Unassociated Document


    EXHIBIT
10.3

     

    SECURITY
AGREEMENT

     

    THIS SECURITY AGREEMENT (the
“Agreement”), is entered into and made
effective as of May 30, 2008, by and between TELKONET, INC., a Utah
corporation with its principal place of business located at 20374 Seneca Meadows
Parkway, Germantown, Maryland 20876 (the “Company”), and the
undersigned subsidiaries of the Company (each a “Guarantor,” and
collectively together with the Company, the “Grantors”), in favor
YA GLOBAL INVESTMENTS,
L.P. (the “Secured
Party”).

     

    WHEREAS, in connection with
the Securities Purchase Agreement by and among the Company and the Secured Party
of even date herewith (the “Securities Purchase
Agreement”), the Company has agreed, upon the terms and subject to the
conditions of the Securities Purchase Agreement, to issue to the Secured Party
(i) an aggregate original principal amount of up to $3,500,000 of senior secured
convertible debentures (the “Convertible
Debentures”), which shall be convertible into shares of the Company’s
Common Stock (the “Conversion Shares”);
and (ii) warrants (the “Warrants”) to be
exercisable to acquire additional shares of Common Stock (the “Warrants Shares”)
initially in that number of shares of Common Stock set forth in the Securities
Purchase Agreement;

     

    WHEREAS, each of the
Guarantors (other than the Company) has executed and delivered a Guaranty dated
the date hereof (the “Guaranty”) in favor
of the Secured Party, with respect to the Company’s obligations under the
Securities Purchase Agreement, the Convertible Debentures, and the Transaction
Documents (as defined below); and

     

    WHEREAS, each of the
Guarantors shall receive a direct benefit from the Secured Party entering into
the Securities Purchase Agreement, the Convertible Debentures, and the
Transaction Documents; and

     

    WHEREAS, it is a condition
precedent to the Secured Party purchasing the Convertible Debentures and
Warrants pursuant to the Securities Purchase Agreement that the Grantors shall
have executed and delivered to the Secured Party this Agreement providing for
the grant to the Secured Party of a security interest in all personal property
of each Grantor to secure all of the Company's obligations under the
“Transaction Documents” (as defined in the Securities Purchase Agreement) (the
“Transaction
Documents”) and the Guarantors’ obligations under the Guaranty, subject
to the Intercreditor Agreement between Secured Party and Thermo Credit, LLC
dated as of the date hereof;

     

    NOW, THEREFORE, in
consideration of the promises and the mutual covenants herein contained, and for
other good and valuable consideration, the adequacy and receipt of which are
hereby acknowledged, the parties hereto hereby agree as follows:

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    ARTICLE
1.

     

    DEFINITIONS AND
INTERPRETATIONS

     

    Section
1.1.    Recitals.  The
above recitals are true and correct and are incorporated herein, in their
entirety, by this reference.

     

    Section
1.2.    Interpretations.
Nothing herein expressed or implied is intended or shall be construed to confer
upon any person other than the Secured Party any right, remedy or claim under or
by reason hereof.

     

    Section
1.3.    Definitions. Reference
is hereby made to the Securities Purchase Agreement and the Convertible
Debentures for a statement of the terms thereof.  All capitalized
terms used in this Agreement and the recitals hereto and not defined herein
shall have the meanings set forth in the Securities Purchase Agreement, the
Convertible Debentures, or in Articles 8 or 9 of the Uniform Commercial Code as
in effect from time to time in the State of New Jersey (the "Code").

     

    Section
1.4.    Other
Definitions.  As used in this Agreement, the following terms
shall have the respective meanings indicated below, such meanings to be
applicable equally to both the singular and plural forms of such
terms:

     

    “Event of Default”
shall be deemed to have occurred under this Agreement upon an Event of Default
under and as defined in the Convertible Debentures, or upon a breach of this
Agreement that is not cured within ten (10) days following written notice of
such breach from the Secured Party.  Notwithstanding anything to the
contrary herein, incurrence of indebtedness by the Company to Thermo Credit, LLC
(“Thermo Credit”) in excess of the amount set forth in Section 2.1(a) hereof
shall be an immediate Event of Default, with no right of cure.

     

    ARTICLE
2.

     

    PLEDGED
PROPERTY

     

    
      Section
2.1.    Grant of Security
Interest.

       

      (a)    As collateral
security for all of the Obligations (as defined in Section 2.2 hereof),
each Grantor hereby pledges and assigns to the Secured Party, and grants to the
Secured Party for its benefit, a continuing security interest in and to all
personal property of each Grantor, wherever located and whether now or
hereinafter existing and whether now owned or hereafter acquired, of every kind
and description, tangible or intangible, including without limitation, all
Goods, Inventory, Equipment, Fixtures, Instruments (including promissory notes),
Documents,  Accounts (including health-care-insurance receivables, and
license fees), Contracts, Contract Rights, Chattel Paper (whether tangible or
electronic), Deposit Accounts (and in and to any deposits or other sums at any
time credited to each such Deposit Account), Money, Letters of Credit and
Letter-of-Credit Rights (whether or not the letter of credit is evidenced by a
writing), Commercial Tort Claims, Securities and all other Investment Property,
General Intangibles (including payment intangibles and software),

       

      
        
           

        

        
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      Farm
Products, all books and records relating to any of the foregoing, and all
supporting obligations, and any and all proceeds and products of any thereof,
including proceeds of insurance covering any or all of the foregoing, wherever
located, whether now owned, or now due, in which a Grantor has an interest or
the power to transfer rights, or hereafter acquired, arising, or to become due,
or in which a Grantor obtains an interest, or the power to transfer rights, and
as more particularly described on Exhibit A attached
hereto (collectively, the “Pledged Property”).   Notwithstanding
anything to the contrary in this Agreement, the Company hereby covenants and
agrees that it shall not incur indebtedness in excess of $2.5 million under the
Factoring and Security Agreement (the “Factoring Agreement”) dated January 25,
2008, by and between the Company and Thermo Credit, LLC (“Thermo
Credit”),   without the prior written consent of the Secured
Party, which consent shall not be unreasonably withheld, conditioned or
delayed.

    

     

    (b)    Simultaneously with
the execution and delivery of this Agreement, each Grantor shall make, execute,
acknowledge, file, record and deliver to the Secured Party such documents,
instruments, and agreements, including, without limitation, financing
statements, certificates, affidavits and forms as may, in the Secured Party’s
reasonable judgment, be necessary to effectuate, complete or perfect, or to
continue and preserve, the security interest of the Secured Party in the Pledged
Property.

     

    (c)    Intercreditor Agreement;
Acknowledgment of Existing Security Interest

     

    (i)    The rights
and obligations set forth hereunder are subject to the letter agreement of even
date herewith among the Secured Party and Thermo Credit, LLC.

     

    (ii)    The Secured
Party acknowledges the validity of the Factoring and Security Agreement between
the Company and Thermo Credit, LLC, the intent of the signatory parties to
structure transactions thereunder as purchases and sales, the intent of the
Company to grant the first priority perfected security interest set forth in
Sections 2.5 and 8.2, and otherwise, in the Factoring and Security Agreement,
including, but not limited to in Contracts, Receivables, Records, payments of
principal and interest on Receivables and Contracts, amounts on deposit from
time to time in the Lockbox Account, and all proceeds of any of the foregoing,
and the impact thereof in the Pledged Property described in this Security
Agreement.  (Capitalized terms in this Section 2.1(c)(ii) shall have
the definitions set forth in the Factoring Agreement.)  This
acknowledgment is not intended to, and shall not, otherwise modify the rights
and remedies of the parties hereto under this Agreement.

     

    Section
2.2.    Security for
Obligations.  The security interest created hereby in the
Pledged Property constitutes continuing collateral security for all of the
following obligations, whether now existing or hereinafter incurred
(collectively, the “Obligations”):

     

    
      
         

      

      
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    (a)    (i)    the payment
by the Company, as and when due and payable (by scheduled maturity,
acceleration, demand or otherwise), of all amounts from time to time owing by it
in respect of the Convertible Debentures, the other Transaction Documents, or
any other amounts owing by it to the Secured Party, whether or not now in
existence or hereinafter incurred, or (ii) in the case of any Guarantor, the
payment by such Guarantor, as and when due and payable of all “Guaranteed
Obligations” under (and as defined in) the Guaranty; and

     

    (b)    the due
performance and observance by the each Grantor of all of its other obligations
from time to time existing in respect of any of the Transaction Documents,
including without limitation, with respect to any conversion or redemption
rights of the Secured Party under the Convertible Debentures.

     

    ARTICLE
3.

     

    ATTORNEY-IN-FACT;
PERFORMANCE

     

    
      Section
3.1.    Secured Party Appointed
Attorney-In-Fact.

       

      The
Grantors hereby appoint the Secured Party as its attorney-in-fact, with full
authority in the place and stead of the Grantor and in the name of the Grantor
or otherwise, exercisable after and during the continuance of an Event of
Default, from time to time in the Secured Party’s discretion to take any action
and to execute any instrument which the Secured Party may reasonably deem
necessary to accomplish the purposes of this Agreement, including, without
limitation, to (a) receive and collect all instruments made payable to the
Grantor representing any payments in respect of the Pledged Property or any part
thereof and to give full discharge for the same; (b) demand, collect, receipt
for, settle, compromise, adjust, sue for, foreclose, or realize on the Pledged
Property as and when the Secured Party may determine, and (c) notify account
debtors and obligors on any Pledged Property to make payments directly to the
Secured Party for the purpose of facilitating the collection of any debt or
obligation owed to any Grantor.  The foregoing power of attorney is a
power coupled with an interest and shall be irrevocable until all Obligations
are paid and performed in full.  The Grantors agree that the powers
conferred on the Secured Party hereunder are solely to protect the Secured
Party’s interests in the Pledged Property and shall not impose any duty upon the
Secured Party to exercise any such powers.

       

      Section
3.2.    Secured Party May
Perform.

       

      If a
Grantor fails to perform any agreement contained herein, the Secured Party, at
its option, may itself perform, or cause performance of, such agreement, and the
expenses of the Secured Party incurred in connection therewith shall be included
in the Obligations secured hereby and payable by such Grantor under
Section 8.3.

    

     

    
      
         

      

      
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    ARTICLE
4.

     

    REPRESENTATIONS AND
WARRANTIES

     

    
      Section
4.1.    Authorization;
Enforceability.

       

      Each of
the parties hereto represents and warrants that it has taken all action
necessary to authorize the execution, delivery and performance of this Agreement
and the transactions contemplated hereby; and upon execution and delivery, this
Agreement shall constitute a valid and binding obligation of the respective
party, subject to applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws affecting creditors’ rights or by the principles governing the
availability of equitable remedies.

       

      Section
4.2.    Ownership of Pledged
Property.

       

      Each
Grantor represents and warrants that it is the legal and beneficial owner of the
Pledged Property free and clear of any lien, security interest, option or other
charge or encumbrance (each, a “Lien”) except for the security interest created
by this Agreement and other Permitted Liens.  For purposes of this
Agreement, “Permitted Liens” means: (1) the security interest created by this
Agreement, (2) existing Liens which have been disclosed by the Company to the
Secured Party on Schedule 4.2 attached hereto; (3) inchoate Liens for taxes,
assessments or governmental charges or levies not yet due, as to which the grace
period, if any, related thereto has not yet expired, or being contested in good
faith and by appropriate proceedings for which adequate reserves have been
established in accordance with GAAP; (4) Liens of carriers, materialmen,
warehousemen, mechanics and landlords and other similar Liens which secure
amounts which are not yet overdue or which are being contested in good faith by
appropriate proceedings for which adequate reserves have been established in
accordance with GAAP; (5) nonexclusive licenses andsublicenses, leases or
subleases granted to other Persons not materially interfering with the conduct
of the business of the Company; (6) Liens securing capitalized lease obligations
and purchase money indebtedness incurred solely for the purpose of financing an
acquisition or lease; (7) easements, rights-of-way, restrictions, encroachments,
municipal zoning ordinances and other similar charges or encumbrances, and minor
title deficiencies, in each case not securing debt and not materially
interfering with the conduct of the business of the Company and not materially
detracting from the value of the property subject thereto; (8) Liens arising out
of the existence of judgments or awards which judgments or awards do not
constitute an Event of Default; (9) Liens incurred in the ordinary course of
business in connection with workers compensation claims, unemployment insurance,
pension liabilities and social security benefits and Liens securing the
performance of bids, tenders, leases and contracts in the ordinary course of
business, statutory obligations, surety bonds, performance bonds and other
obligations of a like nature (other than appeal bonds) incurred in the ordinary
course of business (exclusive of obligations in respect of the payment for
borrowed money); (10) Liens in favor of a banking institution arising by
operation of law encumbering deposits (including the right of set-off) and
contractual set-off rights held by such banking institution and which are within
the general parameters customary in the banking industry and only burdening
deposit accounts or other funds maintained with a creditor depository
institution; (11) usual and customary set-off rights in leases and other
contracts; and (12) escrows in connection with acquisitions and
dispositions.

       

      
        
           

        

        
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      Section
4.3.    Location of Pledged
Property.

       

      The
Pledged Property is or will be kept at the address(es) of each Grantor set forth
on the signature pages hereof, or such other locations as the Grantors have
given the Secured Party written notice prior to the date hereof, and, unless
otherwise provided herein, the Grantors will not remove any Pledged Property
from such locations without the prior written consent of the Secured Party which
consent shall not be unreasonably withheld.

       

      Section
4.4.    Location, State of
Incorporation and Name of Grantors.

       

      Each
Grantor’s principal place of business, state of organization, organization
identification number, and exact legal name is as set forth on each such
Grantor’s signature page to this Agreement.

       

      Section
4.5.    Priority of Security
Interest.

       

      The
security interest granted to the Secured Party hereunder shall be a first
priority security interest subject to no other Liens, except as to the extent
set forth in the Intercreditor Agreement between Thermo Credit, LLC and the
Secured Party dated as of the date hereof.  Except for the Permitted
Liens, no financing statement covering any of the Pledged Property or any
proceeds thereof is on file in any public office.

    

     

    ARTICLE
5.

     

    DEFAULT;
REMEDIES

     

    
      Section
5.1.    Method of Realizing Upon the
Pledged Property: Other Remedies.

       

      If any
Event of Default shall have occurred and be continuing:

       

      (a)    The Secured
Party may exercise in respect of the Pledged Property, in addition to any other
rights and remedies provided for herein or otherwise available to it, all of the
rights and remedies of a secured party upon default under the Code (whether or
not the Code applies to the affected Pledged Property), and also may (i) take
absolute control of the Pledged Property, including, without limitation,
transfer into the Secured Party's name or into the name of its nominee or
nominees (to the extent the Secured Party has not theretofore done so) and
thereafter receive, for the benefit of the Secured Party, all payments made
thereon, give all consents, waivers and ratifications in respect thereof and
otherwise act with respect thereto as though it were the outright owner thereof,
(ii) require each Grantor to assemble all or part of the Pledged Property
as directed by the Secured Party and make it

       

      
        
           

        

        
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      available
to the Secured Party at a place or places to be designated by the Secured Party
that is reasonably convenient to both parties, and the Secured Party may enter
into and occupy any premises owned or leased by a Grantor where the Pledged
Property or any part thereof is located or assembled for a reasonable period in
order to effectuate the Secured Party's rights and remedies hereunder or under
law, without obligation to the Grantor in respect of such occupation, and
(iii) without notice except as specified below and without any obligation
to prepare or process the Pledged Property for sale, (A) sell the Pledged
Property or any part thereof in one or more parcels at public or private sale,
at any of the Secured Party's offices or elsewhere, for cash, on credit or for
future delivery, and at such price or prices and upon such other terms as the
Secured Party may deem commercially reasonable and/or (B) lease, license or
dispose of the Pledged Property or any part thereof upon such terms as the
Secured Party may deem commercially reasonable.  Each Grantor agrees
that, to the extent notice of sale or any other disposition of the Pledged
Property shall be required by law, at least ten (10) days' notice to the Grantor
of the time and place of any public sale or the time after which any private
sale or other disposition of the Pledged Property is to be made shall constitute
reasonable notification.  The Secured Party shall not be obligated to
make any sale or other disposition of any Pledged Property regardless of notice
of sale having been given.  The Secured Party may adjourn any public
or private sale from time to time by announcement at the time and place fixed
therefor, and such sale may, without further notice, be made at the time and
place to which it was so adjourned.  Each Grantor hereby waives any
claims against the Secured Party arising by reason of the fact that the price at
which the Pledged Property may have been sold at a private sale was less than
the price which might have been obtained at a public sale or was less than the
aggregate amount of the Obligations, even if the Secured Party accepts the first
offer received and does not offer such Pledged Property to more than one
offeree, and waives all rights that the Grantor may have to require that all or
any part of such Pledged Property be marshaled upon any sale (public or private)
thereof.  Each Grantor hereby acknowledges that (i) any such sale
of the Pledged Property by the Secured Party may be made without warranty,
(ii) the Secured Party may specifically disclaim any warranties of title,
possession, quiet enjoyment or the like, and (iii) such actions set forth
in clauses (i) and (ii) above shall not adversely affect the commercial
reasonableness of any such sale of Pledged
Property.  

    

     

    (b)    Any cash held
by the Secured Party as Pledged Property and all cash proceeds received by the
Secured Party in respect of any sale of or collection from, or other realization
upon, all or any part of the Pledged Property shall be applied (after payment of
any amounts payable to the Secured Party pursuant to Section 8.3 hereof) by the
Secured Party against, all or any part of the Obligations in such order as the
Secured Party shall elect, consistent with the provisions of the Securities
Purchase Agreement.  Any surplus of such cash or cash proceeds held by
the Secured Party and remaining after the indefeasible payment in full in cash
of all of the Obligations shall be paid over to whomsoever shall be lawfully
entitled to receive the same or as a court of competent jurisdiction shall
direct.

     

    (c)    In the event
that the proceeds of any such sale, collection or realization are insufficient
to pay all amounts to which the Secured Party is legally entitled, each Grantor
shall be liable for the deficiency, together with interest thereon at the rate
specified in the Convertible Debentures for interest on overdue principal
thereof or such other rate as shall be fixed by applicable law, together with
the costs of collection and the reasonable fees, costs, expenses and other
client charges of any attorneys employed by the Secured Party to collect such
deficiency.

     

    
      
         

      

      
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    (d)    Each Grantor
hereby acknowledges that if the Secured Party complies with any applicable
state, provincial, or federal law requirements in connection with a disposition
of the Pledged Property, such compliance will not adversely affect the
commercial reasonableness of any sale or other disposition of the Pledged
Property.

     

    (e)    The Secured
Party shall not be required to marshal any present or future collateral security
(including, but not limited to, this Agreement and the Pledged Property) for, or
other assurances of payment of, the Obligations or any of them or to resort to
such collateral security or other assurances of payment in any particular order,
and all of the Secured Party's rights hereunder and in respect of such
collateral security and other assurances of payment shall be cumulative and in
addition to all other rights, however existing or arising.  To the
extent that the Grantor lawfully may, each Grantor hereby agrees that it will
not invoke any law relating to the marshaling of collateral which might cause
delay in or impede the enforcement of the Secured Party's rights under this
Agreement or under any other instrument creating or evidencing any of the
Obligations or under which any of the Obligations is outstanding or by which any
of the Obligations is secured or payment thereof is otherwise assured, and, to
the extent that it lawfully may, the Company hereby irrevocably waives the
benefits of all such laws.

     

    Section
5.2.    Duties Regarding Pledged
Property.

     

    The
Secured Party shall have no duty as to the collection or protection of the
Pledged Property or any income thereon or as to the preservation of any rights
pertaining thereto, beyond the safe custody and reasonable care of any of the
Pledged Property actually in the Secured Party’s possession.

     

    ARTICLE
6.

     

    AFFIRMATIVE
COVENANTS

     

    So long
as any of the Obligations shall remain outstanding, unless the Secured Party
shall otherwise consent in writing:

     

    Section
6.1.    Existence, Properties,
Etc.

     

    (a)    Each Grantor
shall do, or cause to be done, all things, or proceed with due diligence with
any actions or courses of action, that may be reasonably necessary (i) to
maintain Grantor’s due organization, valid existence and good standing under the
laws of its state of incorporation, and (ii) to preserve and keep in full
force and effect all qualifications, licenses and registrations in those
jurisdictions in which the failure to do so could have a Material Adverse Effect
(as defined below); and (b) each Grantor shall not do, or cause to be done,
any act impairing the Grantor’s corporate power or authority (i) to carry
on the Grantor’s business as now conducted, and (ii) to execute or deliver
this Agreement or any other document delivered in connection herewith,
including, without limitation, any UCC-1 Financing Statements required by the
Secured Party (which other loan instruments collectively shall be referred
to as the “Loan
Instruments”) to which it is or will be a party, or perform any of
its obligations hereunder or thereunder.  For purpose of this
Agreement, the term “Material Adverse
Effect” shall mean any material and adverse effect as determined by
Secured Party in its reasonable discretion, whether individually or in the
aggregate, upon (a) the Grantor’s assets, business, operations, properties
or condition, financial or otherwise; (b) the Grantor’s ability to make
payment as and when due of all or any part of the Obligations; or (c) the
Pledged Property.

     

    
      
         

      

      
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    Section
6.2.    Financial Statements and
Reports.

     

    Each
Grantor shall furnish to the Secured Party within a reasonable time such
financial data as the Secured Party may reasonably request.

     

    Section
6.3.    Accounts and
Reports.

     

    Each
Grantor shall maintain a standard system of accounting in accordance with
generally accepted accounting principles consistently applied (“GAAP”) and
provide, at its sole expense, to the Secured Party the following:

     

    (a)    as soon as
available, a copy of any notice or other communication alleging any nonpayment
or other material breach or default, or any foreclosure or other action
respecting any material portion of its assets and properties, received
respecting any of the indebtedness of the Grantor in excess of $500,000 (other
than the Obligations), or any demand or other request for payment under any
guaranty, assumption, purchase agreement or similar agreement or arrangement
respecting the indebtedness or obligations of others in excess of $500,000;
and

     

    (b)    within
fifteen (15) days after the making of each submission or filing, a copy of
any report, financial statement, notice or other document, whether periodic or
otherwise, submitted to the shareholders of the Grantor, or submitted to or
filed by the Grantor with any governmental authority involving or affecting (i)
the Grantor that could reasonably be expected to result in a Material Adverse
Effect; (ii) the Obligations; (iii) any part of the Pledged Property;
or (iv) any of the transactions contemplated in this Agreement or the Loan
Instruments (except, in each case, to the extent any such submission, filing,
report, financial statement, notice or other document is posted on EDGAR
Online).

     

    
      Section
6.4.    Maintenance of Books and
Records; Inspection.

       

      Each
Grantor shall maintain its books, accounts and records in accordance with GAAP,
and permit the Secured Party, its officers and employees and any professionals
designated by the Secured Party in writing, at any time during normal business
hours and upon reasonable notice to visit and inspect any of its properties
(including but not limited to the collateral security described in the
Transaction Documents and/or the Loan Instruments), corporate books and
financial records, and to discuss its accounts, affairs and finances with any
employee, officer or director thereof (it being agreed that, unless an Event of
Default shall have occurred and be continuing, there shall be no more than two
(2) such visits and inspections in any Fiscal Year).

       

      
        
           

        

        
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      Section
6.5.    Maintenance and
Insurance.

       

      (a)    Each Grantor
shall maintain or cause to be maintained, at its own expense, all of its
material assets and properties in good working order and condition, ordinary
wear and tear excepted, making all necessary repairs thereto and renewals and
replacements thereof.

       

      (b)    Each Grantor
shall maintain or cause to be maintained, at its own expense, insurance in form,
substance and amounts (including deductibles), which the Grantor deems
reasonably necessary to the Company’s business, (i) adequate to insure all
assets and properties of the Grantor of a character usually insured by persons
engaged in the same or similar business against loss or damage resulting from
fire or other risks included in an extended coverage policy; (ii) against
public liability and other tort claims that may be incurred by the Grantor;
(iii) as may be required by the Transaction Documents and/or applicable law
and (iv) as may be reasonably requested by Secured Party, all with financially
sound and reputable insurers.

    

     

    
      Section
6.6.    Contracts and Other
Collateral.

       

      Each
Grantor shall perform all of its obligations under or with respect to each
instrument, receivable, contract and other intangible included in the Pledged
Property to which the Grantor is now or hereafter will be party on a timely
basis and in the manner therein required, including, without limitation, this
Agreement, except to the extent the failure to so perform such obligations would
not reasonably be expected to result in a Material Adverse Effect.

       

      Section
6.7.    Defense of Collateral,
Etc.

       

      Each
Grantor shall defend and enforce its right, title and interest in and to any
part of:  (a) the Pledged Property; and (b) if not included
within the Pledged Property, those assets and properties whose loss would
reasonably be expected to result in a Material Adverse Effect, each against all
manner of claims and demands on a timely basis to the full extent permitted by
applicable law.

       

      Section
6.8.    Taxes and
Assessments.

       

      Each
Grantor shall (a) file all material tax returns and appropriate schedules
thereto that are required to be filed under applicable law, prior to the date of
delinquency (taking into account any extensions of the original due date),
(b) pay and discharge all material taxes, assessments and governmental
charges or levies imposed upon the Grantor, upon its income and profits or upon
any properties belonging to it, prior to the date on which penalties attach
thereto, and (c) pay all material taxes, assessments and governmental
charges or levies that, if unpaid, might become a lien or charge upon any of its
properties; provided,
however, that the Grantor in good faith may contest any such tax,
assessment, governmental charge or levy described in the foregoing clauses (b)
and (c) so long as appropriate reserves are maintained with respect thereto if
and to the extent required by GAAP.

       

      
        
           

        

        
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      Section
6.9.    Compliance with Law and
Other Agreements.

       

      Each
Grantor shall maintain its business operations and property owned or used in
connection therewith in compliance with (a) all applicable federal, state
and local laws, regulations and ordinances governing such business operations
and the use and ownership of such property, and (b) all agreements,
licenses, franchises, indentures and mortgages to which the Grantor is a party
or by which the Grantor or any of its properties is bound, except where the
failure to so comply would not reasonably be expected to have a Material Adverse
Effect.

       

      Section
6.10.    Notice of
Default.

       

      The
Grantors will immediately notify the Secured Party of any event causing a
substantial loss or diminution in the value of all or any material part of the
Pledged Property and the amount or an estimate of the amount of such loss or
diminution. The Grantors shall promptly notify the Secured Party of any
condition or event which constitutes, or would constitute with the passage of
time or giving of notice or both, an Event of Default, and promptly inform the
Secured Party of any events or changes in the financial condition of any Grantor
occurring since the date of the last financial statement of such Grantor
delivered to the Secured Party, which individually or cumulatively when viewed
in light of prior financial statements, which might reasonably be expected to
have a Material Adverse Effect on the business operations or financial condition
of the Grantor.

       

      Section
6.11.    Notice of
Litigation.

       

      Each
Grantor shall give notice, in writing, to the Secured Party of (a) any
actions, suits or proceedings wherein the amount at issue is in excess of
$250,000, instituted by any persons against the Grantor, or affecting any of the
assets of the Company, and (b) any dispute, not resolved within fifteen
(15) days of the commencement thereof, between the Grantor on the one hand and
any governmental or regulatory body on the other hand, which might reasonably be
expected to result in a Material Adverse Effect on the business operations or
financial condition of the Grantor.

       

      Section
6.13.    Future
Subsidiaries.

       

      If any
Grantor shall hereafter create or acquire any subsidiary, simultaneously with
the creation or acquisition of such subsidiary, such Grantor shall cause such
subsidiary to become a party to this Agreement as an additional "Grantor"
hereunder, and to duly execute and deliver a guaranty of the Obligations in
favor of the Secured Party in form and substance reasonably acceptable to the
Secured Party, and to duly execute and/or deliver such opinions of counsel and
other documents, in form and substance reasonably acceptable to the Secured
Party, as the Secured Party shall reasonably request with respect
thereto.

       

      
        
           

        

        
          11

          
            

          

        

        
           

        

      

       

      Section
6.14.    Changes to
Identity.

       

      Each
Grantor will (a) give the Secured Party at least 30 days' prior written notice
of any change in such Grantor's name, identity or organizational structure, (b)
maintain its jurisdiction of incorporation, organization or formation as set
forth on its respective signature page attached hereto, (C) immediately notify
the Secured Party upon obtaining an organizational identification number, if on
the date hereof such Grantor did not have such identification
number.

    

     

    Section
6.15.    Establishment of Deposit
Account, Dominion Account Agreements;
Control. 

     

    Within
ten (10) days of the date hereof, each Grantor, the Secured Party, and each
applicable bank or other depository institution shall enter into a deposit
account agreement (“Deposit Account
Agreement”) in the form of Exhibit B with respect to each of the
Grantor’s Deposit Accounts (other than accounts (the “Thermo Credit Receivables
Accounts”) established to accept proceeds of receivables pursuant to the
Factoring and Security Agreement between Telkonet, Inc. and Thermo Credit, LLC
dated January 25, 2008 (the “Thermo Credit
Agreement”) , including, without limitation, all savings, passbook, money
market or other depository accounts, and all certificates of deposit, maintained
by each Grantor with any bank, savings and loan association, credit union or
other depository institution maintained or used by each Grantor providing
dominion and control over such accounts to the Secured Party such that upon
notice by the Secured Party to such bank or other depository institution of the
occurrence of an Event of Default all actions under such account shall be taken
solely at the Secured Party’s direction.  Each Grantor’s current
Deposit Accounts are set forth on Schedule 6.14 attached hereto.

     

    Each
Grantor shall cause all cash, all collections and proceeds from accounts
receivable, all receipts from credit card payments and all proceeds from the
sale of any Pledged Property (other than those derived from accounts receivable
pledged as collateral pursuant to the Thermo Credit Agreement) to be deposited
only into its Deposit Accounts in the ordinary course of business and consistent
with past practices.

     

    Each
Grantor shall have valid and effective Deposit Account Agreements in place at
all times with respect to all of its Deposit Accounts.  No Deposit
Account shall be established, used or maintained by the Company unless it first
enters into a Deposit Account Agreement.

     

    Each
Grantor covenants that no cash shall be deposited into any of the Thermo Credit
Receivables Accounts other than as expressly and explicitly required by the
Thermo Credit Agreement.

     

    With
respect to each Deposit Account, from and after the occurrence of an Event of
Default, the Secured Party shall have the right, at any time and from time to
time, to exercise its rights under such Deposit Account Agreement, including,
for the avoidance of any doubt, the exclusive right to give instructions to the
financial institution at which such Deposit Account is maintained as to the
disposition of funds or other property on deposit therein or credited
thereto.  The Secured Party hereby covenants and agrees that it will
not send any such notice to a financial institution at which any such Deposit
Account is maintained directing the disposition of funds or other property
therein unless and until the occurrence of an Event of Default.

     

    
      
         

      

      
        12

        
          

        

      

      
         

      

    

     

    In
connection with the foregoing, each Grantor hereby authorizes and directs each
bank or other depository institution which maintains any Deposit Account to pay
or deliver to the Secured Party upon the Secured Party’s written demand thereof
made at any time after the occurrence of an Event of Default has occurred all
balances in each Deposit Account with such depository for application to the
Obligations then outstanding.

     

    Section
6.16.    Perfection of Security
Interests.

     

    (a)    Financing
Statements. The Grantors hereby irrevocably authorize the Secured
Party, at the sole cost and expense of the Grantors, at any time and from time
to time to file in any filing office in any jurisdiction any initial financing
statements and amendments thereto that (a) indicate the Pledged Property (i) as
all assets of Grantors or words of similar effect, regardless of whether any
particular asset comprised in the Pledged Property falls within the scope of
Article 9 of the Code of such jurisdiction, or (ii) as being of an equal or
lesser scope or with greater detail, and (b) contain any other information
required by Part 5 of Article 9 of the Code for the sufficiency or filing office
acceptance of any financing statement or amendment, including (i) whether such
Grantor is an organization, the type of organization and any organization
identification number issued to such Grantor, and (ii) in the case of a
financing statement filed as a fixture filing, a sufficient description of real
property to which the Pledged Property relates.  Grantors agree to
furnish any such information to the Secured Party promptly upon
request.  Grantors also ratify their authorization for the Secured
Party to have filed in any jurisdiction any initial financing statements or
amendments thereto if filed prior to the date hereof. The Grantors acknowledge
that they are not authorized to file any financing statement or amendment or
termination statement with respect to any financing statement without the prior
written consent of the Secured Party and agree that they will not do so without
the prior written consent of the Secured Party.  The Grantors
acknowledge and agree that this Agreement constitutes an authenticated
record.

     

    (b)    Possession. The
Grantors (i) shall have possession of the Pledged Property, except where
expressly otherwise provided in this Agreement or where the Secured Party
chooses to perfect its security interest by possession in addition to the filing
of a financing statement; and (ii) will, where Pledged Property is in the
possession of a third party, join with the Secured Party in notifying the third
party of the Secured Party’s security interest and obtaining an acknowledgment
from the third party that it is holding the Pledged Property for the benefit of
the Secured Party.

     

    (c)    Control. In
addition to the provisions set forth in Section 6.15 above, the Grantors will
cooperate with the Secured Party in obtaining control with respect to the
Pledged Property consisting of (i) Investment Property, (ii) Letters of Credit
and Letter-of-Credit Rights and (iii) electronic Chattel Paper.

     

    
      
         

      

      
        13

        
          

        

      

      
         

      

    

     

    (d)    Chattel
Paper. Marking of Chattel Paper. The Grantors will not create any
Chattel Paper without placing a legend on the Chattel Paper acceptable to the
Secured Party indicating that the Secured Party has a security interest in the
Chattel Paper.

     

    Section
6.17.    Notice of Commercial Tort
Claims. If any Grantor shall at any time acquire a Commercial Tort Claim,
such Grantor shall immediately notify the Secured Party in a writing signed by
such Grantor which shall (a) provide brief details of said claim and (b) grant
to the Secured Party a security interest in said claim and in the proceeds
thereof, all upon the terms of this Agreement, in such form and substance
satisfactory to the Secured Party.

     

    ARTICLE
7.

     

    NEGATIVE
COVENANTS

     

    So long
as any of the Obligations shall remain outstanding, unless the Secured Party
shall otherwise consent in writing each Grantor covenants and agrees that it
shall not:

     

    Section
7.1.    Transfers, Liens and
Encumbrances.

     

    (a)    Sell, assign
(by operation of law or otherwise), lease, license, exchange or otherwise
transfer or dispose of any of the Pledged Property, except Grantor may (i) sell
or dispose of Inventory in the ordinary course of business, and (ii) sell or
dispose of assets the Grantor  has determined, in good faith, not to
be useful in the conduct of its business, and (iii) sell or dispose of accounts
in the course of collection in the ordinary course of business consistent with
past practice.

     

    (b)    Directly or
indirectly make, create, incur, assume or permit to exist any Lien in, to or
against any part of the Pledged Property other than Permitted
Liens.

     

    Section
7.2.    Restriction on Redemption
and Cash Dividends

     

    Directly
or indirectly, redeem, repurchase or declare or pay any cash dividend or
distribution on its capital stock without the prior express written consent of
the Secured Party.

     

    Section
7.3.    Incurrence of
Indebtedness.

     

    Directly
or indirectly, incur or guarantee, assume or suffer to exist any indebtedness,
other than the indebtedness evidenced by the Convertible Debentures and other
Permitted Indebtedness.  “Permitted
Indebtedness” means: (i) indebtedness evidenced by Convertible
Debentures; (ii) indebtedness described on the Disclosure Schedule to the
Securities Purchase Agreement; (iii) indebtedness incurred solely for the
purpose of financing the acquisition or lease of any equipment by the Company,
including capital lease obligations with no recourse other than to such
equipment; (iv) indebtedness (A) the repayment of which has been subordinated to
the payment of the Convertible Debentures on terms and conditions acceptable to
the Secured Party, including with regard to interest payments and repayment of
principal, (B) which does not mature or otherwise require or permit


     

    
      
         

      

      
        14

        
          

        

      

      
         

      

    

     

    redemption
or repayment prior to or on the 91st day
after the maturity date of any Convertible Debentures then outstanding; and (C)
which is not secured by any assets of the Company; (v) indebtedness solely
between the Grantor and/or one of its domestic subsidiaries, on the one hand,
and the Grantor and/or one of its domestic subsidiaries, on the other which
indebtedness is not secured by any assets of the Grantor or any of its
subsidiaries, provided that (x) in each case a majority of the equity of any
such domestic subsidiary is directly or indirectly owned by the Grantor, such
domestic subsidiary is controlled by the Grantor and such domestic subsidiary
has executed a security agreement in the form of this Agreement and (y) any such
loan shall be evidenced by an intercompany note that is pledged by the Grantor
or its subsidiary, as applicable, as collateral pursuant to this Agreement; (vi)
reimbursement obligations in respect of letters of credit issued for the account
of the Grantor or any of its subsidiaries for the purpose of securing
performance obligations of the Grantor or its subsidiaries incurred in the
ordinary course of business so long as the aggregate face amount of all such
letters of credit does not exceed $500,000 at any one time; and (vii) renewals,
extensions and refinancing of any indebtedness described in clauses (i) or (iii)
of this subsection.

     

    Section
7.4.    Places of
Business.

     

    Change
the location of its chief place of business, chief executive office or any place
of business disclosed to the Secured Party, unless such change in location is to
a different location within the United States and the Grantor provides notice to
the Secured Party of new location within 10 days’ of such change in
location.

     

    ARTICLE
8.

     

    MISCELLANEOUS

     

    
      Section
8.1.    Notices.

       

      All
notices or other communications required or permitted to be given pursuant to
this Agreement shall be in writing and shall be considered as duly given
on:  (a) the date of delivery, if delivered in person or by
nationally recognized overnight delivery service or
(b) five (5) days after mailing if mailed from within the
continental United States by certified mail, return receipt requested to the
party entitled to receive the same:

    

     

    
      	
              If
      to the Secured Party:

            	
              YA
      Global Investments, L.P.

            
	 
      	
              101
      Hudson Street-Suite 3700

            
	 
      	
              Jersey
      City, New Jersey 07302

            
	 
      	
              Attention: 
      Mark Angelo

            
	 
      	
              Portfolio
      Manager

            
	 
      	
              Telephone: (201)
      986-8300

            
	 
      	
              Facsimile: (201)
      985-8266

            


    

     

    
      
         

      

      
        15

        
          

        

      

      
         

      

    

     

    
      	
              With
      a copy to:

            	
              David
      Gonzalez, Esq.

            
	 
      	
              101
      Hudson Street, Suite 3700

            
	 
      	
              Jersey
      City, NJ 07302

            
	 
      	
              Telephone: (201)
      985-8300

            
	 
      	
              Facsimile: (201)
      985-8266

            
	 
      	 
      
	
              If
      to the Company, to:

            	
              Telkonet,
      Inc.

            
	 
      	
              20374
      Seneca Meadows Parkway

            
	 
      	
              Germantown,
      Maryland 20876

            
	 
      	
              Attn:
      Richard J. Leimbach

            
	 
      	
              Telephone:
      240-912-1800

            
	 
      	
              Facsimile:
      240-912-1839

            
	 
      	 
      
	
              With
      Copy to:

            	
              Baker
      & Hostetler LLP

            
	 
      	
              1050
      Connecticut Avenue, NW

            
	 
      	
              Suite
      1100

            
	 
      	
              Washington,
      DC 20036

            
	 
      	
              Attn:
      William J. Conti, Esq.

            
	 
      	
              Telephone:
      202-861-1726

            
	 
      	
              Facsimile:
      202-861-1783

            
	 
      	 
      
	
              If
      to any other Grantor

            	
              To
      the address listed on the respective signature pages attached
      hereto

            


    

    


    Any party
may change its address by giving notice to the other party stating its new
address.  Commencing on the tenth (10th) day
after the giving of such notice, such newly designated address shall be such
party’s address for the purpose of all notices or other communications required
or permitted to be given pursuant to this Agreement.

     

    Section
8.2.    Severability.

     

    If any
provision of this Agreement shall be held invalid or unenforceable, such
invalidity or unenforceability shall attach only to such provision and shall not
in any manner affect or render invalid or unenforceable any other severable
provision of this Agreement, and this Agreement shall be carried out as if any
such invalid or unenforceable provision were not contained herein.

     

    Section
8.3.    Expenses.

     

    In the
event of an Event of Default, the Company will pay to the Secured Party the
amount of any and all reasonable out-of-pocket expenses, including the
reasonable fees and expenses of its counsel, which the Secured Party may incur
in connection with:  (i) the custody or preservation of, or the
sale, collection from, or other realization upon, any of the Pledged Property;
(ii) the exercise or enforcement of any of the rights of the Secured Party
hereunder or (iii) the failure by the Grantor to perform or observe any of
the provisions hereof.

     

    
      
         

      

      
        16

        
          

        

      

      
         

      

    

     

    Section
8.4.    Waivers, Amendments,
Etc.

     

    The
Secured Party’s delay or failure at any time or times hereafter to require
strict performance by Grantor of any undertakings, agreements or covenants shall
not waive, affect, or diminish any right of the Secured Party under this
Agreement to demand strict compliance and performance herewith.  Any
waiver by the Secured Party of any Event of Default shall not waive or affect
any other Event of Default, whether such Event of Default is prior or subsequent
thereto and whether of the same or a different type.  None of the
undertakings, agreements and covenants of the Grantor contained in this
Agreement, and no Event of Default, shall be deemed to have been waived by the
Secured Party, nor may this Agreement be amended, changed or modified, unless
such waiver, amendment, change or modification is evidenced by an instrument in
writing specifying such waiver, amendment, change or modification and signed by
the Secured Party in the case of any such waiver, and signed by the Secured
Party and the Grantor in the case of any such amendment, change or
modification.  Further, no such document, instrument, and/or agreement
purported to be executed on behalf of the Secured Party shall be binding upon
the Secured Party unless executed by a duly authorized representative of the
Secured Party.

     

    Section 8.5.    Continuing Security
Interest.

     

    This
Agreement shall create a continuing security interest in the Pledged Property
and shall: (i) remain in full force and effect so long as any of the
Obligations shall remain outstanding; (ii) be binding upon each Grantor and
its successors and assigns; and (iii) inure to the benefit of the Secured
Party and its successors and assigns.  Upon the payment or
satisfaction in full of the Obligations, this Agreement and the security
interest created hereby shall terminate, and, in connection therewith, each
Grantor shall be entitled to the return, at its expense, of such of the Pledged
Property as shall not have been sold in accordance with Section 5.2 hereof
or otherwise applied pursuant to the terms hereof and the Secured Party shall
deliver to the Grantor such documents as the Grantor shall reasonably request to
evidence such termination.

     

    Section
8.6.    Independent
Representation.

     

    Each
party hereto acknowledges and agrees that it has received or has had the
opportunity to receive independent legal counsel of its own choice and that it
has been sufficiently apprised of its rights and responsibilities with regard to
the substance of this Agreement.

     

    Section
8.7.    Applicable
Law:  Jurisdiction.

     

    This
Agreement shall be governed by and interpreted in accordance with the laws of
the State of New Jersey without regard to the principles of conflict of
laws.  The parties further agree that any action between them shall be
heard in Hudson County, New Jersey, and expressly consent to the jurisdiction
and venue of the Superior Court of New Jersey, sitting in Hudson County and the
United States District Court for the District of New Jersey sitting in Newark,
New Jersey for the adjudication of any civil action asserted pursuant to this
Paragraph, provided, however, that nothing
herein shall prevent the Secured Party from enforcing its rights and remedies
(including, without limitation, by filing a civil action) with respect to the
Pledged Property and/or the Grantors in any other jurisdiction in which the
Pledged Property and/or the Grantors may be located.

     

    
      
         

      

      
        17

        
          

        

      

      
         

      

    

     

    Section
8.8.    Waiver of Jury
Trial.

     

    AS A
FURTHER INDUCEMENT FOR THE SECURED PARTY TO ENTER INTO THIS AGREEMENT AND TO
MAKE THE FINANCIAL ACCOMMODATIONS TO THE COMPANY, THE COMPANY HEREBY WAIVES ANY
RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING RELATED IN ANY WAY TO THIS
AGREEMENT AND/OR ANY AND ALL OTHER DOCUMENTS RELATED TO THIS
TRANSACTION.

     

    Section
8.9.    Right of Set
Off.

     

    The
Grantors each hereby grant to the Secured Party, a lien, security interest and
right of setoff as security for all liabilities and obligations to the Secured
Party, whether now existing or hereafter arising, upon and against all deposits,
credits, collateral and property, now or hereafter in the possession, custody,
safekeeping or control of the Secured Party or any of its affiliates, or any
entity under the control of the Secured Party, or in transit to any of them. At
any time, without demand or notice, the Secured Party may set off the same or
any part thereof and apply the same to any liability or obligation of the
Grantors even though unmatured and regardless of the adequacy of any other
collateral securing the Obligations.  ANY AND ALL RIGHTS TO REQUIRE
THE SECURED PARTY TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER
COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF
SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF THE GRANTORS,
ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.

     

    Section
8.10.    Entire
Agreement.

     

    This
Agreement constitutes the entire agreement among the parties and supersedes any
prior agreement or understanding among them with respect to the subject matter
hereof.

     

     

    [REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]

     

    
      
         

      

      
        18

        
          

        

      

      
         

      

    

    


    IN WITNESS WHEREOF, the
parties hereto have executed this Security Agreement as of the date first above
written.

     

    


    
      	 
      	
              COMPANY:

            
	 
      	
              TELKONET,
      INC.

            
	 
      	 
      
	 
      	
              By:           /s/ Richard J.
      Leimbach               

            
	 
      	
              Name: Richard
      J. Leimbach

            
	 
      	
              Title: Chief
      Financial Officer

            
	 
      	 
      
	 	 
	 	 
	 	 
	 
      	
              Jurisdiction
      of Incorporation, Organization or
    Formation:  UTAH

            
	 	 
	 
      	
              Organizational
      ID: 87-0627421

            


    

     

    
      
         

      

      
        19

        
          

        

      

      
         

      

    

     

    IN WITNESS WHEREOF, the
parties hereto have executed this Security Agreement as of the date first above
written.

     

    


    
      	 
      	
              GUARANTOR:

            
	 
      	
              ETHOSTREAM
      LLC

            
	 
      	 
      
	 
      	
              By:           /s/ Richard J.
      Leimbach                

            
	 
      	
              Name: Richard
      J. Leimbach

            
	 
      	
              Title: Chief
      Financial Officer

            
	 
      	 
      
	 
      	 
      
	 
      	
              Address
      For Notices:

               

              20374
      Seneca Meadows Parkway

              Germantown,
      MD 20876

               

               

              Jurisdiction
      of Incorporation, Organization or Formation: Wisconsin

               

            
	 
      	
              Organizational
      ID: 36-4499786

            


    

    


    
      
         

      

      
        20

        
          

        

      

      
         

      

    

     

     IN WITNESS WHEREOF, the
parties hereto have executed this Security Agreement as of the date first above
written.

     

    


    
      	 
      	
              GUARANTOR:

            
	 
      	
              TELKONET
      COMMUNICATIONS INC.

            
	 
      	 
      
	 
      	
              By:           /s/ Richard J.
      Leimbach                  

            
	 
      	
              Name: Richard
      J. Leimbach

            
	 
      	
              Title: Chief
      Financial Officer

            
	 
      	 
      
	 
      	 
      
	 
      	
              Address
      For Notices:

               

              20374
      Seneca Meadows Parkway

              Germantown,
      MD 20876

               

               

              Jurisdiction
      of Incorporation, Organization or Formation: Delaware

               

            
	 
      	
              Organizational
      ID: 52-2207318

            


    

    


    
      
         

      

      
        21

        
          

        

      

      
         

      

    


    IN WITNESS WHEREOF, the
parties hereto have executed this Security Agreement as of the date first above
written.

     

    


    
      	 
      	 
      
	 
      	
              SECURED
      PARTY:

            
	 
      	
              YA
      GLOBAL INVESTMENTS, L.P.

            
	 
      	 
      
	 
      	
              By: Yorkville
      Advisors, LLC

            
	 
      	
              Its: Investment
      Manager

            
	 
      	 
      
	 
      	
              By:           /s/ Mark
      Angelo                           

            
	 
      	
              Name: Mark
      Angelo

            
	 
      	
              Title: Portfolio
      Manager

            


    

     

    
      
         

      

      
        22

        
          

        

      

      
         

      

    


    EXHIBIT
A

     

    DEFINITION OF PLEDGED
PROPERTY

     

    For the
purpose of securing prompt and complete payment and performance by the Grantor
of all of the Obligations, the Grantors each unconditionally and irrevocably
hereby grant to the Secured Party a continuing security interest in and to, and
lien upon, the following Pledged Property of each Grantor (all capitalized terms
used herein shall have the respective meanings ascribed thereto in the
Code).:

     

    All
personal property of each Grantor, wherever located and whether now or
hereinafter existing and whether now owned or hereafter acquired, of every kind
and description, tangible or intangible, including without limitation,
all:

     

    1.    Goods;

     

    2.    Inventory,
including, without limitation, all goods, merchandise and other personal
property now owned or hereafter acquired by the Grantor which are held for sale
or lease, or are furnished or to be furnished under any contract of service or
are raw materials, work-in-process, supplies or materials used or consumed in
the Grantor’s business, and all products thereof, and all substitutions.
replacements, additions or accessions therefor and thereto; and any cash or
non-cash Proceeds of all of the foregoing;

     

    3.    Equipment,
including, without limitation, all machinery, equipment, furniture, parts, tools
and dies, of every kind and description, of the Grantor (including automotive
equipment and motor vehicles), now owned or hereafter acquired by the Grantor,
and used or acquired for use in the business of the Grantor, together with all
accessions thereto and all substitutions and replacements thereof and parts
therefor and all cash or non-cash Proceeds of the foregoing;

     

    4.    Fixtures,
including, without limitation, all goods which are so related to particular real
estate that an interest in them arises under real estate law and all accessions
thereto, replacements thereof and substitutions therefor, including, but not
limited to, plumbing, heating and lighting apparatus, mantels, floor coverings,
furniture, furnishings, draperies, screens, storm windows and doors, awnings,
shrubbery, plants, boilers, tanks, machinery, stoves, gas and electric ranges,
wall cabinets, appliances, furnaces, dynamos, motors, elevators and elevator
machinery, radiators, blinds and all laundry, refrigerating, gas, electric,
ventilating, air-refrigerating, air-conditioning, incinerating and sprinkling
and other fire prevention or extinguishing equipment of whatsoever kind and
nature and any replacements, accessions and additions thereto, Proceeds thereof
and substitutions therefor;

     

    5.    Instruments
(including promissory notes);

     

    6.    Documents;

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    7.    Accounts,
including, without limitation, all Contract Rights and accounts receivable,
health-care-insurance receivables, and license fees; any other obligations or
indebtedness owed to the Grantor from whatever source arising; all rights of
Grantor to receive any payments in money or kind; all guarantees of Accounts and
security therefor; all cash or non-cash Proceeds of all of the foregoing; all of
the right, title and interest of Grantor in and with respect to the goods,
services or other property which gave rise to or which secure any of the
accounts and insurance policies and proceeds relating thereto, and all of the
rights of the Grantor as an unpaid seller of goods or services, including,
without limitation the rights of stoppage in transit, replevin, reclamation and
resale and all of the foregoing, whether now existing or hereafter created or
acquired;

     

    8.    Contracts and
Contract Rights, including, to the extent not included in the definition of
Accounts, all rights to payment or performance under a contract not yet earned
by performance and not evidenced by an Instrument or Chattel Paper;

     

    9.    Chattel Paper
(whether tangible or electronic);

     

    10.   Deposit Accounts
(other than accounts established to effectuate the Thermo Credit Agreement) (and
in and to any deposits or other sums at any time credited to each such Deposit
Account);

     

    11.   Money, cash and
cash equivalents;

     

    12.   Letters of Credit
and Letter-of-Credit Rights (whether or not the Letter of Credit is evidenced by
a writing);

     

    13.   Commercial Tort
Claims;

     

    14.   Securities
Accounts, Security Entitlements, Securities, Financial Assets and all other
Investment Property, including, without limitation, all ownership or membership
interests in any subsidiaries or affiliates (whether or not controlled by the
Grantor);

     

    15.   General
Intangibles, including, without limitation, all payment intangibles, tax refunds
and other claims of the Grantor against any governmental authority, and all
choses in action, insurance proceeds, goodwill, patents, copyrights, trademarks,
tradenames, customer lists, formulae, trade secrets, licenses, permits,
franchises, designs, computer software, research and literary rights now owned
or hereafter acquired;

     

    16.   Farm
Products;

     

    17.   All books and
records (including all ledger sheets, files, computer programs, tapes and
related data processing software) evidencing an interest in or relating to any
of the foregoing;

     

    18.   To the extent not
already included above, all supporting obligations, and any and all cash and
non-cash Proceeds, products, accessions, and/or replacements of any of the
foregoing, including proceeds of insurance covering any or all of the
foregoing.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    EXHIBIT
B

    


    FORM OF DEPOSIT ACCOUNT
AGREEMENT

    


     

     

     

    
 

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    


    DISCLOSURE
SCHEDULE

    


    


    


    Schedule 4.2 – Existing
Liens