Shares of each such
issuer thereafter receivable upon exercise of any Right shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions of Sections 11 and 12 and (E) the
other provisions of this Rights Agreement (including Sections 7, 9
and 10) with respect to the Preferred Shares shall apply, as nearly as
reasonably may be, on like terms to any such Common Shares.

     

    SECTION
12.  Certain
Adjustments.  (a)  To preserve the actual or
potential economic value of the Rights, if at any time after the date of this
Rights Agreement there shall be any change in the Common Shares or the Preferred
Shares, whether by reason of stock dividends, stock splits, reclassifications,
recapitalizations, mergers, consolidations, combinations or exchanges of
securities, split-ups, split-offs, spin-offs, liquidations, other similar
changes in capitalization, any distribution or issuance of cash, assets,
evidences of indebtedness or subscription rights, options or warrants to holders
of Common Shares, or Preferred Shares, as the case may be (other than
distribution of the Rights or regular quarterly cash dividends), or otherwise,
then, in each such event the Board shall make such appropriate adjustments in
the number of Preferred Shares (or the number and kind of other securities)
issuable upon exercise of each Right, the Purchase Price and Redemption Price in
effect at such time and the number of Rights outstanding at such time (including
the number of Rights or fractional Rights associated with each Common Share)
such that following such adjustment such event shall not have had the effect of
reducing or limiting the benefits the holders of the Rights would have had
absent such event.

     

    

    
      
        
           

        

        
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    (b)  If,
as a result of an adjustment made pursuant to Section 12(a), the holder of
any Right thereafter exercised shall become entitled to receive any securities
other than Preferred Shares, thereafter the number of such securities so
receivable upon exercise of any Right shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to the
provisions of Sections 11 and 12 and the other provisions of this
Rights Agreement (including Sections 7, 9 and 10) with respect to the
Preferred Shares shall apply, as nearly as reasonably may be, on like terms to
any such other securities.

     

    (c)  All
Rights originally issued by the Company subsequent to any adjustment made to the
amount of Preferred Shares or other securities relating to a Right shall
evidence the right to purchase, for the Purchase Price, the adjusted number and
kind of securities purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided in this Rights
Agreement.

     

    (d)  Irrespective
of any adjustment or change in the Purchase Price or the number of Preferred
Shares or number or kind of other securities issuable upon the exercise of the
Rights, the Right Certificates theretofore and thereafter issued may continue to
express the terms that were expressed in the initial Right Certificates issued
hereunder.

     

    (e)  In
any case in which action taken pursuant to Section 12(a) requires that an
adjustment be made effective as of a record date for a specified event, the
Company may elect to defer (with prompt written notice thereof to the Rights
Agent) until the occurrence of such event the issuing to the holder of any Right
exercised after such record date the Preferred Shares and/or other securities,
if any, issuable upon such exercise over and above the Preferred Shares and/or
other securities, if any, issuable before giving effect to such adjustment;
provided, however, that the
Company shall deliver to such holder a due bill or other appropriate instrument
evidencing such holder’s right to receive such additional securities upon the
occurrence of the event requiring such adjustment.

     

    SECTION
13.  Certificate of
Adjustment.  Whenever an adjustment is made or any event occurs
affecting the Rights or their exercisability (including an event which causes
the Rights to become null and void) as provided in Section 11 or 12,
the Company shall (a) promptly prepare a certificate setting forth such
adjustment or describing such event and a brief, reasonably detailed statement
of the facts, computations and methodology accounting for such adjustment,
(b) promptly file with the Rights Agent and with each transfer agent for
the Preferred Shares, a copy of such certificate and (c) mail a brief
summary thereof to each holder of a Right Certificate (or, if prior to the
Distribution Date, to each holder of Common Shares) in accordance with
Section 25, provided that the failure to prepare, file or mail such
certificate or summary shall not affect the validity of such
adjustment.  The Rights Agent shall be fully protected in relying on
any such certificate and on any adjustment or statement therein contained and,
subject to Section 21(c) shall have no duty or liability with respect to, and
shall not be deemed to have knowledge of, any adjustment or any such event
unless it shall have received such a certificate.

     

    

    
      
        
           

        

        
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    SECTION
14.  Additional
Covenants.  (a)  Notwithstanding any other provision
of this Rights Agreement, no adjustment to the number of Preferred Shares (or
fractions of a share) or other securities for which a Right is exercisable or
the number of Rights outstanding or associated with each Common Share or any
similar or other adjustment shall be made or be effective if such adjustment
would have the effect of reducing or limiting the benefits the holders of the
Rights would have had absent such adjustment, including the benefits under
Sections 11 and 12, unless the terms of this Rights Agreement are amended so as
to preserve such benefits.

     

    (b)  The
Company covenants and agrees that, after the Distribution Date, except as
permitted by Section 26, it shall not take (or permit any Subsidiary of the
Company to take) any action if at the time such action is taken it is intended
or reasonably foreseeable that such action will reduce or otherwise limit the
benefits the holders of Rights would have had absent such action, including the
benefits under Sections 11 and 12.  Any action taken by the
Company during any period after any Person becomes an Acquiring Person but prior
to the Distribution Date shall be null and void unless such action could be
taken under this Section 14(b) from and after the Distribution
Date.  The Company shall not consummate any Business Combination if
any issuer of Common Shares for which Rights may be exercised after such
Business Combination in accordance with Section 11(c) shall have taken any
action that reduces or otherwise limits the benefits the holders of Rights would
have had absent such action, including the benefits under Sections 11
and 12.

     

    SECTION
15.  Fractional Rights and
Fractional Shares.  (a)  The Company may, but shall
not be required to, issue fractions of Rights or distribute Right Certificates
which evidence fractional Rights.  In lieu of such fractional Rights,
the Company may pay to the registered holders of the Right Certificates with
regard to which such fractional Rights would otherwise be issuable an amount in
cash equal to the same fraction of the current market value of a whole
Right.  For purposes of this Section 15(a), the current market
value of a whole Right shall be the closing price of the Rights (as determined
pursuant to the second sentence of the definition of Market Value contained in
Section 1) for the Trading Day immediately prior to the date on which such
fractional Rights would have been otherwise issuable.

     

    (b)  The
Company may, but shall not be required to, issue fractions of Preferred Shares
upon exercise of the Rights or distribute certificates that evidence fractional
Preferred Shares.  In lieu of fractional Preferred Shares, the Company
may elect to (i) utilize a depository arrangement as provided by the terms
of the Preferred Shares or (ii) in the case of a fraction of a Preferred
Share (other than one one-thousandths (1/1,000ths) of a Preferred Share (as
such fraction may adjusted as provided in this Rights Agreement) or any integral
multiple thereof), pay to the registered holders of Right Certificates at the
time such Rights are exercised as herein provided an amount in cash equal to the
same fraction of the current market value of one Preferred Share, if any are
outstanding and publicly traded (or the same fraction of the current market
value of one Common Share times the Formula Number (as defined in the
Certificate of Designation) if the Preferred Shares are not outstanding and
publicly traded).  For purposes of this Section 15(b), the
current market value of a Preferred Share (or Common Share) shall be the closing
price of a Preferred Share (or Common Share) (as determined pursuant to the
second sentence of the definition of Market Value contained in Section 1)
for the Trading Day immediately prior to the date of such
exercise.  If, as a result of an adjustment made pursuant to
Section 12(a), the holder of any Right thereafter exercised shall become
entitled to receive any securities other than Preferred Shares, the provisions
of this Section 15(b) shall apply, as nearly as reasonably practicable, on
like terms to such other securities.

     

    

    
      
        
           

        

        
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    (c)  The
Company may, but shall not be required to, issue fractions of Common Shares upon
exchange of Rights pursuant to Section 11(b), or to distribute certificates
that evidence fractional Common Shares.  In lieu of such fractional
Common Shares, the Company may pay to the registered holders of the Right
Certificates with regard to which such fractional Common Shares would otherwise
be issuable an amount in cash equal to the same fraction of the current Market
Value of one Common Share as of the date on which a Person became an Acquiring
Person.

     

    (d)  Each
holder of Rights by the acceptance of such Rights expressly waives such holder’s
right to receive any fractional Rights or any fractional shares upon exercise of
a Right except as provided in this Section 15.

     

    (e)  Whenever
a payment for fractional Rights or fractional shares is to be made by the Rights
Agent, the Company shall (i) promptly prepare and deliver to the Rights Agent a
certificate setting forth in reasonable detail the facts related to such
payments and the prices and/or formulas utilized in calculating such payments,
and (ii) provide sufficient monies to the Rights Agent in the form of fully
collected funds to make such payments.  The Rights Agent shall be
fully protected in relying upon such a certificate and shall have no duty with
respect to, and shall not be deemed to have knowledge of any payment for
fractional Rights or fractional shares under any Section of this Agreement
relating to the payment of fractional Rights or fractional shares unless and
until the Rights Agent shall have received such a certificate and sufficient
monies.

     

    SECTION
16.  Rights
of Action.  (a)  All rights of action in respect of
this Rights Agreement, excepting the rights of action given to the Rights Agent
under Sections 19 and 21, are vested in the respective registered holders of the
Right Certificates (and, prior to the Distribution Date, the registered holders
of the Common Shares); and any registered holder of any Right Certificate (or,
prior to the Distribution Date, of the Common Shares), without the consent of
the Rights Agent or of the holder of any other Right Certificate (or, prior to
the Distribution Date, of the Common Shares) may, in such holder’s own behalf
and for such holder’s own benefit, enforce, and may institute and maintain any
suit, action or proceeding against the Company to enforce, or otherwise act in
respect of, such holder’s right to exercise the Rights evidenced by such Right
Certificate in the manner provided in such Right Certificate and in this Rights
Agreement.  Without limiting the foregoing or any remedies available
to the holders of Rights, it is specifically acknowledged that the holders of
Rights would not have an adequate remedy at law for any breach of this Rights
Agreement and shall be entitled to specific performance of the obligations of
any Person under, and injunctive relief against actual or threatened violations
of the obligations of any Person subject to, this Rights
Agreement.  Notwithstanding anything in this Rights Agreement to the
contrary, neither the Company nor the Rights Agent shall have any liability to
any holder of a Right or other Person as a result of its inability to perform
any of its obligations under this Rights Agreement by reason of any preliminary
or permanent injunction or other order, judgment decree or ruling (whether
interlocutory or final) issued by a court of competent jurisdiction or by a
governmental, regulatory, self-regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order promulgated or
enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligation; provided, however, the Company
must use reasonable efforts to have any such injunction, order, judgment, decree
or ruling lifted or otherwise overturned as soon as possible.

     

    

    
      
        
           

        

        
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    (b)  Any
holder of Rights who prevails in an action to enforce the provisions of this
Rights Agreement shall be entitled to recover the reasonable costs and expenses,
including attorneys’ fees, incurred in such action.

     

    SECTION
17.  Transfer and Ownership of
Rights and Right Certificates.  (a)  Prior to the
Distribution Date, the Rights shall be transferable only in connection with the
transfer of the Common Shares and the Right associated with each such Common
Share shall be automatically transferred upon the transfer of each such Common
Share.

     

    (b)  After
the Distribution Date, the Right Certificates shall be transferable, subject to
Section 7(e), only on the registry books of the Rights Agent if surrendered
at the principal office of the Rights Agent, duly endorsed or accompanied by a
proper instrument of transfer and with the appropriate forms and certificates
properly completed and duly executed.

     

    (c)  The
Company and the Rights Agent may deem and treat the Person in whose name a Right
Certificate (or, prior to the Distribution Date, the associated Common Shares
certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on the
Right Certificates or the associated certificate for Common Shares made by
anyone other than the Company or the Rights Agent) for all purposes whatsoever,
and neither the Company nor the Rights Agent shall be affected by any notice to
the contrary.

     

    SECTION
18.  Right
Certificate Holder Not Deemed a Stockholder.  No holder, as
such, of any Right Certificate shall be entitled to vote or receive dividends or
other distributions or be deemed, for any purpose, the holder of the Preferred
Shares or of any other securities of the Company which may at any time be
issuable on the exercise of the Rights represented thereby, nor shall anything
contained herein or in any Right Certificate be construed to confer upon the
holder of any Right Certificate, as such, any of the rights of a stockholder of
the Company, including any right to vote for the election of directors or upon
any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action, or to receive notice of meetings or
other actions affecting stockholders, or to receive dividends or other
distributions or subscription rights, or otherwise, until the Right or Rights
evidenced by such Right Certificate shall have been exercised in accordance with
the provisions hereof.

     

    

    
      
        
           

        

        
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    SECTION
19.  Concerning the Rights
Agent.  (a)  The Company agrees to pay to the Rights
Agent reasonable compensation for all services rendered by it hereunder and,
from time to time, on demand of the Rights Agent, its reasonable expenses and
counsel fees and other disbursements incurred in the preparation, negotiation,
delivery, amendment, administration and execution of this Rights Agreement and
the exercise and performance of its duties hereunder, including any taxes or
governmental charges imposed as a result of the action taken by it hereunder
(other than any taxes on the fees payable to it). The provisions of this Section
19 and Section 21 below shall survive the termination of this Agreement, the
exercise or expiration of the Rights and the resignation, replacement or removal
of the Rights Agent.

     

    (b)  The
Rights Agent shall be protected and shall incur no liability for or in respect
of any action taken, suffered or omitted by it in connection with its acceptance
and administration of this Rights Agreement and the exercise and performance of
its duties hereunder (other than matters arising out of or resulting from a
conflict of interest of the Rights Agent or other business interests of the
Rights Agent) in reliance upon any Right Certificate or certificate for the
Common Shares, or for other securities of the Company, instrument of assignment
or transfer, power of attorney, endorsement, affidavit, letter, notice,
direction, consent, certificate, statement, or other paper or document believed
by it to be genuine and to be signed, executed and, where necessary, verified or
acknowledged, by the proper Person or Persons, or upon the written advice or
opinion of counsel as set forth in Section 21.  The Rights Agent shall
not be deemed to have knowledge of any event of which it was supposed to receive
notice thereof hereunder and, subject to Section 21(c), the Rights Agent shall
be fully protected and incur no liability for failing to take action in
connection therewith unless and until it has received such notice in
writing.

     

    SECTION
20.  Merger
or Consolidation or Change of Rights Agent.

     

    (a)  Any
Person into which the Rights Agent or any successor Rights Agent may be merged
or with which it may be consolidated, or any Person resulting from any merger or
consolidation to which the Rights Agent or any successor Rights Agent shall be a
party, or any Person succeeding to the shareholder services or stock transfer or
corporate trust business of the Rights Agent or any successor Rights Agent,
shall be the successor to the Rights Agent under this Rights Agreement without
the execution or filing of any paper or any further act on the part of any of
the parties hereto; provided, however, that such
Person would be eligible for appointment as a successor Rights Agent under the
provisions of Section 22.  In case, at the time such successor
Rights Agent shall succeed to the agency created by this Rights Agreement, any
of the Right Certificates shall have been countersigned but not delivered, any
such successor Rights Agent may adopt the countersignature of the predecessor
Rights Agent and deliver such Right Certificates so countersigned; and, in case
at that time any of the Right Certificates shall not have been countersigned,
any successor Rights Agent may countersign such Right Certificates either in the
name of the predecessor Rights Agent or in the name of the successor Rights
Agent; and in all such cases such Right Certificates shall have the full force
provided in the Right Certificates and in this Rights Agreement.

     

    

    
      
        
           

        

        
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    (b)  In
case at any time the name of the Rights Agent shall be changed and at such time
any of the Right Certificates shall have been countersigned but not delivered,
the Rights Agent may adopt the countersignature under its prior name and deliver
Right Certificates so countersigned; and, in case at that time any of the Right
Certificates shall not have been countersigned, the Rights Agent may countersign
such Right Certificates either in its prior name or in its changed name; and in
all such cases such Right Certificates shall have the full force provided in the
Right Certificates and in this Rights Agreement.

     

    SECTION
21.  Duties
of Rights Agent.  The Rights Agent undertakes to perform only
the duties and obligations expressly imposed by this Rights Agreement (and no
implied duties) upon the following terms and conditions, by all of which the
Company and the holders of Right Certificates (or, prior to the Distribution
Date, of the Common Shares), by their acceptance thereof, shall be
bound:

     

    (a)  The
Rights Agent may consult with legal counsel (who may be legal counsel for the
Company or legal counsel for the Rights Agent), and the written advice or
opinion of such counsel shall be full and complete authorization and protection
to the Rights Agent and, subject to Section 21(c), the Rights Agent shall incur
no liability for or in respect of any action taken, suffered or omitted by
it  in accordance with such written advice or opinion.

     

    (b)  Whenever
in the performance of its duties under this Rights Agreement the Rights Agent
shall deem it necessary or desirable that any fact or matter (including the
identity of any Acquiring Person and the determination of the current per share
market price of any security) be proved or established by the Company prior to
taking, suffering or omitting to take any action hereunder, such fact or matter
(unless other evidence in respect thereof be herein specifically prescribed) may
be deemed to be conclusively proved and established by a certificate signed by
any corporate officer of the Company having the rank of Vice President or above
and delivered to the Rights Agent; and such certificate shall be full and
complete authorization and protection to the Rights Agent and, subject to
Section 21(c), the Rights Agent shall incur no liability for or in respect of
any action taken, suffered or omitted by it in reliance upon such
certificate.

     

    (c)  The
Rights Agent shall be liable hereunder to the Company and any other Person only
for its own gross negligence, bad faith or intentional misconduct (which gross
negligence, bad faith or willful misconduct must be determined by a final,
non-appealable judgment of a court of competent
jurisdiction).  Anything to the contrary notwithstanding, in no event
shall the Rights Agent be liable for special, punitive, indirect, consequential
or incidental loss or damage of any kind whatsoever (including but not limited
to lost profits), even if the Rights Agent has been advised of the likelihood of
such loss or damage.

     

    

    
      
        
           

        

        
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    (d)  Subject
to Section 21(c), the Rights Agent shall not be liable for or by reason of any
of the statements of fact or recitals contained in this Rights Agreement or in
the Right Certificates (except as to its countersignature thereof) or be
required to verify the same, and all such statements and recitals are and shall
be deemed to have been made by the Company only.

     

    (e)  The
Rights Agent shall not be under any responsibility in respect of the validity of
this Rights Agreement or the execution and delivery hereof (except the due
execution hereof by the Rights Agent) or in respect of the validity or execution
of any Right Certificate (except its countersignature thereof) and, subject to
Section 21(c), shall have no liability therefor; nor shall it be responsible for
any breach by the Company of any covenant or condition contained in this Rights
Agreement or in any Right Certificate; nor shall it be responsible for any
change in the exercisability of the Rights (including the Rights becoming null
and void pursuant to Section 7(e)) or any change or adjustment in the terms of
Rights as required under the provisions of Section 11 or 12 or responsible
for the manner, method or amount of any such change or adjustment or the
ascertaining of the existence of facts that would require any such change or
adjustment (except with respect to the exercise of Rights evidenced by Right
Certificates after actual notice of any such adjustment pursuant to Section 13);
nor shall it by any act hereunder be deemed to make any representation or
warranty as to the authorization or reservation of any Preferred Shares or
Common Shares to be issued pursuant to this Rights Agreement or any Right
Certificate or as to whether any Preferred Shares or Common Shares will, when so
issued, be validly authorized and issued, fully paid and
nonassessable.

     

    (f)  The
Company agrees that it shall perform, execute, acknowledge and deliver or cause
to be performed, executed, acknowledged and delivered all such further and other
acts, instruments and assurances as may reasonably be required by the Rights
Agent for the carrying out or performing by the Rights Agent of the provisions
of this Rights Agreement.

     

    (g)  The
Rights Agent is hereby authorized and directed to accept instructions with
respect to the performance of its duties hereunder from any corporate officer of
the Company having the rank of Vice President or above in connection with its
duties and such instructions shall be full authorization and protection to the
Rights Agent and, subject to Section 21(c), the Rights Agent shall not be liable
for or in respect of any action taken, suffered or omitted by it in accordance
with any such instructions or for any delay in acting while waiting for such
instructions.  In the event of any conflict or inconsistency between
or among any such instructions, the later in time shall govern.  Any application by the Rights Agent for written
instructions from the Company may, at the option of the Rights Agent, set forth
in writing any action proposed to be taken, suffered or omitted by the Rights
Agent under this Agreement and the date on and/or after which such action shall
be taken or suffered or such omission shall be effective.  Subject to
Section 21(c), the Rights Agent shall not be liable for any action taken or
suffered by, or omission of, the Rights Agent in accordance with a proposal
included in any such application on or after the date specified in such
application (which date shall not be less than five Business Days after the date
any officer of the Company actually receives such application, unless any such
officer shall have consented in writing to an earlier date) unless, prior to the
later of (i) the expiry of such five Business Day period and (ii) the Right’s
Agent taking any such action (or the effective date in the case of an omission),
the Rights Agent shall have received either a written instructions in response
to such application specifying the action to be taken, suffered or omitted, or a
written or oral objection by the Company to such proposal.

     

    

    
      
        
           

        

        
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    (h)  The
Rights Agent and any stockholder, affiliate, director, officer or employee of
the Rights Agent may buy, sell or deal in any of the Rights or other securities
of the Company or become pecuniarily interested in any transaction in which the
Company or its Subsidiaries may be interested, or contract with or lend money to
the Company or its Subsidiaries or otherwise act as fully and freely as though
it were not the Rights Agent under this Rights Agreement.  Nothing
herein shall preclude the Rights Agent or any stockholder, affiliate, director,
officer or employee from acting in any other capacity for the Company or for any
other Person.

     

    (i)  If,
with respect to any Right Certificate surrendered to the Rights Agent for
exercise or transfer, the certificate contained in the form of assignment or the
form of election to purchase set forth on the reverse thereof, as the case may
be, has either not been properly completed or indicates an affirmative response
to any clause thereof, the Rights Agent shall not take any further action with
respect to such requested exercise or transfer without first consulting with the
Company.

     

    (j)  The
Rights Agent may execute and exercise any of the rights or powers hereby vested
in it or perform any duty hereunder either itself (through its directors,
officers and employees) or by or through its attorneys or agents, and the Rights
Agent shall not be answerable or accountable for any act, default, neglect or
misconduct of any such attorneys or agents or for any loss to the Company
resulting from any such act, default, neglect or misconduct, provided that
reasonable care was exercised in the selection and continued employment
thereof.

     

    (k)  The
Company shall indemnify the Rights Agent for, and hold the Rights Agent harmless
against, any loss, liability, damage, claim or expense (including reasonable
fees and expenses of legal counsel) that the Rights Agent may incur resulting
from any action taken, suffered or omitted by the Rights Agent in connection
with the acceptance, administration, exercise and performance of its duties
under this Rights Agreement (other than matters arising out of or resulting from
a conflict of interest of the Rights Agent or other business interests of the
Rights Agent); provided, however, that the
Rights Agent shall not be indemnified or held harmless with respect to any such
loss, liability, damage or expense incurred by the Rights Agent as a result of,
or arising out of, its own gross negligence, bad faith or intentional
misconduct.  In no case shall the Company be liable with respect to
any action, proceeding, suit or claim against the Rights Agent unless the Rights
Agent shall have notified the Company, by letter or by facsimile confirmed by
letter, of the assertion of any action, proceeding, suit or claim against the
Rights Agent, promptly after the Rights Agent shall have notice of any such
assertion of an action, proceeding, suit or claim or have been served with the
summons or other first legal process giving information as to the nature and
basis of the action, proceeding, suit or claim.  The Company shall be
entitled to participate at its own expense in the defense of any such action,
proceeding, suit or claim, and, if the Company so elects, the Company shall
assume the defense of any such action, proceeding, suit or claim.  In
the event that the Company assumes such defense, the Company shall not
thereafter be liable for the fees and expenses of any additional counsel
retained by the Rights Agent, so long as the Company shall retain counsel
satisfactory to the Rights Agent, in the exercise of its reasonable judgment, to
defend such action, proceeding, suit or claim.  The Rights Agent
agrees not to settle any litigation in connection with any action, proceeding,
suit or claim with respect to which it may seek indemnification from the Company
without the prior written consent of the Company.  If a final,
non-appealable judgment of a court of competent jurisdiction shall be issued in
favor of the Rights Agent in respect of an action by the Rights Agent to enforce
the indemnification provisions of this Section 21(k), then the Company shall
reimburse the Rights Agent’s for its costs and expenses in enforcing such
indemnification provisions.

     

    

    
      
        
           

        

        
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    (l)  No
provision of this Agreement shall require the Rights Agent to expend or risk its
own funds or otherwise incur any financial liability in the performance of any
of its duties hereunder or in the exercise of its rights if it believes that
repayment of such funds or adequate indemnification against such risk or
liability is not reasonably assured to it.

     

    SECTION
22.  Change
of Rights Agent.  The Rights Agent or any successor Rights
Agent may resign and be discharged from its duties under this Rights Agreement
upon 30 days’ notice in writing mailed to the Company and to each transfer
agent of the Common Shares and the Preferred Shares known to the Rights Agent,
after due inquiry, by registered or certified mail, and to the holders of the
Right Certificates (or, prior to the Distribution Date, of the Common Shares) by
first-class mail.  The Company may remove the Rights Agent or any
successor Rights Agent upon 30 days’ notice in writing, mailed to the
Rights Agent or successor Rights Agent, as the case may be, and to each transfer
agent of the Common Shares and the Preferred Shares by registered or certified
mail, and to the holders of the Right Certificates (or, prior to the
Distribution Date, of the Common Shares) by first-class mail.  If the
Rights Agent shall resign or be removed or shall otherwise become incapable of
acting, the Company shall appoint a successor to the Rights Agent.  If
the Company shall fail to make such appointment within a period of 30 days
after giving notice of such removal or after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Rights Agent or
by the holder of a Right Certificate (or, prior to the Distribution Date, of the
Common Shares) (who shall, with such notice, submit such holder’s Right
Certificate or, prior to the Distribution Date, the certificate representing
such holder’s Common Shares, for inspection by the Company), then the registered
holder of any Right Certificate (or, prior to the Distribution Date, of the
Common Shares) may apply to any court of competent jurisdiction for the
appointment of a new Rights Agent.  Any successor Rights Agent,
whether appointed by the Company or by such a court, shall be a Person organized
and doing business under the laws of the United States or of the State of New
York (or of any other state of the United States so long as such entity is
authorized to conduct a stock transfer or corporate trust business in the State
of New York), in good standing, which is authorized under such laws to exercise
stock transfer or corporate trust powers and is subject to supervision or
examination by Federal or state authority and which has at the time of its
appointment as Rights Agent a combined capital and surplus of at least
$100,000,000; provided, however, that the
principal transfer agent for the Common Shares shall in any event be qualified
to be the Rights Agent.  After appointment, the successor Rights Agent
shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named as Rights Agent without further act or deed; but
the predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the
purpose.  Not later than the effective date of any such appointment,
the Company shall file notice thereof in writing with the predecessor Rights
Agent and each transfer agent of the Common Shares and the Preferred Shares, and
mail a notice thereof in writing to the registered holders of the Right
Certificates (or, prior to the Distribution Date, of the Common
Shares).  Failure to give any notice provided for in this
Section 22, however, or any defect therein shall not affect the legality or
validity of the resignation or removal of the Rights Agent or the appointment of
the successor Rights Agent, as the case may be.

     

    

    
      
        
           

        

        
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    SECTION
23.  Issuance of Additional
Rights and Right Certificates.  Notwithstanding any of the
provisions of this Rights Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Right Certificates evidencing Rights in
such form as may be approved by its Board to reflect any adjustment or change
made in accordance with the provisions of this Rights Agreement.  In
addition, in connection with the issuance or sale of Common Shares following the
Distribution Date and prior to the earlier of the Redemption Date and the
Expiration Date, the Company (a) shall, with respect to Common Shares so
issued, granted or sold pursuant to the exercise of stock options or under any
employee plan or arrangement (whether or not subject to vesting or other
restrictions), or upon the exercise, conversion or exchange of securities, notes
or debentures issued by the Company, and (b) may, in any other case, if
deemed necessary or appropriate by the Board, issue Right Certificates
representing the appropriate number of Rights in connection with such issuance
or sale; provided, however, that
(i) no such Right Certificate shall be issued if, and to the extent that,
the Company shall be advised by counsel that such issuance would create a
significant risk of material adverse tax consequences to the Company or the
Person to whom such Right Certificate would be issued, (ii) no such Right
Certificate shall be issued if, and to the extent that, appropriate adjustment
shall otherwise have been made in lieu of the issuance thereof and (iii) no
such Right Certificate shall be issued to an Acquiring Person or an Affiliate or
Associate of an Acquiring Person.

     

    

    
      
        
           

        

        
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    SECTION
24.  Redemption and
Termination.  (a)  The Board may, at its option, at
any time prior to the earlier of (i) the Distribution Date and
(ii) the Expiration Date, order the redemption of all, but not fewer than
all, the then outstanding Rights at the Redemption Price (the date of such
redemption being the “Redemption Date”),
and the Company, at its option, may pay the Redemption Price either in cash or
Common Shares or other securities of the Company deemed by the Board, in the
exercise of its sole discretion, to be at least equivalent in value to the
Redemption Price.

     

    (b)  Immediately
upon the action of the Board ordering the redemption of the Rights, and without
any further action and without any notice, the right to exercise the Rights will
terminate and the only right thereafter of the holders of Rights shall be to
receive the Redemption Price.  Promptly after the action of the Board
ordering the redemption of the Rights, the Company shall give notice of such
redemption to the Rights Agent and the holders of the then outstanding Rights by
mailing such notice to all such holders at their last addresses as they appear
upon the registry books of the Rights Agent or, prior to the Distribution Date,
on the registry books of the transfer agent for the Common
Shares.  Each such notice of redemption shall state the method by
which payment of the Redemption Price will be made.  The notice, if
mailed in the manner herein provided, shall be conclusively presumed to have
been duly given, whether or not the holder of Rights receives such
notice.  In any case, failure to give such notice by mail, or any
defect in the notice, to any particular holder of Rights shall not affect the
sufficiency of the notice to other holders of Rights.  Neither the
Company nor any of its Affiliates or Associates may redeem, acquire or purchase
for value any Rights at any time in any manner except as specifically set forth
in this Section or in Section 11(b) or in connection with the purchase of
Common Shares prior to the Distribution Date.

     

    SECTION
25.  Notices.  Notices
or demands authorized by this Rights Agreement to be given or made by the Rights
Agent or by the holder of a Right Certificate (or, prior to the Distribution
Date, of the Common Shares) to or on the Company shall be sufficiently given or
made if sent by first-class mail, postage-prepaid, addressed (until another
address is filed in writing with the Rights Agent) as follows:

     

    Barnes
& Noble, Inc.

    122 Fifth
Avenue

    New York,
New York 10111

    Attention:
Director of Investor Relations

     

    

    
      
        
           

        

        
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    Subject
to the provisions of Section 22, any notice or demand authorized by this
Rights Agreement to be given or made by the Company or by the holder of a Right
Certificate (or, prior to the Distribution Date, of the Common Shares) to or on
the Rights Agent shall be sufficiently given or made if sent by first-class
mail, postage-prepaid, addressed (until another address is filed in writing with
the Company) as follows:

     

    Mellon
Investor Services LLC

    Newport
Office Center VII

    480
Washington Boulevard

    Jersey
City, New Jersey  07310

    Attention:  Relationship
Manager

     

    with a
copy to:

     

    Mellon
Investor Services LLC

    Newport
Office Center VII

    480
Washington Boulevard

    Jersey
City, New Jersey  07310

    Attention:  General
Counsel

    

    Notices
or demands authorized by this Rights Agreement to be given or made by the
Company or the Rights Agent to any holder of a Right Certificate (or, prior to
the Distribution Date, of the Common Shares) shall be sufficiently given or made
if sent by first-class mail, postage-prepaid, addressed to such holder at the
address of such holder as shown on the registry books of the Rights Agent or,
prior to the Distribution Date, on the registry books of the transfer agent for
the Common Shares.

     

    SECTION
26.  Supplements and
Amendments.  At any time prior to the time any Person becomes
an Acquiring Person, and subject to the last sentence of this Section 26,
the Company may, and the Rights Agent shall if the Company so directs,
supplement or amend any provision of this Rights Agreement in any manner which
the Company may deem necessary or desirable (including the date on which the
Distribution Date or Expiration Date shall occur, the amount of the Purchase
Price, the definition of “Acquiring Person” or the time during which the Rights
may be redeemed pursuant to Section 24) without the approval of any holder
of the Rights.  From and after the Distribution Date, and subject to
applicable law, the Company may, and the Rights Agent shall if the Company so
directs, amend this Rights Agreement without the approval of any holders of
Right Certificates (a) to cure any ambiguity or to correct or supplement
any provision contained herein which may be defective or inconsistent with any
other provision of this Rights Agreement or (b) to otherwise change or
supplement any other provisions in this Rights Agreement in any matter which the
Company may deem necessary or desirable and which does not adversely affect the
interests of the holders of Right Certificates (other than an Acquiring
Person or an Affiliate or Associate of an Acquiring Person), any such supplement
or amendment to be evidenced in writing.  Any supplement or amendment
adopted during any period after any Person has become an Acquiring Person but
prior to the Distribution Date shall be null and void unless such supplement or
amendment could have been adopted under the prior sentence from and after the
Distribution Date.  Any supplement or amendment to this Rights
Agreement duly approved by the Company that does not affect the Rights Agent’s
own rights, duties, obligations or immunities under this Rights Agreement shall
become effective immediately upon execution by the Company, whether or not also
executed by the Rights Agent.  Upon
delivery of a certificate from an appropriate officer of the Company that states
that the proposed supplement or amendment complies with this Section 26, the
Rights Agent shall execute such supplement or amendment.  Notwithstanding anything to the contrary contained in
this Rights Agreement, the Rights Agent may, but shall not be obligated to,
enter into any supplement or amendment that affects the Rights Agent’s own
rights, duties, obligations or immunities under this Rights
Agreement.  In addition, notwithstanding anything to the
contrary contained in this Rights Agreement, no supplement or amendment to this
Rights Agreement shall be made which extends the date on which the Expiration
Date shall occur or reduces the Redemption Price (except as required by
Section 12(a)).

     

    

    
      
        
           

        

        
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    SECTION
27.  Successors.  All
the covenants and provisions of this Rights Agreement by or for the benefit of
the Company or the Rights Agent shall bind and inure to the benefit of their
respective successors and assigns hereunder.

     

    SECTION
28.  Benefits of Rights
Agreement; Determinations and Actions by the Board,
etc.  (a)  Nothing in this Rights Agreement shall be
construed to give to any Person other than the Company, the Rights Agent and the
registered holders of the Right Certificates (and, prior to the Distribution
Date, of the Common Shares) any legal or equitable right, remedy or claim under
this Rights Agreement; but this Rights Agreement shall be for the sole and
exclusive benefit of the Company, the Rights Agent and the registered holders of
the Right Certificates (and, prior to the Distribution Date, of the Common
Shares).

     

    (b)  Except
as explicitly otherwise provided in this Rights Agreement, the Board shall have
the exclusive power and authority to administer this Rights Agreement and to
exercise all rights and powers specifically granted to the Board or to the
Company, or as may be necessary or advisable, in the administration of this
Rights Agreement, including the right and power to (i) interpret the
provisions of this Rights Agreement and (ii) make all determinations deemed
necessary or advisable for the administration of this Rights Agreement
(including a determination to redeem or not redeem the Rights or to amend this
Rights Agreement and a determination of whether there is an Acquiring
Person).

     

    (c)  Nothing
contained in this Rights Agreement shall be deemed to be in derogation of the
obligation of the Board to exercise its fiduciary duty.  Without
limiting the foregoing, nothing contained herein shall be construed to suggest
or imply that the Board shall not be entitled to reject any tender offer or
other acquisition proposal, or to recommend that holders of Common Shares reject
any tender offer, or to take any other action (including the commencement,
prosecution, defense or settlement of any litigation and the submission of
additional or alternative offers or other proposals) with respect to any tender
offer or other acquisition proposal that the Board believes is necessary or
appropriate in the exercise of such fiduciary duty.

     

    

    
      
        
           

        

        
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    SECTION
29.  Severability.  If
any term, provision, covenant or restriction of this Rights Agreement is held by
a court of competent jurisdiction or other authority to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Rights Agreement shall remain in full force and effect and
shall in no way be affected, impaired or invalidated; provided, however, that if the
absence of such excluded provision shall, in the reasonable judgment of the
Rights Agent, materially and adversely its rights, immunities, duties or
obligations under this Rights Agreement, the Rights Agent shall be entitled to
resign on the next Business Day.

     

    SECTION
30.  Governing
Law.  This Rights Agreement and each Right Certificate issued
hereunder shall be deemed to be a contract made under the law of the State of
Delaware and for all purposes shall be governed by and construed in accordance
with the law of such State applicable to contracts to be made and performed
entirely within such State; provided, however, that all
provisions regarding the rights, duties and obligations of the Rights Agent
shall be governed by and construed in accordance with the laws of the State of
New York applicable to contracts made to be performed entirely within such
State.

     

    SECTION
31.  Counterparts;
Effectiveness.  This Rights Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.  This Rights Agreement shall be
effective as of the Close of Business on the date hereof.

     

    SECTION
32.  Descriptive
Headings.  Descriptive headings of the several Sections of this
Rights Agreement are inserted for convenience only and shall not control or
affect the meaning or construction of any of the provisions of this Rights
Agreement.

     

    SECTION
33.  Force
Majeure.  Notwithstanding
anything to the contrary contained herein, the Rights Agent shall not be liable
for any delays or failures in performance resulting from acts beyond its
reasonable control including acts of God, terrorist acts, shortage of supply,
breakdowns or malfunctions, interruptions or malfunctions of computer
facilities, or loss of data due to power failures or mechanical difficulties
with information storage or retrieval systems, labor difficulties, war or civil
unrest.

     

    

     

    

    
      
        
           

        

        
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    IN
WITNESS WHEREOF, the parties hereto have caused this Rights Agreement to be duly
executed as of the day and year first above written.

     

     

    

      
        	 	
                BARNES
      & NOBLE, INC.,

              	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Joseph
      J. Lombardi	 
	 	 	Name:
      Joseph J. Lombardi	 
	 	 	Title: Chief
      Financial Officer	 
	 	 	 	 

      

    

     

     

     

    
      
        	 	
                MELLON
      INVESTOR SERVICES LLC, as Rights Agent

              	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/
      Stephen Jones 	 
	 	 	Name:
      Stephen Jones 	 
	 	 	Title:
      Vice President	 
	 	 	 	 

      

    

     

     

    

    
      
        
          
             

          

           

        

        
           

          
            

          

        

        
           

        

      

    

    

    EXHIBIT
A

     

    CERTIFICATE
OF THE

    DESIGNATIONS,
PREFERENCES AND RELATIVE

    PARTICIPATING,
OPTIONAL AND OTHER SPECIAL

    RIGHTS
AND QUALIFICATIONS, LIMITATIONS

    OR
RESTRICTIONS OF SERIES I

    PREFERRED
STOCK OF

    BARNES
& NOBLE, INC.

     

     

    Pursuant
to Section 151 of the General Corporation Law of the State of Delaware, BARNES
& NOBLE, INC., a corporation organized and existing under the General
Corporation Law of the State of Delaware, in accordance with the provisions of
Section 103 thereof, DOES HEREBY CERTIFY:

     

    That,
pursuant to the authority conferred upon the Board of Directors (the “Board”) of BARNES
& NOBLE, INC. (the “Company”) by Article
FOURTH, paragraph (b), of the Amended and Restated Certificate of
Incorporation of the Company, the Board on November 17, 2009, adopted the
following resolution designating a new series of preferred stock as Series I
Preferred Stock:

     

    RESOLVED,
that, pursuant to the authority vested in the Board of Directors (the “Board”) of BARNES
& NOBLE, INC. (the “Company”) in
accordance with the provisions of the Amended and Restated Certificate of
Incorporation of the Company (the “Certificate”) and the
provisions of Section 151(g) of the General Corporation Law of the State of
Delaware, a series of preferred stock of the Company is hereby authorized, and
the designation and number of shares thereof, and the preferences and relative,
participating, optional and other special rights, and the qualifications,
limitations or restrictions thereof, shall be as follows (in addition to any
preferences and relative, participating, optional and other special rights, and
the qualifications, limitations or restrictions thereof, set forth in the
Certificate which are applicable to shares of Preferred Stock, par value $0.001
per share of the Company (the “Preferred
Stock”)):

     

    SECTION
1.  Designation and Number of
Shares.  The shares of such series shall be designated as
“Series I Preferred Stock” (the “Series I Preferred
Stock”).  The number of shares initially constituting the
Series I Preferred Stock shall be 300,000; provided, however, that, if
more than a total of 300,000 shares of Series I Preferred Stock shall be
issuable upon the exercise of Rights (the “Rights”) issued
pursuant to the Rights Agreement dated as of November 17, 2009, between the
Company and Mellon Investor Services LLC, a New Jersey limited liability
company, as Rights Agent (the “Rights Agreement”),
the Board, pursuant to Section 151(g) of the General Corporation Law of the
State of Delaware, shall direct by resolution or resolutions that a certificate
be properly executed, acknowledged, filed and recorded, in accordance with the
provisions of Section 103 thereof, providing for the total number of shares of
Series I Preferred Stock authorized to be issued to be increased (to the extent
that the Certificate then permits) to the largest number of whole shares
(rounded up to the nearest whole number) issuable upon exercise of such
Rights.

     

    

    
      
        
          
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    SECTION
2.  Dividends or
Distributions.  (a)  Subject to the superior rights
of the holders of shares of any other series of Preferred Stock or other class
of capital stock of the Company ranking superior to the shares of Series I
Preferred Stock with respect to dividends, the holders of shares of Series I
Preferred Stock shall be entitled to receive, when, as and if declared by the
Board, out of the assets of the Company legally available therefor, (1)
quarterly dividends payable in cash on the last day of each fiscal quarter in
each year, or such other dates as the Board shall approve (each such date being
referred to herein as a “Quarterly Dividend Payment
Date”), commencing on the first Quarterly Dividend Payment Date after the
first issuance of a share or a fraction of a share of Series I Preferred Stock,
in the amount of $0.25 per whole share (rounded to the nearest cent) less the
amount of all cash dividends declared on the Series I Preferred Stock pursuant
to the following clause (2) since the immediately preceding Quarterly Dividend
Payment Date or, with respect to the first Quarterly Dividend Payment Date,
since the first issuance of any share or fraction of a share of Series I
Preferred Stock (the total of which shall not, in any event, be less than zero)
and (2) dividends payable in cash on the payment date for each cash dividend
declared on the shares of Common Stock, par value $0.001 per share, of the
Company (the “Common
Stock”) in an amount per whole share (rounded to the nearest cent) equal
to the Formula Number (as hereinafter defined) then in effect times the cash
dividends then to be paid on each share of Common Stock.  In addition,
if the Company shall pay any dividend or make any distribution on the Common
Stock payable in assets, securities or other forms of noncash consideration
(other than dividends or distributions solely in shares of Common Stock), then,
in each such case, the Company shall simultaneously pay or make on each
outstanding whole share of Series I Preferred Stock a dividend or distribution
in like kind equal to the Formula Number then in effect times such dividend or
distribution on each share of Common Stock.  As used herein, the
“Formula
Number” shall be 1,000; provided, however, that, if at
any time after November 17, 2009, the Company shall (i) declare or pay any
dividend on the Common Stock payable in shares of Common Stock or make any
distribution on the Common Stock in shares of Common Stock, (ii) subdivide
(by a stock split or otherwise) the outstanding shares of Common Stock into a
larger number of shares of Common Stock or (iii) combine (by a reverse stock
split or otherwise) the outstanding shares of Common Stock into a smaller number
of shares of Common Stock, then in each such event the Formula Number shall be
adjusted to a number determined by multiplying the Formula Number in effect
immediately prior to such event by a fraction, the numerator of which is the
number of shares of Common Stock that are outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
are outstanding immediately prior to such event (and rounding the result to the
nearest whole number); and provided further
that, if at any time after November 17, 2009, the Company shall issue any
shares of its capital stock in a merger, reclassification, or change of the
outstanding shares of Common Stock, then in each such event the Formula Number
shall be appropriately adjusted to reflect such merger, reclassification or
change so that each share of Preferred Stock continues to be the economic
equivalent of a Formula Number of shares of Common Stock prior to such merger,
reclassification or change.

     

    

    
      
        
           

        

        
          2

          
            

          

        

        
           

        

      

    

    

    (b)  The
Company shall declare a cash dividend on the Series I Preferred Stock as
provided in Section 2(a) immediately prior to or at the same time it declares a
cash dividend on the Common Stock; provided, however, that, in the
event no cash dividend shall have been declared on the Common Stock during the
period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend
Payment Date, during the period between the first issuance of any share or
fraction of a share of Series I Preferred Stock, a dividend of $0.25 per whole
share on the Series I Preferred Stock shall nevertheless accrue on such
subsequent Quarterly Dividend Payment Date or the first Quarterly Dividend
Payment Date, as the case may be.  The Board may fix a record date for
the determination of holders of shares of Series I Preferred Stock entitled to
receive a dividend or distribution declared thereon, which record date shall be
the same as the record date for any corresponding dividend or distribution on
the Common Stock.

     

    (c)  Dividends
shall begin to accrue and be cumulative on outstanding shares of Series I
Preferred Stock from and after the Quarterly Dividend Payment Date next
preceding the date of issue of such shares, unless the date of issue of such
shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue and be
cumulative from and after the date of issue of such shares, or unless the date
of issue is a Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Series I Preferred Stock entitled
to receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be cumulative
from and after such Quarterly Dividend Payment Date.  Accrued but
unpaid dividends shall not bear interest.  Dividends paid on the
shares of Series I Preferred Stock in an amount less than the total amount of
such dividends at the time accrued and payable on such shares shall be allocated
pro rata on a share-by-share basis among all such shares at the time
outstanding.

     

    (d)  So
long as any shares of Series I Preferred Stock are outstanding, no dividends or
other distributions shall be declared, paid or distributed, or set aside for
payment or distribution, on the Common Stock unless, in each case, the dividend
required by this Section 2 to be declared on the Series I Preferred Stock
shall have been declared and set aside.

     

    (e)  The
holders of shares of Series I Preferred Stock shall not be entitled to receive
any dividends or other distributions except as herein provided.

     

    SECTION
3.  Voting
Rights.  No voting rights shall attach to the Series I
Preferred Stock.

     

    

    
      
        
           

        

        
          3

          
            

          

        

        
           

        

      

    

    

    SECTION
4.  Certain
Restrictions.  (a)  Whenever quarterly dividends or
other dividends or distributions on the Series I Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on shares of Series I Preferred
Stock outstanding shall have been paid in full, the Company shall
not:

     

    (i)  declare
or pay dividends on, make any other distributions on, or redeem or purchase or
otherwise acquire for consideration any shares of stock ranking junior (either
as to dividends or upon liquidation, dissolution or winding up) to the Series I
Preferred Stock;

     

    (ii)  declare
or pay dividends on or make any other distributions on any shares of stock
ranking on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series I Preferred Stock, except dividends paid ratably on
the Series I Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the holders of
all such shares are then entitled;

     

    (iii)  redeem
or purchase or otherwise acquire for consideration shares of any stock ranking
on a parity (either as to dividends or upon liquidation, dissolution or winding
up) with the Series I Preferred Stock; provided, however, that the
Company may at any time redeem, purchase or otherwise acquire shares of any such
parity stock in exchange for shares of any stock of the Company ranking junior
(either as to dividends or upon dissolution, liquidation or winding up) to the
Series I Preferred Stock; or

     

    (iv)  purchase
or otherwise acquire for consideration any shares of Series I Preferred Stock,
or any shares of stock ranking on a parity with the Series I Preferred Stock,
except in accordance with a purchase offer made in writing or by publication (as
determined by the Board) to all holders of such shares upon such terms as the
Board, after consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among the
respective series or classes.

     

    (b)  The
Company shall not permit any subsidiary of the Company to purchase or otherwise
acquire for consideration any shares of stock of the Company unless the Company
could, under Section 4(a), purchase or otherwise acquire such shares at such
time and in such manner.

     

    SECTION
5.  Liquidation
Rights.  Upon the liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, no distribution shall be made
(1) to the holders of any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series I
Preferred Stock unless, prior thereto, the holders of shares of Series I
Preferred Stock shall have received an amount equal to the accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment, plus an amount equal to the greater of (x) $1,000 per whole share
or (y) an aggregate amount per share equal to the Formula Number then in effect
times the aggregate amount to be distributed per share to holders of Common
Stock or (2) to the holders of any shares of stock ranking on a parity (either
as to dividends or upon liquidation, dissolution or winding up) with the Series
I Preferred Stock, except distributions made ratably on the Series I Preferred
Stock and all other such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up; provided, that no
holder of any Series I Preferred Stock shall be authorized or entitled to
receive upon involuntary liquidation of the Company an amount in excess of
$100.00 per share of Series I Preferred Stock.

     

    

    
      
        
           

        

        
          4

          
            

          

        

        
           

        

      

    

    

    SECTION
6.  Consolidation, Merger,
etc.  In case the Company shall enter into any consolidation,
merger, combination or other transaction in which the shares of Common Stock are
exchanged for or changed into other stock or securities, cash or any other
property, then in any such case the then outstanding shares of Series I
Preferred Stock shall at the same time be similarly exchanged or changed into an
amount per share equal to the Formula Number then in effect times the aggregate
amount of stock, securities, cash or any other property (payable in kind), as
the case may be, into which or for which each share of Common Stock is exchanged
or changed.  In the event both this Section 6 and Section 2 appear to
apply to a transaction, this Section 6 will control.

     

    SECTION
7.  No
Redemption; No Sinking Fund.  (a)  The shares of
Series I Preferred Stock shall not be subject to redemption by the Company or at
the option of any holder of Series I Preferred Stock; provided, however, that,
subject to Section 4(a)(iv), the Company may purchase or otherwise acquire
outstanding shares of Series I Preferred Stock in the open market or by offer to
any holder or holders of shares of Series I Preferred Stock.

     

    (b)  The
shares of Series I Preferred Stock shall not be subject to or entitled to the
operation of a retirement or sinking fund.

     

    SECTION
8.  Ranking.  The
Series I Preferred Stock shall rank junior to all other series of Preferred
Stock of the Company unless the Board shall specifically determine otherwise in
fixing the powers, preferences and relative, participating, optional and other
special rights of the shares of such series and the qualifications, limitations
and restrictions thereof.

     

    SECTION
9.  Fractional
Shares.  The Series I Preferred Stock shall be issuable upon
exercise of the Rights issued pursuant to the Rights Agreement in whole shares
or in any fraction of a share that is one one-thousandth of a share (as
such fraction may be adjusted as provided in the Rights Agreement) or any
integral multiple of such fraction which shall entitle the holder, in proportion
to such holder’s fractional shares, to receive dividends, participate in
distributions and to have the benefit of all other rights of holders of Series I
Preferred Stock.  In lieu of fractional shares, the Company, prior to
the first issuance of a share or a fraction of a share of Series I Preferred
Stock, may elect (a) to make a cash payment as provided in the Rights Agreement
for fractions of a share other than one one-thousandths of a share (as such
fraction may be adjusted as provided in the Rights Agreement) or any integral
multiple thereof or (b) to issue depository receipts evidencing such
authorized fraction of a share of Series I Preferred Stock pursuant to an
appropriate agreement between the Company and a depository selected by the
Company; provided, however, that such
agreement shall provide that the holders of such depository receipts shall have
all the rights, privileges and preferences to which they are entitled as holders
of the Series I Preferred Stock.

     

    

    
      
        
           

        

        
          5

          
            

          

        

        
           

        

      

    

    

    SECTION
10.  Reacquired
Shares.  Any shares of Series I Preferred Stock purchased or
otherwise acquired by the Company in any manner whatsoever shall be retired and
canceled promptly after the acquisition thereof.  All such shares
shall upon their cancelation become authorized but unissued shares of Preferred
Stock, without designation as to series until such shares are once more
designated as part of a particular series by the Board pursuant to the
provisions of the Certificate.

     

    SECTION
11.  Amendment.  So
long as any shares of Series I Preferred Stock shall be outstanding,
(i) none of the powers, preferences and relative, participating, optional
and other special rights of the Series I Preferred Stock as herein provided
shall be amended in any manner which would alter or change the powers,
preferences, rights or privileges of the holders of Series I Preferred Stock so
as to affect them adversely and (ii) no amendment, alteration or repeal of
the Certificate or of the By-laws of the Company shall be effected so as to
affect adversely any of such powers, preferences, rights or
privileges.

     

    IN
WITNESS WHEREOF, the Company has caused this Certificate to be duly executed in
its corporate name on this 17th day of November, 2009.

     

    
      
        	 	BARNES
      & NOBLE, INC.,	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ 	 
	 	 	Name 	 
	 	 	Title 	 
	 	 	 	 

      

    

     

     

    

    
      
        
           

        

        
          6

          
            

          

        

        
           

        

      

    

    

    EXHIBIT
B

     

    [Form of
Right Certificate]

     

    Certificate
No. [R]-                                                                       ___________
Rights

     

    NOT
EXERCISABLE AFTER NOVEMBER 17, 2012, OR EARLIER IF REDEEMED BY THE
COMPANY.  THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE
COMPANY, AT $0.001 PER RIGHT, ON THE TERMS SET FORTH IN THE RIGHTS
AGREEMENT.  RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN
AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE
RIGHTS AGREEMENT) AND BY ANY SUBSEQUENT HOLDER OF SUCH RIGHTS ARE NULL AND VOID
AND NONTRANSFERABLE.

     

    Right
Certificate

     

    BARNES
& NOBLE, INC.

     

    This
certifies that
                    ,
or registered assigns, is the registered owner of the number of Rights set forth
above, each of which entitles the owner thereof, subject to the terms,
provisions and conditions of the Rights Agreement dated as of November 17,
2009 as it may be amended from time to time (the “Rights Agreement”),
between BARNES & NOBLE, INC., a Delaware corporation (the “Company”), and MELLON
INVESTOR SERVICES LLC, as Rights Agent (the “Rights Agent”),
unless the Rights evidenced hereby shall have been previously redeemed or
exchanged by the Company, to purchase from the Company at any time after the
Distribution Date (as defined in the Rights Agreement) and prior to
5:00 p.m., New York City time, on the third anniversary of the
date of the Rights Agreement (the “Expiration Date”), at
the office or offices of the Rights Agent designated for such purpose, or its
successors as Rights Agent, one one-thousandth (1/1,000th) of a fully paid,
nonassessable share of Series I Preferred Stock, par value $0.001 per share, of
the Company (the “Preferred Shares”),
at a purchase price per one one-thousandth (1/1,000th) of a share equal to
$100.00 (the “Purchase
Price”) payable in cash, upon presentation and surrender of this Right
Certificate with the Form of Election to Purchase duly executed.

     

    The
Purchase Price and the number and kind of shares which may be purchased upon
exercise of each Right evidenced by this Right Certificate, as set forth above,
are the Purchase Price and the number and kind of shares which may be so
purchased as of November 17, 2009.  As provided in the Rights
Agreement, the Purchase Price and the number and kind of shares which may be
purchased upon the exercise of each Right evidenced by this Right Certificate
are subject to modification and adjustment upon the happening of certain
events.

     

    

    
      
        
          
            \

          

           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    If the
Rights evidenced by this Right Certificate are at any time beneficially owned by
an Acquiring Person or an Affiliate or Associate of an Acquiring Person (as such
terms are defined in the Rights Agreement), such Rights shall be null and void
and nontransferable and the holder of any such Right (including any purported
transferee or subsequent holder) shall not have any right to exercise or
transfer any such Right.

     

    This
Right Certificate is subject to all the terms, provisions and conditions of the
Rights Agreement, which terms, provisions and conditions are hereby incorporated
herein by reference and made a part hereof and to which reference to the Rights
Agreement is hereby made for a full description of the rights, limitations of
rights, obligations, duties and immunities hereunder of the Rights Agent, the
Company and the holders of the Right Certificates.  Copies of the
Rights Agreement are on file at the above-mentioned office of the Rights Agent
and are also available from the Company upon written request.

     

    This
Right Certificate, with or without other Right Certificates, upon surrender at
the office of the Rights Agent designated for such purpose, may be exchanged for
another Right Certificate or Right Certificates of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate number and
kind of shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to
purchase.  If this Right Certificate shall be exercised in part, the
holder shall be entitled to receive upon surrender hereof another Right
Certificate or Right Certificates for the number of whole Rights not
exercised.

     

    Subject
to the provisions of the Rights Agreement, the Rights evidenced by this Right
Certificate may be redeemed by the Company at its option at a redemption price
(in cash or shares of Common Stock, par value $0.001 per share, of the Company
or other securities of the Company deemed by the Board of Directors of the
Company to be at least equivalent in value) of $0.001 per Right (which amount
shall be subject to adjustment as provided in the Rights Agreement) at any time
prior to the earlier of (i) the Distribution Date and (ii) the
Expiration Date.

     

    The
Company may, but shall not be required to, issue fractions of Preferred Shares
or distribute certificates which evidence fractions of Preferred Shares upon the
exercise of any Right or Rights evidenced hereby.  In lieu of issuing
fractional shares, the Company may elect to make a cash payment as provided in
the Rights Agreement for fractions of a share other than
one one-thousandth (1/1,000th) of a share (as such fraction may be
adjusted as provided in the Rights Agreement) or any integral multiple thereof
or to issue certificates or utilize a depository arrangement as provided in the
terms of the Rights Agreement and the Preferred Shares.

     

    No holder
of this Right Certificate shall be entitled to vote or receive dividends or be
deemed for any purpose the holder of the Preferred Shares or of any other
securities of the Company which may at any time be issuable on the exercise
hereof, nor shall anything contained in the Rights Agreement or herein be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company, including, without limitation, any right to vote for
the election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or other
distributions or subscription rights, or otherwise, until the Right or Rights
evidenced by this Right Certificate shall have been exercised as provided in
accordance with the provisions of the Rights Agreement.

     

    

    
      
        
           

        

        
          2

          
            

          

        

        
           

        

      

    

    

    

     

    This
Right Certificate shall not be valid or obligatory for any purpose until it
shall have been countersigned by an authorized signatory of the Rights
Agent.

     

    WITNESS
the facsimile signature of the proper officers of the Company and its corporate
seal.

     

    Dated as
of:

     

    
      
        	 	BARNES & NOBLE, INC.,	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ 	 
	 	 	Name 	 
	 	 	Title 	 
	 	 	 	 

      

    

     

     

    
       

      
        	Attest:	 
	 	 
	Name:	 
	Title:	 

      

       

    

    Date of
countersignature:

     

    Countersigned:

     

    MELLON
INVESTOR SERVICES LLC,

    as Rights
Agent,

     

    
    

     

    
      	 	by	 	 
	 	 	 	 
	 	 	 Authorized
      Signatory	 

    

     

    

    
      
        
           

        

        
          3

          
            

          

        

        
           

        

      

    

    [On
Reverse Side of Right Certificate]

     

    FORM OF
ELECTION TO PURCHASE

     

    (To be
executed by the registered holder if

    such
holder desires to exercise the Rights

    represented
by this Right Certificate.)

     

    To the
Rights Agent:

     

    The
undersigned hereby irrevocably elects to exercise           
Rights represented by this Right Certificate to purchase the Preferred Shares
(or other shares) issuable upon the exercise of such Rights and requests that
certificates for such shares be issued in the name of:

    

    Please
insert social security

    or other
identifying number

     

    
    

     

    
      	 
	 (Please print
      name and address)

    

     

     

    If such
number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:

    

    Please
insert social security

    or other
identifying number

    
       

      
        	 
	 (Please print
      name and address)

      

       

    

    Dated:             ,

     

     

     

       

      
        	 
	Signature

      

    

                                                                        Signature

     

    Signature
Guaranteed:

     

    Signatures
must be guaranteed by a participant in the Securities Transfer Agent Medallion
Program, the Stock Exchanges Medallion Program or the New York Stock Exchange,
Inc. Medallion Signature Program.

     

    The
undersigned hereby certifies that (1) the Rights evidenced by this Right
Certificate are not being exercised by or on behalf of a person who is or was an
Acquiring Person or an Affiliate or Associate thereof (as such terms are defined
in the Rights Agreement) and (2) after due inquiry and to the best
knowledge of the undersigned, the undersigned did not acquire the Rights
evidenced by this Right Certificate from any person who is or was an Acquiring
Person or an Affiliate or Associate thereof.

     

    

    
      
        
           

        

        
          4

          
            

          

        

        
           

        

      

    

     

     

    
    

     

    
      	 Dated:
    	 	 ,	 	 	 	 	 
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 Signature	 	 

    

     

    Signature
Guaranteed:

     

    Signatures
must be guaranteed by a participant in the Securities Transfer Agent Medallion
Program, the Stock Exchanges Medallion Program or the New York Stock Exchange,
Inc. Medallion Signature Program.

     

    

    
      
        
           

        

        
          5

          
            

          

        

        
           

        

      

    

    

    

     

    FORM OF
ASSIGNMENT

     

    (To be
executed by the registered holder if such

    holder
desires to transfer the Right Certificate.)

     

    FOR VALUE
RECEIVED _______________________________ hereby sells, assigns and transfer unto
______________________________________________
____________________________________________________________

    (Please
print name and address of transferee)

     

    ____________________________________________________________________________________________________________

     

    this
Right Certificate, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint ______________ Attorney, to transfer
the within Right Certificate on the books of the within-named Corporation, with
full power of substitution.

     

    Dated:  ____________,
____

     

    ______________________________

    Signature

     

    Signature
Guaranteed:

     

    Signatures
must be guaranteed by a participant in the Securities Transfer Agent Medallion
Program, the Stock Exchanges Medallion Program or the New York Stock Exchange,
Inc. Medallion Signature Program.

     

    The
undersigned hereby certifies that (1) the Rights evidenced by this Right
Certificate are not being sold, assigned or transferred by or on behalf of a
Person who is or was an Acquiring Person or an Affiliate or Associate thereof
(as such terms are defined in the Rights Agreement), (2) this Right
Certificate is not being sold, assigned or transferred to or on behalf of any
such Acquiring Person, Affiliate or Associate and (3) after inquiry and to
the best knowledge of the undersigned, the undersigned did not acquire the
Rights evidenced by this Right Certificate from any Person who is or was an
Acquiring Person or an Affiliate or Associate thereof (as such terms are
defined in the Rights Agreement).

     

    ______________________________

    Signature

     

    

    
      
        
           

        

        
          6

          
            

          

        

        
           

        

      

    

    

    NOTICE

     

    The
signature on the foregoing Form of Election to Purchase or Form of Assignment
must correspond to the name as written upon the face of this Right Certificate
in every particular, without alteration or enlargement or any change
whatsoever.

    

    

    
      
        
           

        

        
          7

          
            

          

        

        
           

        

      

    

    

    EXHIBIT
C

     

    RIGHTS
BENEFICIALLY OWNED BY ANY ACQUIRING PERSONS OR THEIR AFFILIATES OR ASSOCIATES
AND BY ANY SUBSEQUENT HOLDER OF SUCH RIGHTS ARE NULL AND VOID AND
NONTRANSFERABLE.

    SUMMARY
OF RIGHTS TO PURCHASE

     

    SERIES I
PREFERRED STOCK

     

    OF BARNES
& NOBLE, INC.

     

    On
November 17, 2009, the Board of Directors (the “Board”) of BARNES
& NOBLE, INC., a Delaware corporation (the “Company”), declared a
dividend of one right (collectively, the “Rights”) for each
outstanding share of Common Stock, par value $0.001 per share, of the Company
(the “Common
Shares”).  The Rights will be issued to the holders of record
of Common Shares outstanding at November 27, 2009 (the “ Record Date”) and
with respect to Common Shares issued thereafter until the Distribution Date (as
defined below).  Each Right, when it becomes exercisable as described
below, will entitle the registered holder to purchase from the Company
one one-thousandth (1/1,000th) of a share of Series I Preferred Stock,
par value $0.001 per share, of the Company (the “Preferred Shares”) at
a price of $100.00 (the “Purchase
Price”).  The description and terms of the Rights are set forth
in a Rights Agreement dated as of November 17, 2009 as it may be amended
from time to time (the “Rights Agreement”),
between the Company and Mellon Investor Services LLC, a New Jersey limited
liability company, as Rights Agent (the “Rights
Agent”).

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    Until the
earlier of (i) such time as the Company learns that a person or group
(including any affiliate or associate of such person or group), other than any
person or group with beneficial ownership of more than 20% of the outstanding
Common Stock as of November 17, 2009 (only so long as such person or group
does not increase its beneficial ownership of Common Stock, subject to certain
exceptions), has acquired, or obtained the right to acquire, beneficial
ownership of more than 20% of the outstanding Common Shares (any such person or
group being called an “Acquiring Person”)
and (ii) such date, if any, as may be designated by the Board following the
commencement of, or first public disclosure of an intention to commence, a
tender or exchange offer for outstanding Common Shares which could result in
such person or group becoming the beneficial owner of more than 20% of the
outstanding Common Shares (the earlier of such dates being called the “Distribution Date”),
the Rights will be evidenced by certificates for Common Shares registered in the
names of the holders thereof, or, in the case of Common Shares held in
uncertificated form, by the transaction statement or other record of ownership
of such Common Shares, and not by separate Right Certificates.  With
respect to any Common Shares outstanding as of the Record Date, until the
earliest of the Distribution Date, the Redemption Date or the Expiration Date,
(i) in the case of certificated shares, the Rights associated with the Common
Shares represented by a certificate shall be evidenced by such certificate along
with a copy of this Summary of Rights, and the surrender for transfer of any
such certificate shall also constitute the transfer of the Rights associated
with the Common Shares represented thereby, and (ii) in the case of Common
Shares held in uncertificated form, the Rights associated with the Common Shares
shall be evidenced by the balances indicated in the book-entry account system of
the transfer agent for the Common Shares, and the transfer of any Common Shares
in the book-entry account system of the transfer agent for such Common Shares
shall also constitute the transfer of the Rights associated with such Common
Shares.  Therefore, until the Distribution Date, the Rights may be
transferred with and only with the underlying Common Shares.

    

    
      
        
           

        

        
          2

          
            

          

        

        
           

        

      

    

    

    As soon
as practicable following the Distribution Date, separate certificates evidencing
the Rights (“Right
Certificates”) will be mailed to holders of record of the Common Shares
as of the close of business on the Distribution Date, and such separate Right
Certificates alone will thereafter evidence the Rights.

    The Rights are not
exercisable until the Distribution Date and will expire at
5:00 p.m., New York City time, on November 17, 2012 (the “Expiration Date”),
unless earlier redeemed or exchanged by the Company as described
below.

    The
number of Preferred Shares or other securities issuable upon exercise of the
Rights is subject to adjustment by the Board in the event of any change in the
Common Shares or Preferred Shares, whether by reason of stock dividends, stock
splits, reclassifications, recapitalizations, mergers, consolidations,
combinations or exchanges of securities, split-ups, split-offs, spin-offs,
liquidations, other similar changes in capitalization, any distribution or
issuance of assets, evidences of indebtedness or subscription rights, options or
warrants to holders of Common Shares or Preferred Shares or
otherwise.  The Purchase Price and the number of Preferred Shares or
other securities issuable upon exercise of the Rights are subject to adjustment
from time to time in the event of the declaration of a stock dividend on the
Common Shares payable in Common Shares or a subdivision or combination of the
Common Shares prior to the Distribution Date.

    

    
      
        
           

        

        
          3

          
            

          

        

        
           

        

      

    

    

    The
Preferred Shares are authorized to be issued in fractions which are an integral
multiple of one one-thousandth (1/1,000th) of a Preferred
Share.  The Company may, but is not required to, issue fractions of
shares upon the exercise of Rights, and in lieu of fractional shares, the
Company may make a cash payment based on the market price of such shares on the
first trading date prior to the date of exercise or utilize a depositary
arrangement as provided by the terms of the Preferred Shares.

    Subject
to the right of the Board to redeem or exchange the Rights as described below,
at such time as there is an Acquiring Person, the holder of each Right will
thereafter have the right to receive, upon exercise thereof, for the Purchase
Price, that number of one one-thousandths (1/1,000ths) of a Preferred
Share equal to the number of Common Shares which at the time of such transaction
would have a market value of twice the Purchase Price.  Any Rights
that are or were beneficially owned by an Acquiring Person on or after the
Distribution Date will become null and void and will not be subject to the
“flip-in” provision.

    

    
      
        
           

        

        
          4

          
            

          

        

        
           

        

      

    

    

    In the
event the Company is acquired in a merger or other business combination by an
Acquiring Person that has common shares publicly traded in the United States or
50% or more of the Company’s assets or assets representing 50% or more of the
Company’s earning power are sold, leased, exchanged or otherwise transferred (in
one or more transactions) to an Acquiring Person that has common shares publicly
traded in the United States, proper provision must be made so that each Right
will entitle its holder to purchase, for the Purchase Price, that number of
common shares of such entity which at the time of the transaction would have a
market value of twice the Purchase Price.  In the event the Company is
acquired in a merger or other business combination by an Acquiring Person that
does not have common shares publicly traded in the United States or 50% or more
of the Company’s assets or assets representing 50% or more of the earning power
of the Company are sold, leased, exchanged or otherwise transferred (in one or
more transactions) to an Acquiring Person that does not have common shares
publicly traded in the United States, proper provision must be made so that each
Right will entitle its holder to purchase, for the Purchase Price, at such
holder’s option, (i) that number of common shares of the surviving
corporation in the transaction with such entity which at the time of the
transaction would have a book value of twice the Purchase Price, (ii) that
number of common shares of such entity which at the time of the transaction
would have a book value of twice the Purchase Price or (iii) if such entity
has an affiliate which has common shares publicly traded in the United States,
that number of common shares of such affiliate which at the time of the
transaction would have a market value of twice the Purchase
Price.  The “flip-over” provision only applies to a merger or similar
business combination with an Acquiring Person.

    ANY
RIGHTS THAT ARE OR WERE, AT ANY TIME ON OR AFTER THE DATE AN ACQUIRING PERSON
BECOMES SUCH, BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR ANY AFFILIATE OR
ASSOCIATE OF AN ACQUIRING PERSON (OR A TRANSFEREE THEREOF) WILL BECOME NULL AND
VOID AND ANY HOLDER OF ANY SUCH RIGHT (INCLUDING ANY SUBSEQUENT HOLDER) WILL BE
UNABLE TO EXERCISE ANY SUCH RIGHT.

    The
Rights are redeemable by the Board at a redemption price of $0.001 per Right
(the “Redemption
Price”) any time prior to the earlier of (i) the Distribution Date
and (ii) the Expiration Date (the date of such redemption being the “Redemption
Date”).  Immediately upon the action of the Board electing to
redeem the Rights, and without any further action and without any notice, the
right to exercise the Rights will terminate and the only right of the holders of
Rights will be to receive the Redemption Price.

    

    
      
        
           

        

        
          5

          
            

          

        

        
           

        

      

    

    

    After
there is an Acquiring Person the Board may elect to exchange each Right (other
than Rights owned by an Acquiring Person) for consideration per Right consisting
of (i) one-half of the securities that would be issuable at such time upon
the exercise of one Right pursuant to the terms of the Rights Agreement or
(ii) cash in an amount equal to the Purchase
Price.  Notwithstanding the foregoing, the Board is not empowered to
effect such exchange at any time after any person (other than the Company, any
subsidiary of the Company, any employee benefit plan of the Company or any such
subsidiary, or any entity holding Common Shares for or pursuant to the terms of
any such plan), together with all affiliates and associates of such person,
becomes the beneficial owner of 50% or more of the Common Shares then
outstanding.

    At any
time prior to such time as there shall be an Acquiring Person, the Company may,
without the approval of any holder of the Rights, supplement or amend any
provision of the Rights Agreement (including the date on which the Distribution
Date will occur, the amount of the Purchase Price or the definition of
“Acquiring Person”), except that no supplement or amendment may be made that
extends the Expiration Date or reduces the Redemption Price.

    Until a
Right is exercised, the holder thereof, as such, will have no rights as a
stockholder of the Company, including, without limitation, the right to vote or
to receive dividends.

    A copy of
the Rights Agreement, including the terms of the Preferred Shares, will be filed
with the Securities and Exchange Commission as an Exhibit to a Registration
Statement on Form 8-A.  A copy of the Rights Agreement is
available free of charge from the Company upon written request.  This
summary description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement, which is
incorporated herein by reference.

     

     

     

     

    6telkonet_8k-ex1001.htm

    
      
        

      

    

    Exhibit
10.1

    SECURITIES
PURCHASE AGREEMENT

     

    This
Securities Purchase Agreement (this “Agreement”) is dated as of
November 16, 2009, by and among Telkonet, Inc., a Utah corporation (the “Company”), and each purchaser
identified on the signature pages hereto (each, including its successors and
assigns, a “Purchaser”
and collectively, the “Purchasers”).

     

    RECITALS

     

    A. The
Company and each Purchaser is executing and delivering this Agreement in
reliance upon the exemption from securities registration afforded by Section
4(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule
506 of Regulation D (“Regulation D”) as promulgated
by the United States Securities and Exchange Commission (the “Commission”) under the
Securities Act.

    

    B. Each
Purchaser, severally and not jointly, wishes to purchase, and the Company wishes
to sell, upon the terms and conditions stated in this Agreement, (i) that
aggregate number of shares of the Company’s Series A Preferred Stock, par value
$0.001 per share (the “Series
A Preferred Stock”), set forth below such Purchaser’s name on the
signature page of this Agreement (which aggregate amount for all Purchasers
together shall be 215 shares of Series A Preferred Stock and shall be
collectively referred to herein as the “Shares”) and (ii) warrants,
in substantially the form attached hereto as Exhibit A (the “Warrants”), to acquire up to
that number of shares of Common Stock
equal to the quotient resulting from dividing (A) the product of twenty-five
percent (25%) multiplied by the Subscription Amount for such Purchaser by (B)
the Warrant Exercise Price, rounded up to the nearest whole share (the shares of
Common Stock issuable upon exercise of or otherwise pursuant to the Warrants
collectively are referred to herein as the “Warrant
Shares”).  The Shares shall be convertible into shares of the
Company’s common stock, par value $0.001 per share (the “Common Stock”) (the shares of
Common Stock issuable upon conversion of the Shares collectively are referred to
herein as the “Conversion
Shares”), and shall have the rights, preferences and restrictions set
forth in the Articles of Amendment of the Amended and Restated Articles of
Incorporation of the Company, in the form attached hereto as Exhibit B (the “Articles of
Amendment”).

    

    C. In
addition to selling Shares and Warrants as set forth in the foregoing Recital,
the Company wishes to issue as a commitment fee to each of the Purchasers, upon
the terms and conditions stated in this Agreement, an additional Warrant to each
of the Purchasers, to acquire up to that number of Warrant Shares equal to the
quotient resulting from dividing (A) the product of twenty-five percent (25%)
multiplied by the Subscription Amount for such Purchaser by (B) the Warrant
Exercise Price, rounded up to the nearest whole share.

    

    D. The
Shares, the Conversion Shares, the Warrants and the Warrant Shares collectively
are referred to herein as the “Securities”.

    

    E.  Contemporaneously with the
execution and delivery of this Agreement, the parties hereto are executing and
delivering a Registration Rights Agreement, substantially in the form attached
hereto as Exhibit
C (the “Registration
Rights Agreement”), pursuant to which, among other things, the Company
will agree to provide certain registration rights with respect to the Conversion
Shares and the Warrant Shares under the Securities Act and the rules and
regulations promulgated thereunder and applicable state securities
laws.

    

    NOW,
THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement,
and for other good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, the Company and the Purchasers hereby agree as
follows:

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    ARTICLE
I.

    DEFINITIONS

     

    1.1 Definitions.  In
addition to the terms defined elsewhere in this Agreement, for all purposes of
this Agreement, the following terms shall have the meanings indicated in this
Section
1.1:

     

    “Action” means any action,
suit, inquiry, notice of violation, proceeding (including any partial proceeding
such as a deposition) or investigation pending or, to the Company’s Knowledge,
threatened in writing against the Company, any Subsidiary or any of their
respective properties or any officer, director or employee of the Company or any
Subsidiary acting in his or her capacity as an officer, director or employee
before or by any federal, state, county, local or foreign court, arbitrator,
governmental or administrative agency, regulatory authority, stock market, stock
exchange or trading facility.

     

    “Additional Option” has the
meaning set forth in Section
4.13.

     

    “Affiliate” means, with
respect to any Person, any other Person that, directly or indirectly through one
or more intermediaries, Controls, is controlled by or is under common control
with such Person, as such terms are used in and construed under Rule 405 under
the Securities Act.  With respect to a Purchaser, any investment fund
or managed account that is managed on a discretionary basis by the same
investment manager as such Purchaser will be deemed to be an Affiliate of such
Purchaser.

     

    “Agreement” has the meaning
set forth in the Preamble.

     

    “Articles of Amendment” has
the meaning set forth in the Recitals.

     

    “Board of Directors ” means
the board of directors of the Company.

     

    “Business Day” means any day except Saturday, Sunday, any day which is
a federal legal holiday in the United States or any day on which banking
institutions in the State of New York are authorized or required by law or other
governmental action to close.

     

    “Closing” means the Initial
Closing and the Subsequent Closings unless otherwise specified.

     

    “Commission” has the meaning
set forth in the Recitals.

     

    “Common Stock” has the meaning
set forth in the Recitals, and also includes any other class of securities into
which the Common Stock may hereafter be reclassified or changed
into.

     

    “Common Stock Equivalents”
means any securities of the Company or any Subsidiary which would entitle the
holder thereof to acquire at any time Common Stock, including, without
limitation, any debt, preferred stock, rights, options, warrants or other
instrument that is at any time convertible into or exchangeable for, or
otherwise entitles the holder thereof to receive, Common Stock or other
securities that entitle the holder to receive, directly or indirectly, Common
Stock.

     

    “Company” has the meaning set
forth in the Preamble.

    

    “Company Counsel” means
Goodwin Procter LLP, with offices located at 53 State Street, Boston,
Massachusetts.

     

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

    
 

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

    

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

    

    “Control” (including the terms
“controlling”, “controlled by” or “under common control with”) means the
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.

     

    “Conversion Shares” has the
meaning set forth in the Recitals.

     

    “Disclosure Materials” has the
meaning set forth in Section
3.1(h).

     

    “Disclosure Schedules” has the
meaning set forth in Section
3.1.

     

    “Effective Date” means the
date on which the initial Registration Statement required by Section 2(a) of the
Registration Rights Agreement is first declared effective by the
Commission.

     

    “Environmental Laws” has the
meaning set forth in Section
3.1(cc).

     

    “Escrow Agent” have the
meanings set forth in Section
2.1(c).

    

    “Escrow Amount” have the
meanings set forth in Section
2.1(c).

     

    “Evaluation Date” has the meaning set forth in Section 3.1(t).

     

    “Exchange Act” means the
Securities Exchange Act of 1934, as amended, or any successor statute, and the
rules and regulations promulgated thereunder.

     

    “Exercising Shareholder” has
the meaning set forth in Section
4.13.

     

    “GAAP” means U.S. generally
accepted accounting principles, as applied by the Company.

     

    “General Counsel” means Howard
J. Barr, the General Counsel of the Company.

     

    “Initial Closing” means the
initial closing of the purchase and sale of the Shares and the Warrants pursuant
to this Agreement.

     

    “Initial Closing Date” means the
Trading Day when all of the Transaction Documents have been executed and
delivered by the applicable parties thereto, and all of the conditions set forth
in Sections
2.1, 2.2, 5.1 and 5.2 hereof are
satisfied or waived, as the case may be, or such other date as the parties may
agree.

     

    “Intellectual Property Rights”
has the meaning set forth in Section
3.1(p).

     

    “Lien” means any lien, charge,
claim, encumbrance, security interest, right of first refusal, preemptive right
or other restrictions of any kind.

     

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    “Material Adverse Effect”
means a material adverse effect on the results of operations, assets, prospects,
business or financial condition of the Company and the Subsidiaries, taken as a
whole, except that any of the following, either alone or in combination, shall
not be deemed a Material Adverse Effect: (i) effects caused by changes or
circumstances affecting general market conditions in the U.S. economy or which
are generally applicable to the industry in which the Company operates, provided
that such effects are not borne disproportionately by the Company,
(ii) effects resulting from or relating to the announcement or disclosure
of the sale of the Securities or other transactions contemplated by this
Agreement, or (iii) effects caused by any event, occurrence or condition
resulting from or relating to the taking of any action in accordance with this
Agreement.

     

    “Material Contract” means any
contract of the Company that has been filed or was required to have been filed
as an exhibit to the SEC Reports pursuant to Item 601(b)(4) or Item 601(b)(10)
of Regulation S-K.

    

    “Material Permits” has the
meaning set forth in Section
3.1(n).

     

    “New York Courts” means the
state and federal courts sitting in the City of New York, Borough of
Manhattan.

     

    “Outside Date” means the
November 24, 2009.

     

    “Person” means an individual,
corporation, partnership, limited liability company, trust, business trust,
association, joint stock company, joint venture, sole proprietorship,
unincorporated organization, governmental authority or any other form of entity
not specifically listed herein.

     

    “Principal Trading Market”
means the Trading Market on which the Common Stock is primarily listed on and
quoted for trading.

     

    “Proceeding” means an action,
claim, suit, investigation or proceeding (including, without limitation, an
investigation or partial proceeding, such as a deposition), whether commenced or
threatened.

     

    “Proxy Statement” has the
meaning set forth in Section
4.16.

     

    “Purchase Price” means
$5,000  per
share of Series A Preferred Stock.

     

    “Purchaser” or “Purchasers” has the meaning
set forth in the Recitals.

     

    “Purchaser Deliverables” has
the meaning set forth in Section
2.2(b).

     

    “Registration Rights
Agreement” has the meaning set forth in the Recitals.

     

    “Registration Statement” means
a registration statement meeting the requirements set forth in the Registration
Rights Agreement and covering the resale by the Purchasers of the Registrable
Securities (as defined in the Registration Rights Agreement).

     

    “Regulation D” has the meaning
set forth in the Recitals.

     

    “Required Approvals” has the
meaning set forth in Section
3.1(e).

     

    “Reverse Stock Split” has the
meaning set forth in Section
4.16.

     

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    “Rule 144” means Rule 144
promulgated by the Commission pursuant to the Securities Act, as such Rule may
be amended from time to time, or any similar rule or regulation hereafter
adopted by the Commission having substantially the same effect as such
Rule.

     

    “SEC” has the meaning set
forth in Section
4.16.

     

    “SEC Reports” has the meaning
set forth in Section
3.1(h).

     

    “Secretary’s Certificate” has
the meaning set forth in Section
2.2(a)(viii).

     

    “Securities Act” has the
meaning set forth in the Recitals.

     

    “Series A Preferred Stock” has
the meaning set forth in the Recitals.

     

    “Shares” has the meaning set
forth in the Recitals.

     

    “Short Sales” include, without
limitation, (i) all “short sales” as defined in Rule 200 promulgated under
Regulation SHO under the Exchange Act, whether or not against the box, and all
types of direct and indirect stock pledges, forward sale contracts, options,
puts, calls, short sales, swaps, “put equivalent positions” (as defined in Rule
16a-1(h) under the Exchange Act) and similar arrangements (including on a total
return basis), and (ii) sales and other transactions through non-U.S. broker
dealers or foreign regulated brokers (but shall
not be deemed to include the location and/or reservation of borrowable shares of
Common Stock).

     

    “Stock Certificates” has the
meaning set forth in Section
2.2(a)(ii).

     

    “Subscription Amount” means,
with respect to each Purchaser, the aggregate amount to be paid for the Shares
and the related Warrants purchased hereunder as indicated on such Purchaser’s
signature page to this Agreement next to the heading “Aggregate Purchase Price
(Subscription Amount)” in United States dollars
and in immediately available funds.

     

    “Subscription Right” has the
meaning set forth in Section
4.13.

     

    “Subsequent Closing” and
“Subsequent Closings”
have the meanings set forth in Section
2.1(b).

    “Subsequent Closing Date” means the
Trading Day when all of the Transaction Documents have been executed and
delivered by the applicable parties thereto, and all of the conditions set forth
in Sections
5A.1 and 5A.2 hereof are
satisfied or waived, as the case may be, or such other date as the parties may
agree which date(s) shall be no later than the Outside Date.

     

    “Subsidiary” means any subsidiary of the Company as set forth on
Schedule
3.1(a), and shall, where applicable,
include any subsidiary of the Company formed or acquired after the date
hereof.

     

    “Trading Affiliate” has the
meaning set forth in Section
3.2(h).

     

    “Trading Day” means (i) a day
on which the Common Stock is listed or quoted and traded on its Principal
Trading Market (other than the OTC Bulletin Board), or (ii) if the Common Stock
is not listed on a Trading Market (other than the OTC Bulletin Board), a day on
which the Common Stock is traded in the over-the-counter market, as reported by
the OTC Bulletin Board, or (iii) if the Common Stock is not quoted on any
Trading Market, a day on which the Common Stock is quoted in the
over-the-counter market as reported in the “pink sheets” by Pink Sheets LLC (or
any similar organization or agency succeeding to its functions of reporting
prices); provided, that
in the event that the Common Stock is not listed or quoted as set forth in (i),
(ii) and (iii) hereof, then Trading Day shall mean a Business Day.

     

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    “Trading Market” means
whichever of the New York Stock Exchange, NYSE Amex, the NASDAQ Global Select
Market, the NASDAQ Global Market, the NASDAQ Capital Market or the OTC Bulletin
Board on which the Common Stock is listed or quoted for trading on the date in
question.

     

    “Transaction Documents” means
this Agreement, the schedules and exhibits attached hereto, the Warrants, the
Registration Rights Agreement and any other documents or agreements explicitly
contemplated hereunder.

     

    “Transfer Agent” means
StockTrans, the current transfer agent of the
Company, with a mailing address of 44 West Lancaster Avenue, Ardmore,
Pennsylvania 19003, and a facsimile number of 610-649-7302, or any
successor transfer agent for the Company.

     

    “Warrants” has the meaning set
forth in the Recitals to this Agreement.

     

    “Warrant Exercise Price” has
the meaning set forth in Section
2.1(a).

     

    “Warrant Shares” has the
meaning set forth in the Recitals.

     

    
      ARTICLE
II.

      PURCHASE
AND SALE

       

      2.1 Closing.

       

      (a) Amount.  Subject
to the terms and conditions set forth in this Agreement, at the Initial Closing
or a Subsequent Closing, as applicable, the Company shall issue and sell to each
Purchaser, and each Purchaser shall, severally and not jointly, purchase from
the Company, such number of shares of Series A Preferred Stock equal to the
quotient resulting from dividing (i) the Subscription Amount for such Purchaser
by (ii) the Purchase Price, rounded down to the nearest whole
Share.  In addition, (A) each Purchaser shall receive a Warrant to
purchase a number of Warrant Shares equal to the quotient resulting from
dividing (I) the product of twenty-five percent (25%) multiplied by the
Subscription Amount for such Purchaser by (II) the Warrant Exercise Price,
rounded up to the nearest whole share, as indicated below such Purchaser’s name
on the signature page to this Agreement and (B) each Purchaser shall receive an
additional Warrant to purchase a number of Warrant Shares equal to the quotient
resulting from dividing (I) the product of twenty-five percent (25%) multiplied
by the Subscription Amount for such Purchaser by (II) the Warrant Exercise
Price, rounded up to the nearest whole share, as indicated below such
Purchaser’s name on the signature page to this Agreement. The Warrants shall
have an exercise price equal to the greater of (i) the closing bid price of a
share of Common Stock on November 12, 2009 or (ii) the volume-weighted average
price of a share of Common Stock measured over the 30-day period immediately
preceding November 12, 2009, per Warrant Share (the “Warrant Exercise
Price”).

       

      (b) Initial Closing; Subsequent
Closings.  The Initial Closing of the purchase and sale of the
Shares shall take place at the offices of the Company Counsel on the Initial
Closing Date or at such other locations or remotely by facsimile transmission or
other electronic means as the parties may mutually agree.  In the
event there is more than one closing (each such closing after the Initial
Closing, a “Subsequent
Closing” and collectively, the “Subsequent Closings”), the
term “Closing” shall apply to the Initial Closing and the Subsequent Closings
unless otherwise specified.

       

       

      
        
          
          

        

        
          6

          
            

          

        

        
          
          

        

      

       

      (c) Form of
Payment.  Except as may otherwise be agreed to among the
Company and one or more of the Purchasers, on or prior to the Business Day
immediately prior to the Initial Closing Date or a Subsequent Closing Date, as
applicable, each Purchaser shall wire its Subscription Amount, in United States
dollars and in immediately available funds, to a non-interest bearing escrow
account established by the Company with JPMorgan Chase Bank, N.A. (the “Escrow Agent”) as set forth
on Exhibit I
hereto (the aggregate amounts received being held in escrow by the Escrow Agent
are referred to herein as the “Escrow
Amount”).  On the Initial Closing Date or a Subsequent Closing
Date, as applicable, (i) the Company shall
instruct the Escrow Agent to deliver, in immediately available funds, the
applicable portion of the Escrow Amount to the Company, (ii) the Company shall
irrevocably instruct the Transfer Agent to deliver to each Purchaser one or more
stock certificates, free and clear of all restrictive and other legends (except
as expressly provided in Section 4.1(b) hereof), evidencing the number of Shares such Purchaser
is purchasing as is set forth on such Purchaser’s signature page to this
Agreement next to the heading “Number of Shares to be Acquired”, within three (3) Trading Days after the Initial
Closing or such Subsequent Closing, as applicable, and (iii) the Company shall
deliver to (A) each Purchaser one or more Warrants, free and clear of all
restrictive and other legends (except as expressly provided in Section 4.1(b) hereof), evidencing the number of Warrants such
Purchaser is purchasing as is set forth on such Purchaser’s signature
page to this Agreement next to the heading “Underlying Shares Subject to
Warrant” and (B) each Purchaser one or more
Warrants, free and clear of all restrictive and other legends (except as
expressly provided in Section 4.1(b) hereof), evidencing the number of Warrants as is set
forth on such Purchaser’s signature page to this Agreement next to the
heading “Underlying Shares Subject to Additional Warrant,” within three (3) Trading Days after the Initial Closing
or such Subsequent Closing, as applicable.

       

      2.2 Closing
Deliveries.    (a)  On or prior to the
Initial Closing, the Company shall issue, deliver or cause to be delivered to
each Purchaser the following (the “Company
Deliverables”):

       

      (i) this
Agreement, duly executed by the Company;

       

      (ii)
facsimile copies of one or more stock certificates evidencing the Shares
subscribed for by such Purchaser hereunder, registered in the name of such
Purchaser as set forth on the Stock Certificate Questionnaire included as Exhibit D-2 hereto
(the “Stock
Certificate”), with the original Stock Certificates delivered within
three (3) Trading Days of the Initial Closing or
such Subsequent Closing, as applicable;

       

      (iii) (A)
facsimile copies of one or more Warrants, executed by the Company and registered
in the name of such Purchaser as set forth on the Stock Certificate
Questionnaire included as Exhibit D-2 hereto,
pursuant to which such Purchaser shall have the right to acquire such number of
Warrant Shares equal to the quotient resulting from dividing (I) the product of
twenty-five percent (25%) multiplied by the Subscription Amount for such
Purchaser by (II) the Warrant Exercise Price, rounded up to the nearest whole
share, and (B) facsimile copies of one or more additional Warrants, executed by
the Company and registered in the name of such Purchaser as set forth on the
Stock Certificate Questionnaire included as Exhibit D-2 hereto,
pursuant to which such Purchaser shall have the right to acquire such number of
Warrant Shares equal to the quotient resulting from dividing (I) the product of
twenty-five percent (25%) multiplied by the Subscription Amount for such
Purchaser by (II) the Warrant Exercise Price, rounded up to the nearest whole
share, on the terms set forth therein, with the original Warrants delivered
within three (3) Trading Days of the Initial
Closing or such Subsequent Closing, as applicable;

       

      (iv) a
legal opinion of Company Counsel, dated as of the Initial Closing Date and in
the form attached hereto as Exhibit E, executed
by such counsel and addressed to the Purchasers;

       

       

      
        
          
          

        

        
          7

          
            

          

        

        
          
          

        

      

       

      (v) a
legal opinion of General Counsel, dated as of the Initial Closing Date and in
the form attached hereto as Exhibit F, executed
by such counsel and addressed to the Purchasers;

       

      (vi) the
Registration Rights Agreement, duly executed by the Company;

       

      (vii) a
certificate of the Secretary of the Company (the “Secretary’s Certificate”),
dated as of the Initial Closing Date, (a) certifying the resolutions adopted by
the Board of Directors of the Company or a duly authorized committee thereof
approving the transactions contemplated by this Agreement and the other
Transaction Documents and the issuance of the Securities, (b) certifying the
current versions of the certificate or articles of incorporation, as amended by
the Articles of Amendment, and by-laws of the Company and (c) certifying as to
the signatures and authority of persons signing the Transaction Documents and
related documents on behalf of the Company, in the form attached hereto as Exhibit
G;

       

      (viii)
the Compliance Certificate referred to in Section
5.1(h);

       

      (ix) a
certificate evidencing the formation and good standing of the Company issued by
the Secretary of State (or comparable office) of the State of Utah, as of a date
within three (3) Business Days of the Initial Closing Date;

       

      (x) a
certificate evidencing the Company’s qualification as a foreign corporation and
good standing issued by the Secretary of State (or comparable office) of each
jurisdiction in which the Company is qualified to do business as a foreign
corporation, as of a date within three (3) Business Days of the Initial Closing
Date;

       

      (xi) a
copy of the Articles of Amendment, as filed with the Secretary of State (or
comparable office) of the State of Utah; and

       

      (xii)  evidence
of repayment of the Company’s indebtedness to its officers on terms reasonably
satisfactory to the Company and the Purchasers.

       

      (b) On or
prior to the Initial Closing and in the case of 2.2(b)(ii) pursuant to Section
2.1(c), each Purchaser shall deliver or cause to be delivered to the Company the
following (the “Purchaser
Deliverables”):

       

      (i) this
Agreement, duly executed by such Purchaser;

       

      (ii) its
Subscription Amount in United States dollars and in immediately available funds,
in the amount set forth as the “Purchase Price” indicated below such Purchaser’s
name on the applicable signature page hereto under the heading “Aggregate
Purchase Price (Subscription Amount)” by wire transfer to the Escrow Account, as
set forth on Exhibit
I attached hereto; provided, however, in the event
such Purchaser is acquiring Shares and Warrants at a Subsequent Closing, such
Purchaser shall deliver its Subscription Amount on the applicable Subsequent
Closing Date.

       

      (iii) the
Registration Rights Agreement, duly executed by such Purchaser;

       

      (iv) a
fully completed and duly executed Selling Stockholder Questionnaire in the form
attached as Annex B to the Registration Rights Agreement; and

       

       

      
        
          
          

        

        
          8

          
            

          

        

        
          
          

        

      

       

      (v) a
fully completed and duly executed Accredited Investor Questionnaire,
satisfactory to the Company, and Stock Certificate Questionnaire in the forms
attached hereto as Exhibits D-1 and
D-2,
respectively.

       

      ARTICLE
III.

      REPRESENTATIONS
AND WARRANTIES

       

      3.1 Representations and
Warranties of the Company.  Except (i) as set forth in the
schedules delivered herewith (the “Disclosure Schedules”), which
Disclosure Schedules shall be deemed a part hereof and shall qualify any
representation made herein to the extent of the disclosure contained in the
corresponding section of the Disclosure Schedules, or (ii) disclosed in the SEC
Reports, the Company hereby represents and warrants as of the date hereof and
the Initial Closing Date (except for the representations and warranties that
speak as of a specific date, which shall be made as of such date), to each of
the Purchasers:

       

      (a) Subsidiaries.  The
Company has no direct or indirect Subsidiaries other than those listed in Schedule 3.1(a)
hereto.  Except as disclosed in Schedule 3.1(a)
hereto, the Company owns, directly or indirectly, all of the capital stock or
comparable equity interests of each Subsidiary free and clear of any and all
Liens, and all the issued and outstanding shares of capital stock or comparable
equity interest of each Subsidiary are validly issued and are fully paid,
non-assessable and free of preemptive and similar rights to subscribe for or
purchase securities.

       

      (b) Organization and
Qualification.  The Company and each of its Subsidiaries is an
entity duly incorporated or otherwise organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or organization
(as applicable), with the requisite corporate power and authority to own or
lease and use its properties and assets and to carry on its business as
currently conducted.  The Company and each of its Subsidiaries is duly
qualified to conduct business and is in good standing as a foreign corporation
or other entity in each jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary, except
where the failure to be so qualified or in good standing, as the case may be,
would not have or reasonably be expected to result in 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;
Validity.  The Company has the requisite corporate power and
authority to enter into and to consummate the transactions contemplated by each
of the Transaction Documents to which it is a party and otherwise to carry out
its obligations hereunder and thereunder.  The Company’s execution and
delivery of each of the Transaction Documents to which it is a party and the
consummation by it of the transactions contemplated hereby and thereby
(including, but not limited to, the sale and delivery of the Shares and the
Warrants and the reservation for issuance and the  subsequent issuance
of the Conversion Shares upon the conversion of the Shares and the Warrant
Shares upon exercise of the Warrants) have been duly authorized by all necessary
corporate action on the part of the Company, and no further corporate action is
required by the Company, its Board of Directors or its stockholders in
connection therewith other than in connection with the Required
Approvals.  Each of the Transaction Documents to which it is a party
has been (or upon delivery will have been) duly executed by the Company and is,
or when delivered in accordance with the terms hereof, will constitute the
legal, valid and binding obligation of the Company enforceable against the
Company in accordance with its terms, except (i) as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting generally the enforcement
of, creditors’ rights and remedies or by other equitable principles of general
application, (ii) as limited by laws relating to the availability of specific
performance, injunctive relief or other equitable remedies and (iii) insofar as
indemnification and contribution provisions may be limited by applicable
law.

       

       

      
        
          
          

        

        
          9

          
            

          

        

        
          
          

        

      

       

      (d) No
Conflicts.  The execution, delivery and performance by the
Company of the Transaction Documents to which it is a party and the consummation
by the Company of the transactions contemplated hereby or thereby (including,
without limitation, the issuance of the Shares and Warrants and the reservation
for issuance and issuance of the Conversion Shares and the Warrant Shares) do
not and will not (i) conflict with or violate any provisions of the Company’s or
any Subsidiary’s certificate or articles of incorporation, bylaws or otherwise
result in a violation of the organizational documents of the Company, (ii)
conflict with, or constitute a default (or an event that with notice or lapse of
time or both would result in a default) under, result in the creation of any
Lien upon any of the properties or assets of the Company or any Subsidiary or
give to others any rights of termination, amendment, acceleration or
cancellation (with or without notice, lapse of time or both) of, any Material
Contract, or (iii) subject to the Required Approvals, conflict with or result in
a violation of any law, rule, regulation, order, judgment, injunction, decree or
other restriction of any court or governmental authority to which the Company or
a Subsidiary is subject (including federal and state securities laws and
regulations and the rules and regulations, assuming the correctness of the
representations and warranties made by the Purchasers herein, of any
self-regulatory organization to which the Company or its securities are subject,
including all applicable Trading Markets), or by which any property or asset of
the Company or a Subsidiary is bound or affected, except in the case of clauses
(ii) and (iii) such as would not, individually or in the aggregate,
have  or  reasonably be expected to result in a Material
Adverse Effect.

       

      (e) Filings, Consents and
Approvals.  Neither the Company nor any of its Subsidiaries is
required to obtain any consent, waiver, authorization or order of, give any
notice to, or make any filing or registration with, any court or other federal,
state, local or other governmental authority or other Person in connection with
the execution, delivery and performance by the Company of the Transaction
Documents (including the issuance of the Securities), other than (i) the filing
with the Commission of one or more Registration Statements in accordance with
the requirements of the Registration Rights Agreement, (ii) filings required by
applicable state securities laws, (iii) the filing of a Notice of Sale of
Securities on Form D with the Commission under Regulation D of the Securities
Act, (iv) the filing of any requisite notices and/or application(s) to the
Principal Trading Market for the issuance and sale of the Securities and the
listing of the Conversion Shares and the Warrant Shares for trading or
quotation, as the case may be, thereon in the time and manner required thereby,
(v) the filings required in accordance with Section 4.5 of this
Agreement and (vi) those that have been made or obtained prior to the date of
this Agreement (collectively, the “Required
Approvals”).

       

      (f) Issuance of the
Securities.  The Shares have been duly authorized and, when
issued and paid for in accordance with the terms of the Transaction Documents,
will be duly and validly issued, fully paid and nonassessable and free and clear
of all Liens, other than restrictions on transfer provided for in the
Transaction Documents or imposed by applicable securities laws, and shall not be
subject to preemptive or similar rights.  The Conversion Shares
issuable upon conversion of the Shares have been duly authorized and, when
issued and paid for in accordance with the terms of the Transaction Documents
will be duly and validly issued, fully paid and nonassessable, free and clear of
all Liens, other than restrictions on transfer provided for in the Transaction
Documents or imposed by applicable securities laws, and shall not be subject to
preemptive or similar rights of stockholders.  The Warrants have been
duly authorized and, when issued and paid for in accordance with the terms of
the Transaction Documents, will be duly and validly issued, free and clear of
all Liens, other than restrictions on transfer provided for in the Transaction
Documents or imposed by applicable securities laws, and shall not be subject to
preemptive or similar rights of stockholders. The Warrant Shares issuable upon
exercise of the Warrants have been duly authorized and, when issued and paid for
in accordance with the terms of the Transaction Documents and the Warrants will
be duly and validly issued, fully paid and nonassessable, free and clear of all
Liens, other than restrictions on transfer provided for in the Transaction
Documents or imposed by applicable securities laws, and shall not be subject to
preemptive or similar rights of stockholders.

       

       

      
        
          
          

        

        
          10

          
            

          

        

        
          
          

        

      

       

      (g) Capitalization. The number of shares
and type of all authorized, issued and outstanding capital stock, options and
other securities of the Company (whether or not presently convertible into or exercisable or exchangeable for shares of capital stock of the Company) is set forth
in Schedule
3.1(g) hereto.  The Company
has not issued any capital stock since the date of its most recently filed SEC
Report other than to reflect stock option and warrant exercises that do not,
individually or in the aggregate, have a material affect on the issued and
outstanding capital stock, options and other securities.   No Person has any right of first refusal,
preemptive right, right of participation, or any similar right to participate in
the transactions contemplated by the Transaction Documents that have not been
effectively waived as of the Initial Closing Date. Except as set forth in Schedule 3.1(g)
hereto or a result of the purchase and sale of the Shares and Warrants, there
are no outstanding options, warrants, scrip rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities, rights or
obligations convertible into or exercisable or exchangeable for, or giving any
Person any right to subscribe for or acquire any shares of Common Stock, or
contracts, commitments, understandings or arrangements by which the Company or
any Subsidiary is or may become bound to issue additional shares of Common Stock
or Common Stock Equivalents. The issuance and sale of the Shares and Warrants
will not obligate the Company to issue shares of Common Stock or other
securities to any Person (other than the Purchasers) and will not result in a
right of any holder of Company securities to adjust the exercise, conversion,
exchange or reset price under any of such securities. 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 applicable 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. No further approval or authorization of any stockholder,
the Board of Directors 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 Company’s Knowledge, between or among any of the
Company’s stockholders.

       

      (h) SEC Reports; Disclosure
Materials.  The Company has filed all reports, schedules,
forms, statements and other documents required to be filed by it under the
Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the two
years preceding the date hereof (or such shorter period as the Company was
required by law or regulation to file such material) (the foregoing materials,
including the exhibits thereto and documents incorporated by reference therein,
being collectively referred to herein as the “SEC Reports”, and the SEC
Reports, together with the Disclosure Schedules, being collectively referred to
as the “Disclosure
Materials”) on a timely basis or has received a valid extension of such
time of filing and has filed any such SEC Reports prior to the expiration of any
such extension, except where the failure to file
on a timely basis would not have or reasonably be expected to result in a
Material Adverse Effect (including, for this purpose only, any failure to
qualify to register the Conversion Shares and Warrant Shares for resale on Form
S-3 or which would prevent any Purchaser from using Rule 144 to resell any
Securities).  As of their respective filing dates, or to the
extent corrected by a subsequent restatement, the SEC Reports complied in all
material respects with the requirements of the Securities Act and the Exchange
Act and the rules and regulations of the Commission promulgated thereunder, and
none of the SEC Reports, when filed, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Company has never been an issuer subject to Rule
144(i) under the Securities Act.  Each of the Material
Contracts to which the Company or any Subsidiary is a party or to which the
property or assets of the Company or any of its Subsidiaries are subject has
been filed as an exhibit to the SEC Reports.

       

       

      
        
          
          

        

        
          11

          
            

          

        

        
          
          

        

      

       

      (i) Financial
Statements. The financial statements of the Company included in the
SEC Reports comply in all material respects with applicable accounting
requirements and the rules and regulations of the Commission with respect
thereto as in effect at the time of filing (or to the extent corrected by a
subsequent restatement).  Such financial statements have been prepared
in accordance with GAAP applied on a consistent basis during the periods
involved, except as may be otherwise specified in such financial statements or
the notes thereto and except that unaudited financial statements may not contain
all footnotes required by GAAP, and fairly present in all material respects the
financial position of the Company and its consolidated subsidiaries taken as a
whole as of and for the dates thereof and the results of operations and cash
flows for the periods then ended, subject, in the case of unaudited statements,
to normal, immaterial year-end audit adjustments.

       

      (j) Material
Changes.  Since the date of the latest audited financial
statements included within the SEC Reports, except as specifically disclosed in
a subsequent SEC Report filed prior to the date
hereof, (i) there have been no events, occurrences or developments that
have had or would reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect, (ii) the Company has not incurred any
material liabilities (contingent or otherwise) other than (A) trade payables and
accrued expenses incurred in the ordinary course of business consistent with
past practice and (B) liabilities not required to be reflected in the Company's
financial statements pursuant to GAAP or disclosed in filings made with the
Commission, (iii) the Company has not altered materially its method of
accounting or the manner in which it keeps its accounting books and records,
(iv) the Company has not declared or made any dividend or distribution of cash
or other property to its stockholders or purchased, redeemed or made any
agreements to purchase or redeem any shares of its capital stock (other than in
connection with repurchases of unvested stock issued to employees of the
Company), and (v) the Company has not issued any equity securities to any
officer, director or Affiliate, except Common Stock issued in the ordinary
course as dividends on outstanding preferred stock or issued pursuant to
existing Company stock option or stock purchase plans or executive and director
compensation arrangements disclosed in the SEC Reports. Except for the issuance of the Shares and Warrants
contemplated by this Agreement, no event, liability or development has occurred
or exists with respect to the Company or its Subsidiaries or their respective
business, properties, operations or financial condition, that would be required
to be disclosed by the Company under applicable securities laws at the time this
representation is made that has not been publicly disclosed at least one (1)
Trading Day prior to the date that this representation is
made.

       

      (k) Litigation.  Except
as set forth in Schedule 3.1(k)
hereto, there is no Action which (i) adversely affects or challenges the
legality, validity or enforceability of any of the Transaction Documents or the
Securities or (ii) except as specifically disclosed in the SEC Reports, would,
if there were an unfavorable decision, individually or in the aggregate, have or
reasonably be expected to result in a Material Adverse Effect.

       

      (l) Employment
Matters.  No material labor dispute exists or, to the Company’s
Knowledge, is imminent with respect to any of the employees of the Company which
would have or reasonably be expected to result in a Material Adverse
Effect.  None of the Company’s or any Subsidiary’s employees is a
member of a union that relates to such employee’s relationship with the Company,
and neither the Company nor any of its Subsidiaries is a party to a collective
bargaining agreement, and the Company and each Subsidiary believes that its
relationship with its employees is good.

       

      (m) Compliance.  Except
as set forth in Schedule 3.1(m)
hereto, neither the Company nor any of its Subsidiaries (i) is in default under
or in violation of (and no event has occurred that has not been waived that,
with notice or lapse of time or both, would result in a default by the Company
or any of its Subsidiaries under), nor has the Company or any of its
Subsidiaries received written notice of a claim that it is in default under or
that it is in violation of, any Material Contract (whether or not such default
or violation has been waived), (ii) is in violation of any order of any court,
arbitrator or governmental body having jurisdiction over the Company or its
properties or assets, or (iii) is in violation of, or in receipt of written
notice that it is in violation of, any statute, rule or regulation of any
governmental authority applicable to the Company, except in each case as would
not, individually or in the aggregate, have or reasonably be expected to result
in a Material Adverse Effect.

       

       

      
        
          
          

        

        
          12

          
            

          

        

        
          
          

        

      

       

      (n) Regulatory Permits.
The Company and each of its Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state, local or
foreign regulatory authorities necessary to conduct its respective business as
currently conducted and as described in the SEC Reports, except where the
failure to possess such permits, individually or in the aggregate, has not and
would not have or reasonably be expected to result in a Material Adverse Effect
(“Material Permits”),
and neither the Company nor any of its Subsidiaries has received any notice of
Proceedings relating to the revocation or modification of any such Material
Permits.

       

      (o) Title to
Assets.  All real property and facilities held under lease by
the Company and any of 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.

       

      (p) Patents and
Trademarks.  To the Company’s Knowledge, the Company and the
Subsidiaries own, possess, license or have other rights to use, all patents,
patent applications, trade and service marks, trade and service mark
applications and registrations, trade names, trade secrets, inventions,
copyrights, licenses, technology, know-how and other intellectual property
rights and similar rights described in the SEC Reports as necessary or material
for use in connection with their respective businesses and which the failure to
so have would have or reasonably be expected to result in a Material Adverse
Effect (collectively, the “ Intellectual Property
Rights”).  Neither the Company nor any Subsidiary has received
a notice (written or otherwise) that any of the Intellectual
Property Rights used by the Company or any Subsidiary violates or infringes upon
the rights of any Person.  Except as set forth in Schedule 3.1(p)
hereto, there is no pending or, to the Company’s Knowledge, threatened action,
suit, proceeding or claim by any Person that the Company’s business as now
conducted infringes or otherwise violates any patent, trademark, copyright,
trade secret or other proprietary rights of another.  To the Company’s
Knowledge, there is no existing infringement by another Person of any of the
Intellectual Property Rights that would have or would reasonably be expected to
have a Material Adverse Effect. The Company and its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of all of their Intellectual Property Rights, except where failure to do so
could not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.

       

      (q) Insurance.  The
Company and each of the Subsidiaries are insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
the Company believes to be prudent and customary in the businesses and locations
in which the Company and the Subsidiaries are engaged, including, but not
limited to, directors and officers insurance coverage.  Neither the
Company nor any of its Subsidiaries has received any notice of cancellation of
any such insurance, nor, to the Company’s Knowledge, will it or any Subsidiary
be unable to renew their respective 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 without a
significant  increase  in cost.

       

      (r) Transactions With Affiliates
and Employees.  Except as set
forth in the SEC Reports, none of the officers or directors of the Company and,
to the Company’s Knowledge, none of the employees of the Company is presently a
party to any transaction with the Company or any Subsidiary (other than for
services as employees, officers and directors), that would be required to be
disclosed pursuant to Item 404 of Regulation S-K promulgated under the
Securities Act.

       

       

      
        
          
          

        

        
          13

          
            

          

        

        
          
          

        

      

       

      (s) Internal Accounting
Controls.  The Company 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 GAAP and to maintain
asset and liability accountability, (iii) access to assets or incurrence of
liabilities is permitted only in accordance with management's general or
specific authorization, and (iv) the recorded accountability for assets and
liabilities is compared with the existing assets and liabilities at reasonable
intervals and appropriate action is taken with respect to any
differences.

       

      (t) Sarbanes-Oxley; Disclosure
Controls.  Except as set forth in the SEC Reports, the Company
is in compliance in all material respects with all of the provisions of the
Sarbanes-Oxley Act of 2002 which are applicable to it as of the Initial Closing
Date. The Company has established disclosure controls and procedures (as such
term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) for the Company and designed such disclosure controls
and procedures to ensure that information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Commission’s rules and forms. The Company’s certifying officers have evaluated
the effectiveness of the Company’s disclosure controls and procedures as of the
end of the period covered by the Company’s most recently filed periodic report
under the Exchange Act (such date, the “Evaluation Date”). The Company presented in its most recently filed
periodic report under the Exchange Act the conclusions of the certifying
officers about the effectiveness of the disclosure controls and procedures based
on their evaluations as of the Evaluation Date. Since the Evaluation Date, there
have been no changes in the Company’s internal control over financial reporting
(as such term is defined in the Exchange Act) that has materially affected, or
is reasonably likely to materially affect, the Company’s internal control over
financial reporting.

       

      (u) Certain
Fees.   Other than the fees and expenses set forth in
Section 6.1
hereof or as set forth in Schedule 3.1(u)
hereto, no person or entity will have, as a result
of the transactions contemplated by this Agreement, any valid right, interest or
claim against or upon the Company or a Purchaser for any commission, fee or
other compensation pursuant to any agreement, arrangement or understanding
entered into by or on behalf of the Company. The Purchasers shall have no
obligation with respect to any fees or with respect to any claims made by or on
behalf of other Persons for fees of a type contemplated in this paragraph (u)
that may be due in connection with the transactions contemplated by the
Transaction Documents.  The Company shall indemnify, pay, and hold
each Purchaser harmless against, any liability, loss or expense (including,
without limitation, attorneys’ fees and out-of-pocket expenses) arising in
connection with any such right, interest or claim.

       

      (v) Private Placement.
Assuming the accuracy of the Purchasers’ representations and warranties set
forth in Section
3.2 of this Agreement and the accuracy of the information disclosed in
the Accredited Investor Questionnaires provided by the Purchasers, no
registration under the Securities Act is required for the offer and sale of the
Securities by the Company to the Purchasers under the Transaction
Documents. The issuance and sale of the Securities
hereunder does not contravene the rules and regulations of the Trading Market.

       

      (w) Investment
Company  The Company is not, and
immediately after receipt of payment for the Shares and Warrants, will not be or
be 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 of 1940, as
amended.

       

      (x) Registration
Rights.  Other than each of the Purchasers or as set forth in
Schedule 3.1(x)
hereto, no Person has any right to cause the Company to effect the registration
under the Securities Act of any securities of the Company other than those
securities which are currently registered on an effective registration statement
on file with the Commission.

       

       

      
        
          
          

        

        
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      (y) Listing and Maintenance
Requirements.  Other than as set forth in Schedule 3.1(y)
hereto, 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 the registration of the Common Stock under the Exchange Act nor has
the Company received any notification that the Commission is contemplating
terminating such registration.  Other than as set forth in Schedule 3.1(y)
hereto, the Company has not, in the twelve (12) months preceding the date
hereof, received written notice from any Trading Market on which the Common
Stock is listed or quoted to the effect that the Company is not in compliance
with the listing or maintenance requirements of such Trading
Market.  Other than as set forth in Schedule 3.1(y)
hereto, the Company is in compliance with all
listing and maintenance requirements of the Principal Trading Market on the date
hereof.

       

      (z) Application of Takeover
Protections; Rights Agreements.  The Company and the Board of
Directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Company's charter documents or the laws of its
state of incorporation that is or could reasonably be expected to become
applicable to any of the Purchasers as a result of the Purchasers and the
Company fulfilling their obligations or exercising their rights under the
Transaction Documents, including, without limitation, the Company's issuance of
the Securities and the Purchasers' ownership of the Securities.

       

      (aa)
No Integrated
Offering.  Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2, none of
the Company, its Subsidiaries nor, to the Company’s Knowledge, any of its
Affiliates or any Person acting on its behalf has, directly or indirectly, at
any time within the past six (6) months, made any offers or sales of any Company
security or solicited any offers to buy any security under circumstances that
would (i) eliminate the availability of the exemption from registration under
Regulation D under the Securities Act in connection with the offer and sale by
the Company of the Securities as contemplated hereby or (ii) cause the offering
of the Securities pursuant to the Transaction Documents to be integrated with
prior offerings by the Company for purposes of any applicable law, regulation or
stockholder approval provisions, including, without limitation, under the rules
and regulations of any Trading Market on which any of the securities of the
Company are listed or designated.

       

      (bb)
Tax
Matters.  Other than as set forth in Schedule 3.1(bb)
hereto, the Company and each of its Subsidiaries (i) has accurately and timely
prepared and filed all foreign, federal and state income and all other tax
returns, reports and declarations required by any jurisdiction to which it is
subject, (ii) has paid all taxes and other governmental assessments and charges
that are material in amount, shown or determined to be due on such returns,
reports and declarations, except those being contested in good faith, with
respect to which adequate reserves have been set aside on the books of the
Company and (iii) has set aside on its books provisions reasonably adequate for
the payment of all taxes for periods subsequent to the periods to which such
returns, reports or declarations apply, except, in the case of clauses (i) and
(ii) above, where the failure to so pay or file any such tax, assessment, charge
or return would not have or reasonably be expected to result in a Material
Adverse Effect.  There are no unpaid taxes in any material amount
claimed to be due by the Company or any of its Subsidiaries by the taxing
authority of any jurisdiction.

       

      (cc)
Environmental
Matters.  To the Company’s Knowledge, neither the Company nor
any of its Subsidiaries (i) is in violation of any statute, rule, regulation,
decision or order of any governmental agency or body or any court, domestic or
foreign, relating to the use, disposal or release of hazardous or toxic
substances or relating to the protection or restoration of the environment or
human exposure to hazardous or toxic substances (collectively, “Environmental Laws”), (ii)
owns or operates any real property contaminated with any substance that is in
violation of any Environmental Laws, (iii) is liable for any off-site disposal
or contamination pursuant to any Environmental Laws, or (iv) is subject to any
claim relating to any Environmental Laws; which violation, contamination,
liability or claim has had or would have, individually or in the aggregate, a
Material Adverse Effect.

       

       

      
        
          
          

        

        
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      (dd)
No General
Solicitation. Neither the Company nor, to
the Company’s Knowledge, any person acting on behalf of the Company has offered
or sold any of the Securities by any form of general solicitation or general
advertising.

       

      (ee)
Acknowledgment
Regarding Purchasers’ Purchase of Securities.  The Company
acknowledges and agrees that each of the Purchasers is acting solely in the
capacity of an arm’s length purchaser with respect to the Transaction Documents
and the transactions contemplated hereby and thereby.  The Company further
acknowledges that no Purchaser is acting as a financial advisor or fiduciary of
the Company (or in any similar capacity) with respect to the Transaction
Documents and the transactions contemplated thereby and any advice given by any
Purchaser or any of their respective representatives or agents in connection
with the Transaction Documents and the transactions contemplated thereby is
merely incidental to the Purchasers’ purchase of the Securities. The Company further represents to each Purchaser that
the Company’s decision to enter into this Agreement and the other Transaction
Documents has been based solely on the independent evaluation of the
transactions contemplated hereby by the Company and its
representatives.

       

      (ff)
Regulation M
Compliance.  The Company has not, and to the Company’s 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.

       

      (gg)
No Additional
Agreements.  The Company does not have any agreement or
understanding with any Purchaser with respect to the transactions contemplated
by the Transaction Documents other than as specified in the Transaction
Documents.

       

      (hh)
Use of Form
S-3.  The Company meets the registration and transaction
requirements for use of Form S-3 for the registration of the Conversion Shares
and the Warrant Shares for resale by the Purchasers.

       

      3.2 Representations and
Warranties of the Purchasers.  Each Purchaser hereby, for
itself and for no other Purchaser, represents and warrants as of the date hereof
and as of the Initial Closing Date to the Company as follows:

       

      (a) Organization;
Authority.  Such Purchaser is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization with the requisite corporate or partnership power and authority to
enter into and to consummate the transactions contemplated by the applicable
Transaction Documents and otherwise to carry out its obligations hereunder and
thereunder. The execution and delivery of this Agreement by such Purchaser and
performance by such Purchaser of the transactions contemplated by this Agreement
have been duly authorized by all necessary corporate or, if such Purchaser is
not a corporation, such partnership, limited liability company or other
applicable like action, on the part of such Purchaser.  Each
Transaction document to which it is a party has been duly executed by such
Purchaser, and when delivered by such Purchaser in accordance with the terms
hereof, will constitute the valid and legally binding obligation of such
Purchaser, enforceable against it in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of, creditors’ rights and remedies or by
other equitable principles of general application.

       

       

      
        
          
          

        

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

       

      (c) Investment
Intent.  Such Purchaser understands that the Securities are
“restricted securities” and have not been registered under the Securities Act or
any applicable state securities law and is acquiring the Shares and, upon
conversion of the Shares, will acquire the Conversion Shares issuable upon
conversion thereof, and Warrants and, upon exercise of the Warrants, will
acquire the Warrant Shares issuable upon exercise thereof as principal for its
own account and not with a view to, or for distributing or reselling such
Securities or any part thereof in violation of the Securities Act or any
applicable state securities laws, provided, however, that by
making the representations herein, such Purchaser does not agree to hold any of
the Securities for any minimum period of time and reserves the right, subject to
the provisions of this Agreement and the Registration Rights Agreement, at all
times to sell or otherwise dispose of all or any part of such Securities
pursuant to an effective registration statement under the Securities Act or
under an exemption from such registration and in compliance with applicable
federal and state securities laws.  Such Purchaser is acquiring the
Securities hereunder in the ordinary course of its business. Such Purchaser does
not presently have any agreement, plan or understanding, directly or indirectly,
with any Person to distribute or effect any distribution of any of the
Securities (or any securities which are derivatives thereof) to or through any
person or entity; such Purchaser is not a registered broker-dealer under Section
15 of the Exchange Act or an entity engaged in a business that would require it
to be so registered as a broker-dealer.

       

      (d) Purchaser
Status.  At the time such Purchaser was offered the Shares and
Warrants, it was, and at the date hereof it is, and on each date on which it
exercises the Warrants it will be, an “accredited investor” as defined in Rule
501(a) under the Securities Act.

       

      (e) General
Solicitation.  Such Purchaser is not purchasing the Securities
as a result of any advertisement, article, notice or other communication
regarding the Securities published in any newspaper, magazine or similar media
or broadcast over television or radio or presented at any seminar or any other
general advertisement.

       

      (f) Experience of Such
Purchaser.  Such Purchaser, either alone or together with its
representatives, has such knowledge, sophistication and experience in business
and financial matters so as to be capable of evaluating the merits and risks of
the prospective investment in the Securities, and has so evaluated the merits
and risks of such investment.  Such Purchaser is able to bear the
economic risk of an investment in the Securities and, at the present time, is
able to afford a complete loss of such investment.

       

       

      
        
          
          

        

        
          17

          
            

          

        

        
          
          

        

      

       

      (g) Access to
Information.  Such Purchaser acknowledges that it has had the
opportunity to review the Disclosure Materials and has been afforded (i) the
opportunity to ask such questions as it has deemed necessary of, and to receive
answers from, representatives of the Company concerning the terms and conditions
of the offering of the Securities and the merits and risks of investing in the
Securities; (ii) access to information about the Company and the Subsidiaries
and their respective financial condition, results of operations, business,
properties, management and prospects sufficient to enable it to evaluate its
investment; and (iii) the opportunity to obtain such additional information that
the Company possesses or can acquire without unreasonable effort or expense that
is necessary to make an informed investment decision with respect to the
investment. Neither such inquiries nor any other investigation conducted by or
on behalf of such Purchaser or its representatives or counsel shall modify,
amend or affect such Purchaser's right to rely on the truth, accuracy and
completeness of the Disclosure Materials and the Company's representations and
warranties contained in the Transaction Documents.  Such Purchaser has
sought such accounting, legal and tax advice as it has considered necessary to
make an informed decision with respect to its acquisition of the
Securities.

       

      (h) Certain Trading
Activities.  Other than with respect to the transactions
contemplated herein, since the time that such Purchaser was first contacted by
the Company or any other Person regarding the transactions contemplated hereby,
neither the Purchaser nor any Affiliate of such Purchaser which (x) had
knowledge of the transactions contemplated hereby, (y) has or shares discretion
relating to such Purchaser’s investments or trading or information concerning
such Purchaser’s investments, including in respect of the Securities, and (z) is
subject to such Purchaser’s review or input concerning such Affiliate’s
investments or trading (collectively, “Trading Affiliates”) has
directly or indirectly, nor has any Person acting on behalf of or pursuant to
any understanding with such Purchaser or Trading Affiliate, effected or agreed
to effect any purchases or sales of the securities of the Company (including,
without limitation, any Short Sales involving the Company’s securities).
Notwithstanding the foregoing, in the case of a Purchaser and/or Trading
Affiliate that is, individually or collectively, a multi-managed investment bank
or vehicle whereby separate portfolio managers manage separate portions of such
Purchaser's or Trading Affiliate’s assets and the portfolio managers have no
direct knowledge of the investment decisions made by the portfolio managers
managing other portions of such Purchaser's or Trading Affiliate’s assets, the
representation set forth above shall apply only with respect to the portion of
assets managed by the portfolio manager that have knowledge about the financing
transaction contemplated by this Agreement.  Other than to other
Persons party to this Agreement, such Purchaser has maintained the
confidentiality of all disclosures made to it in connection with this
transaction (including the existence and terms of this transaction).
Notwithstanding the foregoing, for avoidance of doubt, nothing contained herein
shall constitute a representation or warranty, or preclude any actions, with
respect to the identification of the availability of, or securing of, available
shares to borrow in order to effect short sales or similar transactions in the
future.

       

      (i) Brokers and
Finders.  No Person will have, as a result of the transactions
contemplated by this Agreement, any valid right, interest or claim against or
upon the Company or any Purchaser for any commission, fee or other compensation
pursuant to any agreement, arrangement or understanding entered into by or on
behalf of the Purchaser.

       

      (j) Independent Investment
Decision.  Such Purchaser has independently evaluated the
merits of its decision to purchase Securities pursuant to the Transaction
Documents, and such Purchaser confirms that it has not relied on the advice of
any other Purchaser’s business and/or legal counsel in making such
decision.  Such Purchaser understands that nothing in this Agreement
or any other materials presented by or on behalf of the Company to the Purchaser
in connection with the purchase of the Securities constitutes legal, tax or
investment advice.  Such Purchaser has consulted such legal, tax and
investment advisors as it, in its sole discretion, has deemed necessary or
appropriate in connection with its purchase of the Securities.

       

       

      
        
          
          

        

        
          18

          
            

          

        

        
          
          

        

      

       

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

       

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

       

      (m) Regulation M. Such
Purchaser is aware that the anti-manipulation rules of Regulation M under the
Exchange Act may apply to sales of Common Stock and other activities with
respect to the Common Stock by the Purchasers.

       

      (n) Residency.  Such
Purchaser’s residence (if an individual) or offices in which its investment
decision with respect to the Securities was made (if an entity) are located at
the address immediately below such Purchaser’s name on its signature page
hereto.

       

      The
Company and each of the Purchasers acknowledge and agree that no party to this
Agreement has made or makes any representations or warranties with respect to
the transactions contemplated hereby other than those specifically set forth in
this Article
III and the Transaction Documents.

       

      ARTICLE
IV.

      OTHER
AGREEMENTS OF THE PARTIES

       

      4.1 Transfer
Restrictions.

       

      (a) Compliance with
Laws.  Notwithstanding any other provision of this Article IV, each
Purchaser covenants that the Securities may be disposed of only pursuant to an
effective registration statement under, and in compliance with the requirements
of, the Securities Act, or pursuant to an available exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act,
and in compliance with any applicable state and federal securities
laws.  In connection with any transfer of the Securities other than
(i) pursuant to an effective registration statement, (ii) to the
Company  or (iii) pursuant to Rule 144 (provided that the Purchaser
provides the Company with reasonable assurances (in the form of seller and, if
applicable, broker representation letters) that the securities may be sold
pursuant to such rule), the Company may require the transferor thereof to
provide to the Company an opinion of counsel selected by the transferor and
reasonably acceptable to the Company, the form and substance of which opinion
shall be reasonably satisfactory to the Company, to the effect that such
transfer does not require registration of such transferred Securities under the
Securities Act.  As a condition of transfer, any such transferee shall
agree in writing to be bound by the terms of this Agreement and the Registration
Rights Agreement and shall have the rights of a Purchaser under this Agreement
and the Registration Rights Agreement with respect to such transferred
Securities.

       

      (b) Legends.  Certificates
evidencing the Securities shall bear any legend as required by the “blue sky”
laws of any state and a restrictive legend in substantially the following form,
until such time as they are not required under Section
4.1(c):

       

      [NEITHER
THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES
HAVE BEEN REGISTERED] [THESE SECURITIES HAVE NOT BEEN REGISTERED] UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR APPLICABLE STATE
SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OR (B) AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS OR BLUE SKY LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE COMPANY AND ITS TRANSFER AGENT OR (II) UNLESS
SOLD PURSUANT TO RULE 144 UNDER THE SECURITIES ACT.  NOTWITHSTANDING
THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE
MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES.

       

       

      
        
          
          

        

        
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      (c) Removal of
Legends.  The legend set forth in Section 4.1(b) above
shall be removed and the Company shall issue a certificate without such legend
or any other legend to the holder of the applicable Securities upon which it is
stamped, if (i) such Securities are registered for resale under the Securities
Act (provided that, if the Purchaser is selling pursuant to the effective
registration statement registering the Securities for resale, the
Purchaser agrees to only sell such Securities during such time that such registration statement is
effective and not withdrawn or suspended, and only as
permitted by such registration statement), (ii) such Securities are sold or
transferred pursuant to Rule 144 (if the transferor is not an Affiliate of the
Company), or (iii) such Securities are eligible for sale under Rule 144, without
the requirement for the Company to be in compliance with the current public
information required under Rule 144 as to such securities and without volume or
manner-of-sale restrictions.

      

      (d) Acknowledgement.  Each
Purchaser hereunder acknowledges its primary responsibilities under the
Securities Act and accordingly will not sell or otherwise transfer the
Securities or any interest therein without complying with the requirements of
the Securities Act.  While the Registration Statement remains
effective, each Purchaser hereunder may sell the Conversion Shares and Warrant
Shares in accordance with the plan of distribution contained in the Registration
Statement and if it does so it will comply therewith and with the related
prospectus delivery requirements unless an exemption therefrom is
available.  Each Purchaser, severally and not jointly with the other
Purchasers, agrees that if it is notified by the Company in writing at any time
that the Registration Statement registering the resale of the Conversion Shares
or the Warrant Shares is not effective or that the prospectus included in such
Registration Statement no longer complies with the requirements of Section 10 of
the Securities Act, the Purchaser will refrain from selling such Conversion
Shares and Warrant Shares until such time as the Purchaser is notified by the
Company that such Registration Statement is effective or such prospectus is
compliant with Section 10 of the Securities Act, unless such Purchaser is able
to, and does, sell such Conversion Shares or Warrant Shares pursuant to an
available exemption from the registration requirements of Section 5 of the
Securities Act.  Both the Company and its Transfer Agent, and their
respective directors, officers, employees and agents, may rely on this Section 4.1(d) and
each Purchaser hereunder will indemnify and hold harmless each of such persons
from any breaches or violations of this Section
4.1(d).

      

      4.2      Reservation of Common
Stock.  The Company shall take all action necessary to at all
times have authorized, and reserved for the purpose of issuance from and after
the Initial Closing Date, the number of shares of Common Stock issuable upon
conversion of the Shares and exercise of the Warrants issued at the Closing
(without taking into account any limitations on exercise of the Warrants set
forth in the Warrants).

       

       

      
        
          
          

        

        
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      4.3 Furnishing of
Information.  In order to enable the Purchasers to sell the
Securities under Rule 144, for a period of twelve (12) months from the Initial
Closing, the Company shall use its commercially reasonable efforts to timely
file (or obtain extensions in respect thereof and file within the applicable
grace period) all reports required to be filed by the Company after the date
hereof pursuant to the Exchange Act. During such twelve (12) month period, if
the Company is not required to file reports pursuant to the Exchange Act, it
will prepare and furnish to the Purchasers and make publicly available in
accordance with Rule 144(c) such information as is required for the Purchasers
to sell the Securities under Rule 144.

       

      4.4 Integration.  The
Company shall not, and shall use its commercially reasonable efforts to ensure
that no Affiliate of the Company shall, sell, offer for sale or solicit offers
to buy or otherwise negotiate in respect of any security (as defined in Section
2 of the Securities Act) that will be integrated with the offer or sale of the
Securities in a manner that would require the registration under the Securities
Act of the sale of the Securities to the Purchasers, or that will be integrated
with the offer or sale of the Securities for purposes of the rules and
regulations of any Trading Market such that it would require stockholder
approval prior to the closing of such other transaction unless stockholder
approval is obtained before the closing of such subsequent
transaction.

       

      4.5 Securities Laws Disclosure;
Publicity.  By 9:00 A.M., New York City time, on the Trading
Day immediately following the date hereof, the Company shall issue a press
release disclosing all material terms of the transactions contemplated
hereby.  On or before 9:00 A.M., New York City time, on the second
(2nd)
Trading Day immediately following the execution of this Agreement, the Company
will file a Current Report on Form 8-K with the Commission describing the terms
of the Transaction Documents (and including as exhibits to such Current Report
on Form 8-K the material Transaction Documents (including, without limitation,
this Agreement, the form of Warrant and the Registration Rights
Agreement)).  Notwithstanding the foregoing, the Company shall not
publicly disclose the name of any Purchaser or an Affiliate of any Purchaser, or
include the name of any Purchaser or an Affiliate of any Purchaser in any press
release or filing with the Commission (other than the Registration Statement) or
any regulatory agency or Trading Market, without the prior written consent of
such Purchaser, except (i) as required by federal securities law in connection
with (A) any registration statement contemplated by the Registration Rights
Agreement and (B) the filing of final Transaction Documents (including signature
pages thereto) with the Commission and (ii) to the extent such disclosure is
required by law, request of the Staff of the Commission or Trading Market
regulations, in which case the Company shall provide the Purchasers with prior
written notice of such disclosure permitted under this subclause
(ii).  Each Purchaser, severally and not jointly with the other
Purchasers, covenants that until such time as the transactions contemplated by
this Agreement are required to be publicly disclosed by the Company as described
in this Section
4.5, such Purchaser will maintain the confidentiality of all disclosures
made to it in connection with this transaction (including the existence and
terms of this transaction).

       

      4.6 Use of
Proceeds.  The Company shall use the net proceeds from the sale
of the Shares and Warrants hereunder for working capital and general corporate
purposes and satisfaction of the Company’s debt as set forth in Section
2.2(a)(xii).

       

      4.7 Principal Trading Market
Listing.  In the time and manner required by the Principal
Trading Market, the Company shall prepare and file with such Principal Trading
Market an additional shares listing application covering all of the Conversion
Shares and Warrant Shares and shall use its commercially reasonable efforts to
take all steps necessary to cause all of the Conversion Shares and Warrant
Shares to be approved for listing on the Principal Trading Market as promptly as
possible thereafter.     

       

       

      
        
          
          

        

        
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      4.8 Form D; Blue
Sky.  The Company agrees to timely file a Form D with
respect to the Securities as required under Regulation D and to provide a
copy thereof, promptly upon the written request of any Purchaser.  The
Company, on or before the Initial Closing Date, shall take such action as the
Company shall reasonably determine is necessary in order to obtain an exemption
for or to qualify the Securities for sale to the Purchasers under applicable
securities or “Blue Sky” laws of the states of the United States (or to obtain
an exemption from such qualification) and shall provide evidence of such actions
promptly upon the written request of any Purchaser.

       

      4.9 Delivery of Shares and
Warrants After Closing. The Company shall deliver, or cause to be
delivered, the respective Shares and Warrants purchased by each Purchaser to
such Purchaser within three (3) Trading Days of the Initial Closing or such
Subsequent Closing, as applicable. 

       

      4.10 Short Sales and
Confidentiality After The Date Hereof.  Each Purchaser shall not, and shall cause
its Trading Affiliates not to, engage, directly or indirectly, in any Net Short
Sales (as hereinafter defined) from the period commencing on the date hereof and
ending on the earliest of (x) the Effective Date of the initial Registration
Statement, (y) the twenty-four (24) month anniversary of the Initial Closing
Date or (z) the date that such Purchaser no longer holds any
Securities.  For purposes of this Section 4.10, a “Net Short Sale” by any Purchaser shall mean a sale of Common Stock by
such Purchaser that is marked as a short sale and that is made at a time when
there is no equivalent offsetting long position in Common Stock held by such
Purchaser.  For purposes of determining whether there is an equivalent
offsetting position in Common Stock held by the Purchaser, Warrant Shares that
have not yet been issued pursuant to the exercise of Warrants shall be deemed to
be held long by the Purchaser, and the amount of shares of Common Stock held in
a long position shall be all Conversion Shares and unexercised Warrant Shares
(ignoring any exercise limitations included therein) issuable to such Purchaser
on such date, plus any shares of Common Stock or Common Stock Equivalents
otherwise then held by such Purchaser.  Notwithstanding the foregoing,
in the event that a Purchaser is a multi-managed investment vehicle whereby
separate portfolio managers manage separate portions of such Purchaser's assets
and the portfolio managers have no direct knowledge of the investment decisions
made by the portfolio managers managing other portions of such Purchaser's
assets, the representation set forth above shall apply only with respect to the
portion of assets managed by the portfolio manager that have knowledge about the
financing transaction contemplated by this Agreement.  Each
Purchaser understands and acknowledges, severally
and not jointly with any other Purchaser, that the Commission currently takes
the position that covering a short position established prior to effectiveness
of a resale registration statement with shares included in such registration
statement would be a violation of Section 5 of the Securities Act, as set forth
in Item 65, Section 5 under Section A, of the Manual of Publicly Available
Telephone Interpretations, dated July 1997, compiled by the Office of Chief
Counsel, Division of Corporation Finance.

       

      4.11
Provisions Regarding
Board of Directors.  The Company shall take all action
necessary to ensure that, as of the Initial Closing, (i) the Board of Directors
will include (a) Jason Tienor, Chief Executive Officer of the Company, (b)
Warren V. Musser, (c) Anthony J. Paoni and (d) Thomas C. Lynch, (ii) a
Nominating Committee of the Board of Directors to be chaired by Anthony J. Paoni
shall be established and (iii) if requested by the Nominating Committee of the
Board of Directors, Warren V. Musser and Thomas C. Lynch will not stand for
reelection at the annual meeting of the stockholders of the Company immediately
following the Initial Closing and will resign prior to such
meeting.

       

      4.12
Reserved.

       

       

      
        
          
          

        

        
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      4.13
Rights
Offering.  As soon as practicable following the Initial Closing
Date, subject to approval of the Board of Directors, the Company shall
distribute, at no charge, one (1) non-transferable subscription right (the “Subscription Right”) for
each share of Common Stock owned by its shareholders (other than the Purchasers
and participants in the Company’s 401(k) Plan).  Each Subscription
Right will entitle the holder thereof to purchase the number of equity
securities of the Company mutually determined by the Board of Directors and the
Purchasers at the price and terms mutually determined by the Board of Directors
and the Purchasers.  Each shareholder who fully exercises their
Subscription Right (each, an “Exercising Shareholder”)
shall, subject to the provisions of this Section 4.13, have an
additional option (the “Additional Option”) to
purchase all or any part of the balance of any such remaining unsubscribed
equity securities of the Company.  In the event there are two or more
such Exercising Shareholders that choose to exercise the Additional Option for a
total number of remaining equity securities of the Company in excess of the
number available, the remaining equity securities of the Company available for
purchase under this Section 4.13 shall be
allocated to such Exercising Shareholders pro rata based on the number of equity
securities of the Company such Exercising Shareholders have elected to purchase
pursuant to their Subscription Right (without giving effect to any equity
securities of the Company that any such Exercising Shareholders has elected to
purchase pursuant to the Additional Option).  The Board of Directors
will determine whether it is desirable to enter into a Backstop Agreement with a
third party in connection with this Section
4.13.

       

      4.14
Option
Exchange.  As soon as practicable following the closing of the
transactions contemplated by Section 4.13, the
Company shall offer its current employees the ability to exchange their current
“out of the money options” in the Company for new options of the Company on
terms reasonably satisfactory to the Company.

       

      4.15
Employment
Agreements.  As soon as practicable following the closing of
the transactions contemplated by Section 4.13, the
Company shall enter into employment agreements with the Company’s key employees
on terms reasonably satisfactory to the Company.

       

      4.16
Reverse Stock Split of
the Issued and Outstanding Common Stock.  As soon as
practicable following the Initial Closing Date, subject to the approval of the
Board of Directors, the Company will prepare and file with the United States
Securities Exchange Commission (the “SEC”), a preliminary proxy
statement (as amended, the “Proxy Statement”) relating to
a reverse stock split of the issued and outstanding Common Stock (the “Reverse Stock
Split”).  The Company will respond to any comments of the SEC
and use its commercially reasonable efforts to mail the Proxy Statement to its
stockholders at the earliest practicable time. As soon as practicable following
its approval by the SEC, the Company shall distribute the Proxy Statement to its
stockholders and, pursuant thereto, shall hold a special meeting of its
stockholders, for the purpose of voting on the Reverse Stock
Split.  Such efforts will include, without limitation, the
preparation, delivery and dissemination of the Proxy Statement, prepared in
accordance with the Exchange Act, to the stockholders of the Company soliciting
their vote in favor of the Reverse Stock Split and containing advice that the
Board of Directors recommends that the stockholders approve the Reverse Stock
Split.

       

       

      
        
          
          

        

        
          23

          
            

          

        

        
          
          

        

      

      
ARTICLE
V.

      CONDITIONS
PRECEDENT TO THE INITIAL CLOSING

      

      5.1 Conditions Precedent to the
Obligations of the Purchasers to Purchase Securities.  The
obligation of each Purchaser to acquire Shares and Warrants at the Initial
Closing is subject to the fulfillment to such Purchaser’s satisfaction, on or
prior to the Initial Closing Date, of each of the following conditions, any of
which may be waived by such Purchaser (as to itself only):

       

      (a) Representations and
Warranties.  The representations and warranties of the Company
contained herein shall be true and correct in all material respects (except for
those representations and warranties which are qualified as to materiality, in
which case such representations and warranties shall be true and correct in all
respects) as of the date when made and as of the Initial Closing Date, as though
made on and as of such date, except for such representations and warranties that
speak as of a specific date.

       

      (b) Performance.  The
Company shall have performed, satisfied and complied in all material respects
with all covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by it at or prior to the
Initial Closing.

       

      (c) No
Injunction.  No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction that
prohibits the consummation of any of the transactions contemplated by the
Transaction Documents.

       

      (d) Consents.  The
Company shall have obtained in a timely fashion any and all consents, permits,
approvals, registrations and waivers necessary for consummation of the purchase
and sale of the Securities (including all Required Approvals), all of which
shall be and remain so long as necessary in full force and effect.

       

      (e) Adverse
Changes.  Since the date of execution of this Agreement, no
event or series of events shall have occurred that has had or would reasonably
be expected to have a Material Adverse Effect.

       

      (f) Company
Deliverables.  The Company shall have delivered the Company
Deliverables in accordance with Section
2.2(a).

       

      (g) Compliance
Certificate.  The Company shall have delivered to each
Purchaser a certificate, dated as of the Initial Closing Date and signed by its
Chief Executive Officer or its Chief Financial Officer, certifying to the
fulfillment of the conditions specified in Sections 5.1(a) and
(b) in the form
attached hereto as Exhibit
H.

       

      (h) Termination.  This
Agreement shall not have been terminated as to such Purchaser in accordance with
Section 6.16
herein.

       

      5.2 Conditions Precedent to the
Obligations of the Company to sell Securities.  The Company’s
obligation to sell and issue the Shares and Warrants at the Initial Closing to
the Purchasers is subject to the fulfillment to the satisfaction of the Company
on or prior to the Initial Closing Date of the following conditions, any of
which may be waived by the Company:

       

      (a) Representations and
Warranties.  The representations and warranties made by the
Purchasers in Section
3.2 hereof shall be true and correct in all material respects (except for
those representations and warranties which are qualified as to materiality, in
which case such representations and warranties shall be true and correct in all
respects) as of the date when made, and as of the Initial Closing Date as though
made on and as of such date, except for representations and warranties that
speak as of a specific date.

       

       

      
        
          
          

        

        
          24

          
            

          

        

        
          
          

        

      

       

      (b) Performance.  Such
Purchaser shall have performed, satisfied and complied in all material respects
with all covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by such Purchaser at or
prior to the Initial Closing Date.

       

      (c) No
Injunction.  No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction that
prohibits the consummation of any of the transactions contemplated by the
Transaction Documents.

       

      (d) Consents.  The
Company shall have obtained in a timely fashion any and all consents, permits,
approvals, registrations and waivers necessary for consummation of the purchase
and sale of the Securities, all of which shall be and remain so long as
necessary in full force and effect.

       

      (e) Purchasers
Deliverables.  In the case of each Purchaser acquiring Shares
and Warrants at the Initial Closing, such Purchaser shall have delivered its
Purchaser Deliverables in accordance with Section
2.2(b).  In the case of each Purchaser acquiring Shares and
Warrants at a Subsequent Closing, such Purchaser shall have delivered its
Purchaser Deliverables in accordance with Section 2.2(b) (other
than its Subscription Amount pursuant to Section 2.2(b)(ii)
which will be delivered on the applicable Subsequent Closing Date).

       

      (f) Termination. This
Agreement shall not have been terminated as to such Purchaser in accordance with
Section 6.16
herein.

       

       

      ARTICLE
V.A.

      CONDITIONS
PRECEDENT TO SUBSEQUENT CLOSINGS

      

      5A.1
Conditions Precedent
to the Obligations of the Purchasers to Purchase
Securities.  The obligation of each Purchaser to acquire Shares
and Warrants at a Subsequent Closing is subject to the fulfillment to such
Purchaser’s satisfaction, on or prior to the applicable Subsequent Closing Date,
of each of the following conditions, any of which may be waived by such
Purchaser (as to itself only):

      

      (a) Initial
Closing.  The Initial Closing shall have occurred.

      

      5A.2
Conditions Precedent
to the Obligations of the Company to sell Securities.  The
Company’s obligation to sell and issue the Shares and Warrants at a Subsequent
Closing to the Purchasers is subject to the fulfillment to the satisfaction of
the Company on or prior to the applicable Subsequent Closing Date of the
following conditions, any of which may be waived by the Company:

      

      (a) Initial
Closing.  The Initial Closing shall have occurred.

      

      (b) Purchaser
Deliverables.  Such Purchaser shall have delivered its
Subscription Amount in accordance with Section
2.2(b)(ii).

       

       

      
        
          
          

        

        
          25

          
            

          

        

        
          
          

        

      

      
 

      ARTICLE
VI.

      MISCELLANEOUS

       

      6.1 Fees and
Expenses.  The Company and the Purchasers shall each pay the
fees and expenses of their respective advisers, counsel, accountants and other
experts, if any, and all other expenses incurred by such party in connection
with the negotiation, preparation, execution, delivery and performance of this
Agreement.

       

      6.2 Entire
Agreement.  The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements,
understandings, discussions and representations, oral or written, with respect
to such matters, which the parties acknowledge have been merged into such
documents, exhibits and schedules.  At or after the Closing, and
without further consideration, the Company and the Purchasers will execute and
deliver to the other such further documents as may be reasonably requested in
order to give practical effect to the intention of the parties under the
Transaction Documents.

       

      6.3 Notices.  Any
and all notices or other communications or deliveries required or permitted to
be provided hereunder shall be in writing and shall be deemed given and
effective on the earliest of (a) the date of transmission, if such notice or
communication is delivered via facsimile (provided the sender receives a
machine-generated confirmation of successful transmission) at the facsimile
number specified in this Section 6.3 prior to
5:00 P.M., New York City time, on a Trading Day, (b) the next Trading Day after
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile number specified in this Section 6.3 on a day
that is not a Trading Day or later than 5:00 P.M., New York City time, on any
Trading Day, (c) the Trading Day following the date of mailing, if sent by U.S.
nationally recognized overnight courier service with next day delivery
specified, or (d) upon actual receipt by the party to whom such notice is
required to be given.  The address for such notices and communications
shall be as follows:

      
      

       

      
        	 	If to the
      Company:  	Telkonet, Inc.
      

                20374
      Seneca Meadows Parkway

                Germantown,
      Maryland 20876-7004

                Telephone
      No.: 240-912-1800

                Facsimile
      No.: 240-912-1839

                Attention:
      Jason Tienor

                E-mail:
      jtienor@telkonet.com

              
	 	 	 
	 	With a copy
      to:	Goodwin Procter LLP
      

                53
      State Street

                Boston,
      Massachusetts 02109-2802

                Telephone
      No.: 617-570-1000

                Facsimile
      No.: 617-523-1231

                Attention:
      Jocelyn M. Arel

                E-mail:
      jarel@goodwinprocter.com

              
	 	 	 
	 	

                If
      to a Purchaser:

              	

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

              

      

       

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

      

      6.4 Amendments; Waivers; No
Additional Consideration.  No provision of this Agreement may
be waived, modified, supplemented or amended except in a written instrument
signed, in the case of an amendment, by the Company and the Purchasers of at
least a majority in interest of the Securities still held by Purchasers or, in
the case of a waiver, by the party against whom enforcement of any such waiver
is sought.  No waiver of any default with respect to any provision,
condition or requirement of this Agreement shall be deemed to be a continuing
waiver in the future or a waiver of any subsequent default or a waiver of any
other provision, condition or requirement hereof, nor shall any delay or
omission of either party to exercise any right hereunder in any manner impair
the exercise of any such right.  No consideration shall be offered or
paid to any Purchaser to amend or consent to a waiver or modification of any
provision of any Transaction Document unless the same consideration is also
offered to all Purchasers who then hold Securities.

       

       

      
        
          
          

        

        
          26

          
            

          

        

        
          
          

        

      

       

      6.5 Construction.  The
headings herein are for convenience only, do not constitute a part of this
Agreement and shall not be deemed to limit or affect any of the provisions
hereof.  The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent, and no rules of
strict construction will be applied against any party.  This Agreement
shall be construed as if drafted jointly by the parties, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any provisions of this Agreement or any of the Transaction
Documents.

       

      6.6 Successors and
Assigns.  The provisions of this Agreement shall inure to the
benefit of and be binding upon the parties and their successors and permitted
assigns.  This Agreement, or any rights or obligations hereunder, may
not be assigned by the Company without the prior written consent of each
Purchaser.  Any Purchaser may assign its rights hereunder in whole or
in part to any Person to whom such Purchaser assigns or transfers any Securities
in compliance with the Transaction Documents and applicable law, provided such
transferee shall agree in writing to be bound, with respect to the transferred
Securities, by the terms and conditions of this Agreement that apply to the
“Purchasers”.

       

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

       

      6.8 Governing
Law.  All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law
thereof.  Each party agrees that all Proceedings concerning the
interpretations, enforcement and defense of the transactions contemplated by
this Agreement and any other Transaction Documents (whether brought against a
party hereto or its respective Affiliates, employees or agents) shall be
commenced exclusively in the New York Courts.  Each party hereto
hereby irrevocably submits to the exclusive jurisdiction of the New York Courts
for the adjudication of any dispute hereunder or in connection herewith or with
any transaction contemplated hereby or discussed herein (including with respect
to the enforcement of any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any Proceeding, any claim that it is not
personally subject to the jurisdiction of any such New York Court, or that such
Proceeding has been commenced in an improper or inconvenient
forum.  Each party hereto hereby irrevocably waives personal service
of process and consents to process being served in any such Proceeding by
mailing a copy thereof via registered or certified mail or overnight delivery
(with evidence of delivery) to such party at the address in effect for notices
to it under this Agreement and agrees that such service shall constitute good
and sufficient service of process and notice thereof.  Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law.  EACH PARTY HERETO HEREBY IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO
TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

       

       

      
        
          
          

        

        
          27

          
            

          

        

        
          
          

        

      

       

      6.9 Survival.  Subject
to applicable statute of limitations, the representations, warranties,
agreements and covenants contained herein shall survive the Closing and the
delivery of the Securities.

       

      6.10
Execution.  This
Agreement may be executed in two or more counterparts, all of which when taken
together shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to the
other party, it being understood that both parties need not sign the same
counterpart.  In the event that any signature is delivered by
facsimile transmission, or by e-mail delivery of a “.pdf” format data file, such
signature shall create a valid and binding obligation of the party executing (or
on whose behalf such signature is executed) with the same force and effect as if
such facsimile signature page were an original thereof.

       

      6.11
Severability.  If
any provision of this Agreement is held to be invalid or unenforceable in any
respect, the validity and enforceability of the remaining terms and provisions
of this Agreement shall not in any way be affected or impaired thereby and the
parties will attempt to agree upon a valid and enforceable provision that is a
reasonable substitute therefor, and upon so agreeing, shall incorporate such
substitute provision in this Agreement.

       

      6.12
Replacement of
Securities.  If any certificate or instrument evidencing any
Securities is mutilated, lost, stolen or destroyed, the Company shall issue or
cause to be issued in exchange and substitution for and upon cancellation
thereof, or in lieu of and substitution therefor, a new certificate or
instrument, but only upon receipt of evidence reasonably satisfactory to the
Company and the Transfer Agent of such loss, theft or destruction and the
execution by the holder thereof of a customary lost certificate affidavit of
that fact and an agreement to indemnify and hold harmless the Company and the
Transfer Agent for any losses in connection therewith or, if required by the
Transfer Agent, a bond in such form and amount as is required by the Transfer
Agent.  The applicants for a new certificate or instrument under such
circumstances shall also pay any reasonable third-party costs associated with
the issuance of such replacement Securities.  If a replacement
certificate or instrument evidencing any Securities is requested due to a
mutilation thereof, the Company may require delivery of such mutilated
certificate or instrument as a condition precedent to any issuance of a
replacement.

       

      6.13
Remedies.  In
addition to being entitled to exercise all rights provided herein or granted by
law, including recovery of damages, each of the Purchasers and the Company will
be entitled to specific performance under the Transaction
Documents.  The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations described in the foregoing sentence and hereby agree to waive in any
action for specific performance of any such obligation (other than in connection
with any action for a temporary restraining order) the defense that a remedy at
law would be adequate.

       

      6.14
Adjustments in Share
Numbers and Prices. In the event of any stock split, subdivision,
dividend or distribution payable in shares of Common Stock (or other securities
or rights convertible into, or entitling the holder thereof to receive directly
or indirectly shares of Common Stock), combination or other similar
recapitalization or event occurring after the date hereof and prior to the
Closing, each reference in any Transaction Document to a number of shares or a
price per share shall be deemed to be amended to appropriately account for such
event.

       

       

      
        
          
          

        

        
          28

          
            

          

        

        
          
          

        

      

       

      6.15
Independent Nature of
Purchasers' Obligations and Rights.  The obligations of each
Purchaser under any Transaction Document are several and not joint with the
obligations of any other Purchaser, and no Purchaser shall be responsible in any
way for the performance of the obligations of any other Purchaser under any
Transaction Document.  The decision of each Purchaser to purchase
Securities pursuant to the Transaction Documents has been made by such Purchaser
independently of any other Purchaser and independently of any information,
materials, statements or opinions as to the business, affairs, operations,
assets, properties, liabilities, results of operations, condition (financial or
otherwise) or prospects of the Company or any Subsidiary which may have been
made or given by any other Purchaser or by any agent or employee of any other
Purchaser, and no Purchaser and any of its agents or employees shall have any
liability to any other Purchaser (or any other Person) relating to or arising
from any such information, materials, statement or opinions.  Nothing
contained herein or in any Transaction Document, and no action taken by any
Purchaser pursuant thereto, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of entity, or
create a presumption that the Purchasers are in any way acting in concert or as
a group with respect to such obligations or the transactions contemplated by the
Transaction Documents.  Each Purchaser acknowledges that no other
Purchaser has acted as agent for such Purchaser in connection with making its
investment hereunder and that no Purchaser will be acting as agent of such
Purchaser in connection with monitoring its investment in the Securities or
enforcing its rights under the Transaction Documents.  Each Purchaser
shall be entitled to independently protect and enforce its rights, including
without limitation the rights arising out of this Agreement or out of the other
Transaction Documents, and it shall not be necessary for any other Purchaser to
be joined as an additional party in any proceeding for such
purpose.  Each Purchaser has been represented by its own separate
legal counsel in its review and negotiation of the Transaction
Documents.  The Company has elected to provide all Purchasers with the
same terms and Transaction Documents for the convenience of the Company and not
because it was required or requested to do so by any Purchaser.

       

      6.16
Termination.
This Agreement may be terminated and the sale and purchase of the Shares and the
Warrants abandoned at any time prior to the Initial Closing by either the
Company or any Purchaser (with respect to itself only) upon written notice to
the other, if the Initial Closing has not been consummated on or prior to 5:00
P.M., New York City time, on the Outside Date; provided, however, that the
right to terminate this Agreement under this Section 6.16 shall
not be available to any Person whose failure to comply with its obligations
under this Agreement has been the cause of or resulted in the failure of the
Initial Closing to occur on or before such time.  Nothing in this
Section 6.16
shall be deemed to release any party from any liability for any breach by such
party of the terms and provisions of this Agreement or the other Transaction
Documents or to impair the right of any party to compel specific performance by
any other party of its obligations under this Agreement or the other Transaction
Documents.  In the event of a termination pursuant to this Section 6.16, the
Company shall promptly notify all non-terminating Purchasers.  Upon a
termination in accordance with this Section 6.16, the
Company and the terminating Purchaser(s) shall not have any further obligation
or liability (including arising from such termination) to the other, and no
Purchaser will have any liability to any other Purchaser under the Transaction
Documents as a result therefrom.

       

       

       

      
 

       

      [REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]

      

       

      
        
          
          

        

        
          29

          
            

          

        

        
          
          

        

      

      

      IN
WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.

       

      TELKONET,
INC.

       

      By: /s/ Jason Tienor      

      Name:
Jason Tienor

      Title:
Chief Executive Officer

       

      

       

      
        
          
          

        

        
          
            SIGNATURE
PAGE TO SECURITIES PURCHASE AGREEMENT

          

          
            

          

        

        
          
          

        

      

       

      NAME OF PURCHASER:
____________________________

      

      

      

      By:                                                                                                       

      Name:

      Title:

      

       

      Aggregate
Purchase Price (Subscription Amount): $__________

       

      

       

      Number of
Shares to be Acquired: ______________________

       

      Underlying
Shares Subject to Warrant: ____________________

      (25% of
the Subscription Amount)

      

      Underlying
Shares Subject to Additional Warrant: ___________

      (25% of
the Subscription Amount)

       

      Tax ID
No.: ____________________

       

      Address for Notice:

       

      __________________________________

      __________________________________

      __________________________________

      

      Telephone
No.:   _______________________

      

      Facsimile
No.:   ________________________

      

      E-mail
Address:   ________________________

      

      Attention:  _______________________

      

      

      Delivery
Instructions:

      (if
different than above)

      

      c/o  _______________________________

      

      Street:   ____________________________

      

      City/State/Zip:
______________________

      

      Attention:
__________________________

      

      Telephone
No.: ____________________________

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      EXHIBITS:

       

      
        
          	
                  A:

                	
                  Form
      of Warrant

                
	
                  B:

                	
                  Form
      of Articles of Amendment

                
	
                  C:

                	
                  Form
      of Registration Rights Agreement

                
	
                  D-1:

                	
                  Accredited
      Investor Questionnaire

                
	
                  D-2:

                	
                  Stock
      Certificate Questionnaire

                
	
                  E:

                	
                  Form
      of Opinion of Company Counsel

                
	
                  F:

                	
                  Form
      of Opinion of General Counsel

                
	
                  G:

                	
                  Form
      of Secretary’s Certificate

                
	
                  H:

                	
                  Form
      of Officer’s Certificate

                
	
                  I:

                	
                  Wire
      Instructions

                

        

      SCHEDULES:

       

      3.1(a)
Subsidiaries

      3.1(g)
Capitalization

      3.1(k)
Litigation

      3.1(m)
Compliance

      3.1(p)
Patents and Trademarks

      3.1(u)
Certain Fees

      3.1(x)
Registration Rights

      3.1(y)
Listing and Maintenance Requirements

      3.1(bb)
Tax Matters

       
 

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

       

      EXHIBIT
A

       

      FORM OF
WARRANT

       

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      EXHIBIT
B

       

      FORM OF
ARTICLES OF AMENDMENT

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      EXHIBIT
C

       

      FORM OF
REGISTRATION RIGHTS AGREEMENT

       

       

      
 

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      INSTRUCTION
SHEET

      

      (to be
read in conjunction with the entire Securities Purchase Agreement and
Registration Rights Agreement)

      

      
        	
                A.

              	
                Complete
      the following items in the Securities Purchase Agreement and/or
      Registration Rights Agreement:

              

      

      

      
        
          	
                	
                  1.

                	
                  Provide
      the information regarding the Purchaser requested on the signature page.
      The Securities Purchase Agreement and the Registration Rights Agreement
      must be executed by an individual authorized to bind the
      Purchaser.

                

        

      

      

      
        	
              	
                2.

              	
                Exhibit D-1 –
      Accredited Investor Questionnaire:

              

      

      

      
        
          	
                   

                	
                  Provide
      the information requested by the Accredited Investor
      Questionnaire

                

        

      

      

      
        	
              	
                3.

              	
                Exhibit D-2
      Stock Certificate Questionnaire:

              

      

      

      
        
          	
                	
                   

                	
                  Provide
      the information requested by the Stock Certificate
      Questionnaire

                

        

      

      

      
        	
                4.

              	
                Annex B to the
      Registration Rights Agreement -- Selling Securityholder Notice and
      Questionnaire

              

      

      

      
        
          	
                   

                	
                  Provide
      the information requested by the Selling Securityholder Notice and
      Questionnaire

                

        

      

      

      
        	
              	
                5.

              	
                Return
      the signed Securities Purchase Agreement and Registration Rights Agreement
      to:

              

      

       

      
        
          	
                   

                	
                  

                    Goodwin
      Procter LLP

                    
                      53
      State Street

                      Boston,
      Massachusetts 02109-2802

                      Telephone
      No.: 617-570-1000

                      Facsimile
      No.: 617-523-1231

                      Attention:
      Carlos C. Clark

                      E-mail:
      ccclark@goodwinprocter.com

                    

                  

                

        

      

       

      
        	
                B.

              	
                Instructions
      regarding the transfer of funds for the purchase of Shares and Warrants is
      set forth on Exhibit I to
      the Securities Purchase Agreement.

              

      

      

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      

       

      EXHIBIT
D-1

      

      ACCREDITED
INVESTOR QUESTIONNAIRE

      

      (ALL
INFORMATION WILL BE TREATED CONFIDENTIALLY)

      

      To:           Telkonet,
Inc.

      

      This
Investor Questionnaire (“Questionnaire”) must be
completed by each potential investor in connection with the offer and sale of
the shares of the Series A Preferred Stock, par value $.001 per share (the
“Series A Preferred
Stock”), and shares of common stock, par value $.001 per share, that may
be issued upon conversion of the shares of Series A Preferred Stock and exercise
of certain warrants (collectively, the “Securities”), of Telkonet,
Inc., a Utah corporation (the “Corporation”).  The
Securities are being offered and sold by the Corporation without registration
under the Securities Act of 1933, as amended (the “Act”), and the securities
laws of certain states, in reliance on the exemptions contained in
Section 4(2) of the Act and on Regulation D promulgated thereunder and in
reliance on similar exemptions under applicable state laws.  The
Corporation must determine that a potential investor meets certain suitability
requirements before offering or selling Securities to such
investor.  The purpose of this Questionnaire is to assure the
Corporation that each investor will meet the applicable suitability
requirements.  The information supplied by you will be
used  in determining whether you meet such criteria, and reliance upon
the private offering exemptions from registration is based in part on the
information herein supplied.

       

      This
Questionnaire does not constitute an offer to sell or a solicitation of an offer
to buy any security.  Your answers will be kept strictly
confidential.  However, by signing this Questionnaire, you will be
authorizing the Corporation to provide a completed copy of this Questionnaire to
such parties as the Corporation deems appropriate in order to ensure that the
offer and sale of the Securities will not result in a violation of the Act or
the securities laws of any state and that you otherwise satisfy the suitability
standards applicable to purchasers of the Securities.  All potential
investors must answer all applicable questions and complete, date and sign this
Questionnaire.  Please print or type your responses and attach
additional sheets of paper if necessary to complete your answers to any
item.

       

      PART
A.                      BACKGROUND
INFORMATION

      

      Name of
Beneficial Owner of the Securities:                                                                                                                                                                                                        

      

      Business
Address:                                                                                                                                                                                                                                                   

      
        (Number
and Street)

      

     

    
                                                                                                                                                                                                                                                                                            

      (City)                                           (State)                                                                (Zip
Code)

      

      Telephone
Number: (___)                                                                                                                                              

      

      If
a corporation, partnership, limited liability company, trust or other
entity:

       

      Type of
entity:                                                                                                                                                                                                                                                             

      State of
formation:_____________                                               Approximate
Date of formation:                                                                                                                  

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      
 

      
         
Were you
formed for the purpose of investing in the securities being offered?      

         

        Yes
____                      No
____

      

      

      If an individual:

      

      
        Residence Address:                                                                                                                                                                                                                                                   

        
          
            (Number
and Street)

          

           

          
                                                                                                                                                                                                                                                                                                  

            (City)                                           (State)                                                                (Zip
Code)

            

            Telephone
Number: (___)                                                                                                                                              

        

      

      Age:­­­­­­­­
­__________                                Citizenship:
____________                                                      Where
registered to vote: _______________

      

      Set forth
in the space provided below the state(s), if any, in the United States in which
you maintained your residence during the past two years and the dates during
which you resided in each state:

      
 

      
        Are you a
director or executive officer of the Corporation?

         

      

      Yes
____                      No
____

      

      Social
Security or Taxpayer Identification No.                                                                                                                                                                              
        

      

      PART
B.                      ACCREDITED INVESTOR
QUESTIONNAIRE

      

       

      In order for the Company to offer and
sell the Securities in conformance with state and federal securities laws, the
following information must be obtained regarding your investor status. Please
initial each
category applicable to you as a
Purchaser of Securities of the Company.

       

      
        	
                 
      

              	
                __
      (1)

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

              

      

      

      
        	
                 
      

              	
                __
      (2)

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

              

      

      

      
        	
                 
      

              	
                __
      (3)

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

              

      

      

      
        	
                 
      

              	
                __
      (4)

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

              

      

      

      
        	
                 
      

              	
                __
      (5)

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

              

      

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      
 

      
        	
                 
      

              	
                __
      (6)

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

              

      

      

      
        	
                 
      

              	
                __
      (7)

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

              

      

      

      
        	
                 
      

              	
                __
      (8)

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

              

      

      
        	
                 
      

              	 

      

      
        	
                 
      

              	
                __
      (9)

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

              

      

      

      
        	
              	
                __
      (10)

              	
                A
      trust, with total assets in excess of $5,000,000, not formed for the
      specific purpose of acquiring the Securities, whose purchase is directed
      by a sophisticated person who has such knowledge and experience in
      financial and business matters that such person is capable of evaluating
      the merits and risks of investing in the
  Company;

              

      

      
        	
                 
      

              	 

      

      
        	
                 
      

              	
                __(11)

              	
                A
      natural person whose individual net worth, or joint net worth with that
      person’s spouse, at the time of his purchase exceeds
      $1,000,000;

              

      

       

      
        	
                 
      

              	
                __(12)

              	
                A
      natural person who had an individual income in excess of $200,000 in each
      of the two most recent years, or joint income with that person’s spouse in
      excess of $300,000, in each of those years, and has a reasonable
      expectation of reaching the same income level in the current
      year;

              

      

       

      
        	
                 
      

              	
                __(13)

              	
                  An
      executive officer or director of the
Company;

              

      

      

      
        	
              	
                __(14)

              	
                An
      entity in which all of the equity owners qualify under any of the above
      subparagraphs. If the undersigned belongs to this investor category only,
      list the equity owners of the undersigned, and the investor category which
      each such equity owner satisfies.

              

      

       

      
        
          
            	
                    A.

                  	
                    FOR
      EXECUTION BY AN INDIVIDUAL:

                  
	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	
                    By

                  	 
      	 
      
	
                     

                  	Date	 
      	 
      	 
      	 
      
	
                     

                  	 
      	 
      	

                    Print
      Name:

                  	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      
	
                    B.

                  	
                    FOR
      EXECUTION BY AN ENTITY:

                  
	 
      	 
      	 
      	

                    Entity
      Name:

                  	 
      	 
      

          

           

           

          
            
              
              

            

            
              
              

              
                

              

            

            
              
              

            

          

           

          
            	 
      	
                    

                       

                    

                  	 
      	 
      	 
      	 
      
	 
      	

                    Date

                  	 
      	

                    By

                  	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      
	 	 
      	 
      	
                    

                      Print
      Name:

                    

                  	 
      	 
      
	
                     

                  	 
      	 
      	 
      	 
      	 
      
	
                     

                  	 
      	 
      	

                    Title:

                  	 
      	 
      
	
                     

                  	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      
	
                    C.

                  	
                    ADDITIONAL
      SIGNATURES (if required by partnership, corporation or trust
      document):

                  
	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	

                    Entity
      Name:

                  	 
      	 
      	 
      
	
                     

                  	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	

                    By

                  	 
      	 
      
	

                     

                  	

                    Date

                  	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	
                    

                      Print
      Name:

                    

                  	 
      	 
      
	
                     

                  	 
      	 
      	 
      	 
      	 
      
	
                     

                  	 
      	 
      	

                    Title:

                  	 
      	 
      
	
                     

                  	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      
	
                     

                  	 
      	

                    Entity
      Name:

                  	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	
                    By

                  	 
      	 
      
	
                     

                  	

                    Date

                  	 
      	 
      	 
      	 
      
	
                     

                  	 
      	 
      	

                    Print
      Name:

                  	 
      	 
      
	 	 	 	 	 	 
	 
      	 
      	 
      	

                    Title:

                  	 
      	 
      

          

        

      

       

      
 

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      EXHIBIT
D-2

       

      STOCK
CERTIFICATE QUESTIONNAIRE

       

      Pursuant
to Section
2.2(b) of the Agreement, please provide us with the following
information:

       

      
        	
                1.

              	
                The
      exact name that the Securities are to be registered in (this is the name
      that will appear on the stock certificate(s)).  You may use a
      nominee name if appropriate:

              	 	 
      
	 	 	 	 
	
                2.

              	
                The
      relationship between the Purchaser of the Securities and the Registered
      Holder listed in response to Item 1 above:

              	 	 
      
	 	 	 	 
	
                3.

              	
                The
      mailing address, telephone and telecopy number of the Registered Holder
      listed in response to Item 1 above:

              	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 
      	 
      	 	 
      
	 	 	 	 
	
                4.

              	
                The
      Tax Identification Number (or, if an individual, the Social Security
      Number) of the Registered Holder listed in response to Item 1
      above:

              	 	 
      

      

      

       

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      EXHIBIT
E

       

      FORM OF
OPINION OF COMPANY COUNSEL

       

      

      _______________, 2009

      

      To
Purchasers Listed on the signature pages to the

      Purchase
Agreement referred to below

      

       

      Ladies
and Gentlemen:

       

      We have
acted as counsel to Telkonet, Inc., a Utah corporation (the “Company”), in
connection with the sale to you today of the shares (the “Preferred Shares”) of
the Company’s Series A Preferred Stock, par value $0.001 per share, and warrants
(the “Warrants”) to
purchase the Company’s common stock, par value $0.001 per share, pursuant to the
Securities Purchase Agreement dated as of November 16, 2009 (the “Purchase Agreement”)
by and among the Company and each of the Purchasers listed on the signature
pages to the Purchase Agreement (the “Purchasers”).  We
are furnishing this opinion letter to you pursuant to Section 2.2(a)(iv) of the
Purchase Agreement.  Capitalized terms that are defined in the
Purchase Agreement and not otherwise defined in this opinion letter are used in
this opinion letter as so defined.

       

      We have
reviewed such documents and made such examination of law as we have deemed
appropriate to give the opinions expressed below.  We have relied,
without independent verification, on certificates of public officials and, as to
matters of fact material to the opinions set forth below, on representations in
the Purchase Agreement and certificates of officers of the Company.

       

      Our
opinion in numbered paragraph 1 is based on the assumption that the Company and
any person acting on its behalf have complied and will comply with the
limitations on manner of offering and sale set forth in Rule 502(c) under the
Securities Act of 1933, as amended (the “Securities Act”),
with respect to all offers and sales of the Company’s securities, including the
Preferred Shares and the Warrants.

       

      Our
opinion set forth below is limited to the federal law of the United
States.

       

      Based
upon the foregoing and subject to the additional qualifications set forth below,
we are of the opinion that:

       

      1. Based
on, and assuming the accuracy of, the representations of each of the Purchasers
in the Purchase Agreement, the sale of the Preferred Shares and the Warrants
pursuant to the Purchase Agreement does not require registration under the
Securities Act.

       

      Our
opinion expressed above is subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and other similar laws of general
application affecting the rights and remedies of creditors and to general
principles of equity.

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      This
opinion letter and the opinion it contains shall be interpreted in accordance
with the Legal Opinion Principles issued by the Committee on Legal Opinions of
the American Bar Association’s Business Law Section as published in 53 Business Lawyer 831 (May
1998).

       

      This
opinion letter is being furnished only to you for your use solely in connection
with the Purchase Agreement and the transactions contemplated thereby, and
neither it nor the opinion it contains may be relied on for any other purpose or
by anyone else.

       

      Very
truly yours,

       

      GOODWIN
PROCTER  LLP

      

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      

      EXHIBIT
F

       

      FORM OF
OPINION OF GENERAL COUNSEL

       

      _______________,
2009

      

      To
Purchasers Listed on the signature pages to the

      Purchase
Agreement referred to below

      

       

      Ladies
and Gentlemen:

       

      This
letter is being furnished to you in my role as General Counsel for Telkonet,
Inc., a Utah corporation (the “Company”), in
connection with the sale to you today of the shares (the “Preferred Shares”) of
the Company’s Series A Preferred Stock, par value $0.001 per share (the “Series A Preferred
Stock”), and warrants (the “Warrants”) to
purchase the Company’s common stock, par value $0.001 per share (the “Common Stock”),
pursuant to the Securities Purchase Agreement dated as of November 16, 2009 (the
“Purchase
Agreement”) by and among the Company and each of the Purchasers listed on
the signature pages to the Purchase Agreement.  I am furnishing this
opinion letter to you pursuant to Section 2.2(a)(v) of the Purchase
Agreement.  Capitalized terms that are defined in the Purchase
Agreement and not otherwise defined in this opinion letter are used in this
opinion letter as so defined.

       

      The
Purchase Agreement, the Warrants and the Registration Rights Agreement are
referred to collectively in this opinion letter as the “Transaction
Documents.”

       

      I have
reviewed such documents and made such examination of law as I have deemed
appropriate to give the opinions expressed below.  I have relied,
without independent verification, on certificates of public officials and, as to
matters of fact material to the opinions set forth below, on representations in
the Purchase Agreement and certificates of officers of the Company.

       

      My
opinion regarding valid existence and good standing in numbered paragraph 1 is
based solely on a certificate of the Utah Secretary of State and, in the case of
valid existence, a review of the Company’s articles of incorporation and an
officer’s certificate confirming that the Company has taken no action looking to
its dissolution.

       

      My
opinion in numbered paragraph 7 regarding the number of shares of each series or
class of stock issued and outstanding is based solely on my review of a copy of
the stock ledger of the Company certified by an officer of the Company and of
minutes of meetings and actions by written consent at or by which stock
issuances were approved.

       

      I note
that the Transaction Documents provide that they are to be governed by New York
law.  The opinions in numbered paragraph 3 below regarding the
validity, binding effect and enforceability of the Transaction Documents are
given as though each of the Transaction Documents were governed by the internal
law of Maryland.

       

      My
opinions set forth below are limited to Maryland law, the Utah Revised Business
Corporation Act and the federal law of the United States.

       

      Based
upon the foregoing and subject to the additional qualifications set forth below,
I am of the opinion that:

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      1. The
Company is validly existing as a corporation in good standing under Utah
law.

       

      2. The
Company has the corporate power to execute and deliver each of the Transaction
Documents and perform its obligations thereunder.

       

      3. Each
of the Transaction Documents has been duly authorized, executed and delivered by
the Company and constitutes its valid and binding obligation enforceable against
it in accordance with its terms.

       

      4. The
execution and delivery by the Company of the Transaction Documents and the
performance by the Company of its obligations under the Transaction Documents,
including its issuance and sale of the Preferred Shares, its issuance of the
shares of Common Stock issuable upon conversion of the Preferred Shares in
accordance with the Company’s articles of incorporation (the “Conversion Shares”),
its issuance and sale of the Warrants, and its issuance of the shares of Common
Stock issuable upon exercise of the Warrants in accordance with the terms of the
Warrants (the “Warrant
Shares”), do not and will not (i) violate the Utah Revised Business
Corporation Act or any Maryland or federal statute, rule or regulation, or
(ii) violate the Company’s articles of incorporation or
by-laws.

       

      5. No
consent, approval, license or exemption by, order or authorization of, or
filing, recording or registration with any Utah governmental authority pursuant
to the Utah Revised Business Corporation Act or any Maryland or federal
governmental authority is required to be obtained or made by the Company in
connection with the execution and delivery by the Company of the Transaction
Documents or the performance by it of its obligations thereunder, including its
issuance and sale of the Preferred Shares, its issuance of the Conversion Shares
upon conversion of the Preferred Shares in accordance with the Company’s
articles of incorporation, its issuance and sale of the Warrants, and its
issuance of the Warrant Shares upon exercise of the Warrants in accordance with
the terms of the Warrants, other than those that have been obtained or
made.

       

      6. The
Preferred Shares have been duly authorized and, when issued, delivered and paid
for in accordance with the Purchase Agreement, will be validly issued, fully
paid and nonassessable.  Assuming a sufficient number of authorized
but unissued shares of Common Stock are available for issuance when the
Preferred Shares are converted, the Conversion Shares, when issued and delivered
upon conversion of the Preferred Shares in accordance with the Company’s
articles of incorporation, will be validly issued, fully paid and
nonassessable.  The Warrants have been duly authorized and, when
issued, delivered and paid for in accordance with the Purchase Agreement, will
be validly issued.  Assuming a sufficient number of authorized but
unissued shares of Common Stock are available for issuance when the Warrants are
exercised, the Warrant Shares, when issued and delivered upon exercise of the
Warrants in accordance with the terms of the Warrants, will be validly issued,
fully paid and nonassessable.

       

      7. The
authorized capital stock of the Company consists of (i) 155,000,000 shares
of  Common Stock, of which _________ shares are issued and
outstanding, and (ii) 15,000,000 shares of Preferred Stock, par value $0.001 per
share, of which _________ shares have been designated Series A Preferred Stock,
none of which are issued and outstanding.  The issued and outstanding
shares of Common Stock have been duly authorized and validly issued and are
fully paid and nonassessable.

       

      I am not
representing the Company in any pending litigation in which it is a named
defendant that challenges the validity or enforceability of, or seeks to enjoin
the performance of, the Transaction Documents.

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      My
opinions expressed above are subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and other similar laws of general
application affecting the rights and remedies of creditors and to general
principles of equity.

       

      I express
no opinion as to (i) compliance by the directors of the Company with their
fiduciary duties in approving the Transaction Documents; and (ii) the validity,
binding effect and enforceability of (a) provisions in the Transaction Documents
relating to the choice of forum for resolving disputes and (b) the
indemnification obligations of the Company in the Purchase
Agreement.

       

      This
opinion letter and the opinions it contains shall be interpreted in accordance
with the Legal Opinion Principles issued by the Committee on Legal Opinions of
the American Bar Association’s Business Law Section as published in 53 Business Lawyer 831 (May
1998).

       

      This
opinion letter is being furnished only to you for your use solely in connection
with the Purchase Agreement and the transactions contemplated thereby, and
neither it nor the opinions it contains may be relied on for any other purpose
or by anyone else.

       

      Very
truly yours,

       

      Howard J. Barr

      

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      EXHIBIT
G

       

      FORM OF
SECRETARY’S CERTIFICATE

      

      The
undersigned hereby certifies that he is the duly elected, qualified and acting
Secretary of Telkonet, Inc., a Utah corporation (the “Company”), and that as such
he is authorized to execute and deliver this certificate in the name and on
behalf of the Company and in connection with the Securities Purchase Agreement,
dated as of November 16, 2009, by and among the Company and the investors party
thereto (the “Securities
Purchase Agreement”), and further certifies in his official capacity, in
the name and on behalf of the Company, the items set forth
below.  Capitalized terms used but not otherwise defined herein shall
have the meaning set forth in the Securities Purchase Agreement.

       

      
        	
                1.

              	
                Attached
      hereto as Exhibit A is a
      true, correct and complete copy of the resolutions duly adopted by the
      Board of Directors of the Company on November ___, 2009.  Such
      resolutions have not in any way been amended, modified, revoked or
      rescinded, have been in full force and effect since their adoption to and
      including the date hereof and are now in full force and
      effect.

              

      

       

      
        	
                2.

              	
                Attached
      hereto as Exhibit B is a
      true, correct and complete copy of the Articles of Incorporation of the
      Company, together with any and all amendments thereto currently in effect,
      and no action has been taken to further amend, modify or repeal such
      Articles of Incorporation, the same being in full force and effect in the
      attached form as of the date
hereof.

              

      

       

      
        	
                3.

              	
                Attached
      hereto as Exhibit C is a
      true, correct and complete copy of the Bylaws of the Company and any and
      all amendments thereto currently in effect, and no action has been taken
      to further amend, modify or repeal such Bylaws, the same being in full
      force and effect in the attached form as of the date
    hereof.

              

      

       

      
        	
                4.

              	
                Each
      person listed below has been duly elected or appointed to the position(s)
      indicated opposite his name and is duly authorized to sign the Securities
      Purchase Agreement and each of the Transaction Documents on behalf of the
      Company, and the signature appearing opposite such person’s name below is
      such person’s genuine signature.

              

      

       

      

      
        	 	
                Name

              	
                Position

              	
                Signature

                 

              
	 	
                Jason
      L. Tienor

              	
                Chief
      Executive Officer

              	
                _________________________

              
	 	
                Richard
      J. Leimbach

              	
                Chief
      Financial Officer

              	
                _________________________

              

      

      

      

      IN
WITNESS WHEREOF, the undersigned has hereunto set his hand as of this ____ day
of _____________, 2009.

       

      

      

       

      
        	 	 	 
	 	

                Secretary

              	 

      

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      
 

      I, Jason
L. Tienor, Chief Executive Officer, hereby certify that _____________ is the
duly elected, qualified and acting Secretary of the Company and that the
signature set forth above is his true signature.

       

      
        
          

           

          
            	 	 	 
	 	

                    Chief
      Executive Officer

                  	 

          

           

        

      

      
         

        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        

         

         
EXHIBIT
A

      

       

      Resolutions

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      EXHIBIT
B

       

      Articles
of Incorporation

       

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      EXHIBIT
C

       

      Bylaws

       

      

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      EXHIBIT
H

       

      FORM OF
OFFICER’S CERTIFICATE

       

      

      The
undersigned, the Chief Executive Officer of Telkonet, Inc., a Utah corporation
(the “Company”),
pursuant to Section 5.1(i) of the Securities Purchase Agreement, dated as of
November 16, 2009, by and among the Company and the investors signatory thereto
(the “Securities Purchase
Agreement”), hereby represents, warrants and certifies as follows
(capitalized terms used but not otherwise defined herein shall have the meaning
set forth in the Securities Purchase Agreement):

      

      
        	
                 
      

              	
                1.

              	
                The
      representations and warranties of the Company contained in the Securities
      Purchase Agreement are true and correct in all material respects (except
      for those representations and warranties which are qualified as to
      materiality, in which case, such representations and warranties shall be
      true and correct in all respects) as of the date when made and as of the
      date hereof, as though made on and as of such date, except for such
      representations and warranties that speak as of a specific
      date.

              

      

      

      
        	
                 
      

              	
                2.

              	
                The
      Company has performed, satisfied and complied in all material respects
      with all covenants, agreements and conditions required by the Transaction
      Documents to be performed, satisfied or complied with by it at or prior to
      the date hereof.

              

      

      

      

      IN
WITNESS WHEREOF, the undersigned has executed this certificate this ___ day of
______________, 2009.

      

      

      
         

        
          	 	 	 
	 	

                  Chief
      Executive Officer

                	 

        

         

         

        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        

         
EXHIBIT
I

       

      WIRE
INSTRUCTIONS

      

      JPMorgan
Chase Bank

      ABA #
021000021

      Account
No.: 806031209

      Account
Name: Telkonet, Inc.

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      Schedule
3.1(a)

      

       

      Subsidiaries

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      Schedule
3.1(g)

       

       

      Capitalization

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      Schedule
3.1(w)

      

       

      Registration
Rights

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      Schedule
3.1(x)

       

      
 

      Listing
and Maintenance Requirements

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