Document:

telkonet_8k-ex1002.htm

    EXHIBIT
10.2

     

    REGISTRATION RIGHTS
AGREEMENT

     

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

     

    WHEREAS:

     

    A.    In connection
with the Securities Purchase Agreement by and among the parties hereto 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 and sell to the Buyers
(i) secured convertible debentures (the “Convertible
Debentures”) which shall be convertible into shares of the Company’s
common stock, par value $0.001 per share (the “Common Stock,” as
converted, the “Conversion Shares”)
in accordance with the terms of the Convertible Debentures, and (ii) warrants
(the “Warrants”), which
will be exercisable to purchase shares of Common Stock (as exercised,
collectively, the “Warrant
Shares”).  Capitalized terms not defined herein shall have the
meaning ascribed to them in the Securities Purchase Agreement.

     

    B.    To induce the
Buyers to execute and deliver the Securities Purchase Agreement, the Company has
agreed to provide certain registration rights under the Securities Act of 1933,
as amended, and the rules and regulations thereunder, or any similar successor
statute (collectively, the “Securities Act”), and
applicable state securities laws.

     

    NOW, THEREFORE, in
consideration of the premises and the mutual covenants contained herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Company and the Buyers hereby agree as
follows:

     

    1.    DEFINITIONS.

     

    As used
in this Agreement, the following terms shall have the following
meanings:

     

    (a)    “Effectiveness
Deadline” means, with respect to any Registration Statement required to
be filed hereunder, the later to occur of (i) the 60th calendar day following
the date such Registration Statement is filed, provided, however, in the event
the Company is notified by the U.S. Securities and Exchange Commission (“SEC”) that the
Registration Statement will not be reviewed or is no longer subject to further
review and comments, the Effectiveness Date as to such Registration Statement
shall be the fifth Trading Day following the date on which the Company is so
notified if such date precedes the date required above, and (ii) the fifth
Trading Day following the Third Closing Date or, if the parties terminate the
Securities Purchase Agreement with respect to the Third Closing or the Second
Closing, then the fifth Trading Day following such termination.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    (b)    “Filing Deadline”
means, with respect to the initial Registration Statement, the 10th calendar day
following the First Closing Date, and with respect to any additional
Registration Statements which may be required pursuant to Section 3(c), the 30th
day following the date on which the Company first knows, or reasonably should
have known that such additional Registration Statement is required
hereunder.

     

    (c)    “Person” means a
corporation, a limited liability company, an association, a partnership, an
organization, a business, an individual, a governmental or political subdivision
thereof or a governmental agency.

     

    (d)    “Prospectus” means the
prospectus included in a Registration Statement (including, without limitation,
a prospectus that includes any information previously omitted from a prospectus
filed as part of an effective registration statement in reliance upon Rule 430A
promulgated under the Securities Act), as amended or supplemented by any
prospectus supplement, with respect to the terms of the offering of any portion
of the Registrable Securities covered by a Registration Statement, and all other
amendments and supplements to the Prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such Prospectus.

     

    (e)    “Registrable
Securities” means all of (i) the Conversion Shares issuable upon
conversion of the Convertible Debentures, (ii) the Warrant Shares issuable upon
exercise of the Warrants, (iii) any additional shares issuable in connection
with any anti-dilution provisions in the Warrants or the Convertible Debentures
(without giving effect to any limitations on exercise set forth in the Warrants
or Convertible Debentures) and (iv) any shares of Common Stock issued or
issuable with respect to the Conversion Shares, the Convertible Debentures, the
Warrant Shares, or the Warrants as a result of any stock split, dividend or
other distribution, recapitalization or similar event or otherwise, without
regard to any limitations on the conversion of the Convertible Debentures or
exercise of the Warrants.

     

    (f)    “Registration
Statement” means the initial registration statement required to be filed
pursuant to Section 2(a) and any additional registration statements contemplated
by Section 3(c), including (in each case) the Prospectus, amendments and
supplements to such registration statement or Prospectus, including pre- and
post-effective amendments, all exhibits thereto, and all material incorporated
by reference or deemed to be incorporated by reference in such registration
statement.

     

    (g)    “Required Registration
Amount” means (i) at least 4,700,000
shares of Common Stock issued or to be issued upon conversion of the Convertible
Debentures and exercise of the Warrants issued in the First Closing, (ii) at
least 2,125,000 shares of Common Stock issued or to be issued upon conversion of
the Convertible Debentures and exercise of the Warrants issued in the Second
Closing, (iii) at least 12,526,000 shares of Common Stock issued or to be issued
upon conversion of the Convertible Debentures and exercise of the Warrants
issued in the Third Closing, and (iv) with respect to subsequent Registration
Statements all remaining Registrable Securities to be filed, in each case,
subject to any cutback set forth in Section 3(c).

     

    (h)    “Rule 415” means Rule
415 promulgated by the SEC 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 SEC  having substantially the same purpose and effect as such
Rule.

     

    
      
        
        

      

      
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    All other
capitalized terms used, but not defined, in this Agreement shall have the
meanings ascribed to such terms in the Securities Purchase
Agreement.

     

    2.    REGISTRATION.

     

    (a)    On or
prior to the Filing Deadline, the Company shall prepare and file with the SEC a
Registration Statement on Form S-1 or SB-2 (or, if the Company is then eligible,
on Form S-3) covering the resale of all of the Registrable
Securities.  The Registration Statement prepared pursuant hereto shall
register for resale at least the number of shares of Common Stock equal to the
Required Registration Amount as of date the Registration Statement is initially
filed with the SEC.  The Registration Statement shall contain the
“Selling
Stockholders” and “Plan of Distribution”
sections in substantially the form attached hereto as Exhibit A and contain
all the required disclosures set forth on Exhibit
B.  The Company shall use its best efforts to have the
Registration Statement declared effective by the SEC as soon as practicable, but
in no event later than the Effectiveness Deadline.  By 9:30 am on the
date following the date of effectiveness, the Company shall file with the SEC in
accordance with Rule 424 under the 1933 Act the final Prospectus to be used in
connection with sales pursuant to such Registration Statement.  The
Company shall cause the Registration Statement to remain effective until all of
the Registrable Securities have been sold or may be sold without volume
restrictions pursuant to Rule 144(k), as determined by the counsel to the
Company pursuant to a written opinion letter to such effect, addressed and
acceptable to the Company’s transfer agent and the affected Holders (“Registration
Period”).

     

    (b)    Failure to File or Obtain
Effectiveness of the Registration
Statement.     If: (i) a Registration Statement
is not filed on or prior to its Filing Date (if the Company files a Registration
Statement without affording the Holders the opportunity to review and comment on
the same as required by Section 3(a), the Company shall not be deemed to have
satisfied this clause (i)), or (ii) a Registration Statement filed or required
to be filed hereunder is not declared effective by the SEC by its Effectiveness
Deadline, or (iii) after the effectiveness, a Registration Statement ceases for
any reason to remain continuously effective as to all Registrable Securities for
which it is required to be effective, or the Holders are otherwise not permitted
to utilize the Prospectus therein to resell such Registrable Securities for more
than 30 consecutive calendar days or more than an aggregate of 40 calendar days
during any 12-month period (which need not be consecutive calendar days) (any
such failure or breach being referred to as an “Event”), then in
addition to any other rights the holders of the Convertible Debentures may have
hereunder or under applicable law, on each such Event date and on each monthly
anniversary of each such Event date (if the applicable Event shall not have been
cured by such date) until the applicable Event is cured, the Company shall pay
to each holder of Convertible Debentures an amount in cash, as partial
liquidated damages (“Liquidated Damages”)
and not as a penalty, equal to 2.0% of the aggregate purchase price paid by such
holder pursuant to the Securities Purchase Agreement for any Convertible
Debentures then held by such holder.  The parties agree that (1) the
Company shall not be liable for Liquidated Damages under this Agreement with
respect to any Warrants or Warrant Shares and (2) the maximum aggregate
Liquidated Damages payable to a holder of Convertible Debentures under this
Agreement shall be twenty-four percent (24%) of the aggregate Purchase Price
paid by such holder pursuant to the Securities Purchase
Agreement.  The partial Liquidated Damages pursuant to the terms
hereof shall apply on a daily pro-rata basis for any portion of a month prior to
the cure of an Event.

     

    
      
        
        

      

      
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    (c)    Liquidated
Damages.  The Company and the Buyer hereto acknowledge and
agree that the sums payable under subsection 2(b) above shall constitute
liquidated damages and not penalties and are in addition to all other rights of
the Buyer, including the right to call a default under the Convertible
Debenture.  The parties further acknowledge that (i) the amount of
loss or damages likely to be incurred is incapable or is difficult to precisely
estimate, (ii) the amounts specified in such subsections bear a reasonable
relationship to, and are not plainly or grossly disproportionate to, the
probable loss likely to be incurred in connection with any failure by the
Company to obtain or maintain the effectiveness of a Registration Statement,
(iii) one of the reasons for the Company and the Buyer reaching an agreement as
to such amounts was the uncertainty and cost of litigation regarding the
question of actual damages, and (iv) the Company and the Buyer are sophisticated
business parties and have been represented by sophisticated and able legal
counsel and negotiated this Agreement at arm’s length.

     

    3.    RELATED
OBLIGATIONS.

     

    (a)    The
Company shall, not less than three (3) Trading Days prior to the filing of each
Registration Statement and not less than one (1) Trading Day prior to the filing
of any related amendments and supplements to all Registration Statements (except
for annual reports on Form 10-K or Form 10-KSB), furnish to each Buyer copies of
all such documents proposed to be filed, which documents (other than those
incorporated or deemed to be incorporated by reference) will be subject to the
reasonable and prompt review of such Buyers. The Company shall not file a
Registration Statement or any such Prospectus or any amendments or supplements
thereto to which the Buyers shall reasonably object in good faith; provided that, the Company is
notified of such objection in writing no later than one (1) Trading Day after
the Buyers have been so furnished copies of a Registration
Statement.

     

    (b)    The
Company shall (i) prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to a Registration Statement and the
Prospectus used in connection with such Registration Statement, which prospectus
is to be filed pursuant to Rule 424 promulgated under the Securities Act, as may
be necessary to keep such Registration Statement effective at all times during
the Registration Period, and prepare and file with the SEC such additional
Registration Statements in order to register for resale under the Securities Act
all of the Registrable Securities; (ii) cause the related Prospectus to be
amended or supplemented by any required Prospectus supplement (subject to the
terms of this Agreement), and as so supplemented or amended to be filed pursuant
to Rule 424; (iii) respond as promptly as reasonably possible to any comments
received from the SEC with respect to a Registration Statement or any amendment
thereto and as promptly as reasonably possible provide the Buyers true and
complete copies of all correspondence from and to the SEC relating to a
Registration Statement (provided that the Company may excise any information
contained therein which would constitute material non-public information as to
any Buyer which has not executed a confidentiality agreement with the Company);
and (iv) comply with the provisions of the Securities Act with respect to the
disposition of all Registrable Securities of the Company covered by such
Registration Statement until such time as all of such Registrable Securities
shall have been disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof as set forth in such Registration
Statement.  In the case of amendments and supplements to a
Registration Statement which are required to be filed pursuant to this Agreement
(including pursuant to this Section 3(b)) by reason of the Company’s filing a
report on Form 10-K, Form 10-Q or Form 8-K or any analogous report under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), the
Company shall incorporate such report by reference into the Registration
Statement, if applicable, or shall file such amendments or supplements with the
SEC on the same day on which the Exchange Act report is filed which created the
requirement for the Company to amend or supplement the Registration
Statement.

     

    
      
        
        

      

      
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    (c)    Reduction of Registrable
Securities Included in a Registration Statement. Notwithstanding anything
contained herein, in the event that the SEC requires the Company to reduce the
number of Registrable Securities to be included in a Registration Statement in
order to allow the Company to rely on Rule 415 with respect to a Registration
Statement, then the Company shall be obligated to include in such Registration
Statement (which may be a subsequent Registration Statement if the Company needs
to withdraw the initial Registration Statement and refile a new Registration
Statement in order to rely on Rule 415) only such limited portion of the
Registrable Securities as the SEC shall permit.  Any Registrable
Securities that are excluded in accordance with the foregoing terms are
hereinafter referred to as “Cut Back
Securities.”  To the extent Cut Back Securities exist, as soon
as may be permitted by the SEC, the Company shall be required to file a
Registration Statement covering the resale of the Cut Back Securities and shall
use best efforts to cause such Registration Statement to be declared effective
as promptly as practicable thereafter.

     

    (d)    The
Company shall furnish to each Buyer whose Registrable Securities are included in
any Registration Statement, without charge, upon Buyer’s request (i) at least
one (1) copy of such Registration Statement as declared effective by the SEC and
any amendment(s) thereto, including financial statements and schedules, all
documents incorporated therein by reference, all exhibits and each preliminary
prospectus, (ii) ten (10) copies of the final prospectus included in such
Registration Statement and all amendments and supplements thereto (or such other
number of copies as such Buyer may reasonably request) and (iii) such other
documents as such Buyer may reasonably request from time to time in order to
facilitate the disposition of the Registrable Securities owned by such
Buyer.

     

    (e)    The
Company shall use its best efforts to (i) register and qualify the Registrable
Securities covered by a Registration Statement under such other securities or
“blue sky” laws of such jurisdictions in the United States as any Buyer
reasonably requests, (ii) prepare and file in those jurisdictions, such
amendments (including post-effective amendments) and supplements to such
registrations and qualifications as may be necessary to maintain the
effectiveness thereof during the Registration Period, (iii) take such other
actions as may be necessary to maintain such registrations and qualifications in
effect at all times during the Registration Period, and (iv) take all other
actions reasonably necessary or advisable to qualify the Registrable Securities
for sale in such jurisdictions; provided, however, that the Company shall not be
required in connection therewith or as a condition thereto to (w) make any
change to its articles of incorporation or by-laws, (x) qualify to do business
in any jurisdiction where it would not otherwise be required to qualify but for
this Section 3(e), (y) subject itself to general taxation in any such
jurisdiction, or (z) file a general consent to service of process in any such
jurisdiction.  The Company shall promptly notify each Buyer who holds
Registrable Securities of the receipt by the Company of any notification with
respect to the suspension of the registration or qualification of any of the
Registrable Securities for sale under the securities or “blue sky” laws of any
jurisdiction in the United States or its receipt of actual notice of the
initiation or threat of any proceeding for such purpose.

     

    
      
        
        

      

      
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    (f)    As
promptly as practicable after becoming aware of such event or development, the
Company shall notify each Buyer in writing of the happening of any event as a
result of which the Prospectus included in a Registration Statement, as then in
effect, includes an untrue statement of a material fact or omission to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading (provided that in no event shall such notice contain any material,
nonpublic information), and promptly prepare a supplement or amendment to such
Registration Statement to correct such untrue statement or omission, and deliver
ten (10) copies of such supplement or amendment to each Buyer.  The
Company shall also promptly notify each Buyer in writing (i) when a Prospectus
or any Prospectus supplement or post-effective amendment has been filed, and
when a Registration Statement or any post-effective amendment has become
effective (notification of such effectiveness shall be delivered to each Buyer
by facsimile on the same day of such effectiveness), (ii) of any request by the
SEC for amendments or supplements to a Registration Statement or related
prospectus or related information, and (iii) of the Company’s reasonable
determination that a post-effective amendment to a Registration Statement would
be appropriate.

     

    (g)    The
Company shall use its best efforts to prevent the issuance of any stop order or
other suspension of effectiveness of a Registration Statement, or the suspension
of the qualification of any of the Registrable Securities for sale in any
jurisdiction within the United States of America and, if such an order or
suspension is issued, to obtain the withdrawal of such order or suspension at
the earliest possible moment and to notify each Buyer who holds Registrable
Securities being sold of the issuance of such order and the resolution thereof
or its receipt of actual notice of the initiation or threat of any proceeding
for such purpose.

     

    (h)    If, after
the execution of this Agreement, a Buyer believes, after consultation with its
legal counsel, that it could reasonably be deemed to be an underwriter of
Registrable Securities, at the request of any Buyer, the Company shall furnish
to such Buyer, on the date of the effectiveness of the Registration Statement
and thereafter from time to time on such dates as a Buyer may reasonably request
(i) a letter, dated such date, from the Company’s independent certified public
accountants in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
and (ii) an opinion, dated as of such date, of counsel representing the Company
for purposes of such Registration Statement, in form, scope and substance as is
customarily given in an underwritten public offering, addressed to the
Buyers.

     

    (i)    If, after
the execution of this Agreement, a Buyer believes, after consultation with its
legal counsel, that it could reasonably be deemed to be an underwriter of
Registrable Securities, at the request of any Buyer, the Company shall make
available for inspection by (i) any Buyer and (ii) one (1) firm of
accountants or other agents retained by the Buyers (collectively, the “Inspectors”) all
pertinent financial and other records, and pertinent corporate documents and
properties of the Company (collectively, the “Records”), as shall
be reasonably deemed necessary by each Inspector, and cause the Company’s
officers, directors and employees to supply all information which any Inspector
may reasonably request;

     

    
      
        
        

      

      
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    provided,
however, that each Inspector shall agree, and each Buyer hereby agrees, to hold
in strict confidence and shall not make any disclosure (except to a Buyer) or
use  any Record or other information which the Company determines in
good faith to be confidential, and of which determination the Inspectors are so
notified, unless (a) the disclosure of such Records is necessary to avoid or
correct a misstatement or omission in any Registration Statement or is otherwise
required under the Securities Act, (b) the release of such Records is ordered
pursuant to a final, non-appealable subpoena or order from a court or government
body of competent jurisdiction, or (c) the information in such Records has been
made generally available to the public other than by disclosure in violation of
this or any other agreement of which the Inspector and the Buyer has
knowledge.  Each Buyer agrees that it shall, upon learning that
disclosure of such Records is sought in or by a court or governmental body of
competent jurisdiction or through other means, give prompt notice to the Company
and allow the Company, at its expense, to undertake appropriate action to
prevent disclosure of, or to obtain a protective order for, the Records deemed
confidential.

     

    (j)    The
Company shall hold in confidence and not make any disclosure of information
concerning a Buyer provided to the Company unless (i) disclosure of such
information is necessary to comply with federal or state securities laws, (ii)
the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this Agreement or any other
agreement.  The Company agrees that it shall, upon learning that
disclosure of such information concerning a Buyer is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
written notice to such Buyer and allow such Buyer, at the Buyer’s expense, to
undertake appropriate action to prevent disclosure of, or to obtain a protective
order for, such information.

     

    (k)    The
Company shall use its best efforts either to cause all the Registrable
Securities covered by a Registration Statement to be (i) listed on each
securities exchange on which securities of the same class or series issued by
the Company are then listed, if any, if the listing of such Registrable
Securities is then permitted under the rules of such exchange or
(ii) included for quotation on the OTC Bulletin Board.  The
Company shall pay all fees and expenses in connection with satisfying its
obligation under this Section 3(k).

     

    (l)    The
Company shall cooperate with each Buyer who holds Registrable Securities being
offered and, to the extent applicable, to facilitate the timely preparation and
delivery of certificates (not bearing any restrictive legend) representing the
Registrable Securities to be offered pursuant to a Registration Statement and
enable such certificates to be in such denominations or amounts, as the case may
be, as the Buyers may reasonably request and registered in such names as the
Buyers may request.

     

    (m)    The
Company shall use its best efforts to cause the Registrable Securities covered
by the applicable Registration Statement to be registered with or approved by
such other governmental agencies or authorities as may be necessary to
consummate the disposition of such Registrable Securities.

     

    
      
        
        

      

      
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    (n)    The
Company shall make generally available to its security holders as soon as
practical, but not later than ninety (90) days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 under the Securities Act) covering a twelve (12) month period beginning
not later than the first day of the Company’s fiscal quarter next following the
effective date of the Registration Statement.

     

    (o)    The
Company shall otherwise use its best efforts to comply with all applicable rules
and regulations of the SEC in connection with any registration
hereunder.

     

    (p)    Within
two (2) business days after a Registration Statement which covers Registrable
Securities is declared effective by the SEC, the Company shall deliver, and
shall cause legal counsel for the Company to deliver, to the transfer agent for
such Registrable Securities (with copies to the Buyer whose Registrable
Securities are included in such Registration Statement) confirmation that such
Registration Statement has been declared effective by the SEC in the form
attached hereto as Exhibit
C.

     

    (q)    The
Company shall take all other reasonable actions necessary to expedite and
facilitate disposition by each Buyer of Registrable Securities pursuant to a
Registration Statement.

     

    4.    OBLIGATIONS OF THE
BUYERS.

     

    (a)    Each
Buyer agrees that, upon receipt of any notice from the Company of the happening
of any event of the kind described in Section 3(f) such Buyer will immediately
discontinue disposition of Registrable Securities pursuant to any Registration
Statement covering such Registrable Securities until such Buyer’s receipt of the
copies of the supplemented or amended prospectus contemplated by Section 3(f) or
receipt of notice that no supplement or amendment is
required.  Notwithstanding anything to the contrary, the Company shall
cause its transfer agent to deliver unlegended certificates for shares of Common
Stock to a transferee of a Buyer in accordance with the terms of the Securities
Purchase Agreement in connection with any sale of Registrable Securities with
respect to which a Buyer has entered into a contract for sale prior to the
Buyer’s receipt of a notice from the Company of the happening of any event of
the kind described in Section 3(f) or the first sentence of 3(g) and for which
the Buyer has not yet settled.

     

    (b)    Each
Buyer covenants and agrees that it will comply with the prospectus delivery
requirements of the Securities Act as applicable to it or an exemption therefrom
in connection with sales of Registrable Securities pursuant to the Registration
Statement.

     

    (c)    At least
five (5) Business Days prior to the first anticipated filing date of a
Registration Statement, the Company shall notify each Buyer in writing of the
information the Company requires from each such Buyer (to the extent such
information has not already been provided) if such Buyer elects to have any of
such Buyer's Registrable Securities included in such Registration
Statement.  It shall be a condition precedent to the obligations of
the Company to complete the registration pursuant to this Agreement with respect
to the Registrable Securities of a particular Buyer that such Buyer shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the
effectiveness of the registration of such Registrable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request.

     

    
      
        
        

      

      
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    (d)    Each
Buyer, by such Buyer's acceptance of the Registrable Securities, agrees to
cooperate with the Company as reasonably requested by the Company in connection
with the preparation and filing of any Registration Statement hereunder, unless
such Buyer has notified the Company in writing of such Buyer's election to
exclude all of such Buyer's Registrable Securities from such Registration
Statement.

     

    5.    EXPENSES OF
REGISTRATION.

     

    All
expenses incurred in connection with registrations, filings or qualifications
pursuant to Sections 2 and 3, including, without limitation, all registration,
listing and qualifications fees, printers, legal and accounting fees shall be
paid by the Company.

     

    6.    INDEMNIFICATION.

     

    With
respect to Registrable Securities which are included in a Registration Statement
under this Agreement:

     

    (a)    To the
fullest extent permitted by law, the Company will, and hereby does, indemnify,
hold harmless and defend each Buyer, the directors, officers, partners,
employees, agents, representatives of, and each Person, if any, who controls any
Buyer within the meaning of the Securities Act or the Exchange Act (each, an
“Indemnified
Person”), against any losses, claims, damages, liabilities, judgments,
fines, penalties, charges, costs, reasonable attorneys’ fees, amounts paid in
settlement or expenses, joint or several (collectively, “Claims”) incurred in
investigating, preparing or defending any action, claim, suit, inquiry,
proceeding, investigation or appeal taken from the foregoing by or before any
court or governmental, administrative or other regulatory agency, body or the
SEC, whether pending or threatened, whether or not an indemnified party is or
may be a party thereto (“Indemnified
Damages”), to which any of them may become subject insofar as such Claims
(or actions or proceedings, whether commenced or threatened, in respect thereof)
arise out of or are based upon: (i) any untrue statement or alleged untrue
statement of a material fact in a Registration Statement or any post-effective
amendment thereto or in any filing made in connection with the qualification of
the offering under the securities or other “blue sky” laws of any jurisdiction
in which Registrable Securities are offered (“Blue Sky Filing”), or
the omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; (ii) any
untrue statement or alleged untrue statement of a material fact contained in any
final prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading; or (iii) any violation or alleged violation by the Company
of the Securities Act, the Exchange Act, any other law, including, without
limitation, any state securities law, or any rule or regulation there under
relating to the offer or sale of the Registrable Securities pursuant to a
Registration Statement (the matters in the foregoing clauses (i) through (iii)
being, collectively, “Violations”).  The
Company shall reimburse the Buyers and each such controlling person promptly as
such expenses are incurred and are due and payable, for

     

    
      
        
        

      

      
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    any legal
fees or disbursements or other reasonable expenses incurred by them in
connection with investigating or defending any such
Claim.  Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(a): (x) shall not apply to
a Claim by an Indemnified Person arising out of or based upon a Violation which
occurs in reliance upon and in conformity with information furnished in writing
to the Company by such Indemnified Person expressly for use in connection with
the preparation of the Registration Statement or any such amendment thereof or
supplement thereto; (y) shall not be available to the extent such Claim is based
on a failure of the Buyer to deliver or to cause to be delivered the prospectus
made available by the Company, if such prospectus was timely made available by
the Company pursuant to Section 3(c); and (z) shall not apply to amounts
paid in settlement of any Claim if such settlement is effected without the prior
written consent of the Company, which consent shall not be unreasonably
withheld. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Indemnified Person and shall survive
the transfer of the Registrable Securities by the Buyers pursuant to Section 9
hereof.

     

    (b)    In
connection with a Registration Statement, each Buyer agrees to severally and not
jointly indemnify, hold harmless and defend, to the same extent and in the same
manner as is set forth in Section 6(a), the Company, each of its directors, each
of its officers, employees, representatives, or agents and each Person, if any,
who controls the Company within the meaning of the Securities Act or the
Exchange Act (each an “Indemnified Party”),
against any Claim or Indemnified Damages to which any of them may become
subject, under the Securities Act, the Exchange Act or otherwise, insofar as
such Claim or Indemnified Damages arise out of or are based upon any Violation,
in each case to the extent, and only to the extent, that such Violation occurs
in reliance upon and in conformity with written information furnished to the
Company by such Buyer expressly for use in connection with such Registration
Statement or any post-effective amendment thereof or any prospectus contained
therein; and, subject to Section 6(d), such Buyer will reimburse any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such Claim as promptly as such expenses are incurred and are due
and payable; provided, however, that the indemnity agreement contained in this
Section 6(b) and the agreement with respect to contribution contained in Section
7 shall not apply to amounts paid in settlement of any Claim if such settlement
is effected without the prior written consent of such Buyer, which consent shall
not be unreasonably withheld; provided, further, however, that the Buyer shall
be liable under this Section 6(b) for only that amount of a Claim or Indemnified
Damages as does not exceed the net proceeds to such Buyer as a result of the
sale of Registrable Securities pursuant to such Registration
Statement.  Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such Indemnified Party
and shall survive the transfer of the Registrable Securities by the Buyers
pursuant to Section 9.  Notwithstanding anything to the contrary
contained herein, the indemnification agreement contained in this Section 6(b)
with respect to any prospectus shall not inure to the benefit of any Indemnified
Party if the untrue statement or omission of material fact contained in the
prospectus was corrected and such new prospectus was delivered to each Buyer
prior to such Buyer’s use of the prospectus to which the Claim
relates.

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    (c)    Promptly
after receipt by an Indemnified Person or Indemnified Party under this Section 6
of notice of the commencement of any action or proceeding (including any
governmental action or proceeding) involving a Claim, such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof, and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be; provided, however, that an Indemnified Person or Indemnified Party
shall have the right to retain its own counsel with the fees and expenses of not
more than one (1) counsel for such Indemnified Person or Indemnified Party to be
paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential differing  interests between
such Indemnified Person or Indemnified Party and any other party represented by
such counsel in such proceeding.  The Indemnified Party or Indemnified
Person shall cooperate fully with the indemnifying party in connection with any
negotiation or defense of any such action or claim by the indemnifying party and
shall furnish to the indemnifying party all information reasonably available to
the Indemnified Party or Indemnified Person which relates to such action or
claim.  The indemnifying party shall keep the Indemnified Party or
Indemnified Person fully apprised at all times as to the status of the defense
or any settlement negotiations with respect thereto.  No indemnifying
party shall be liable for any settlement of any action, claim or proceeding
effected without its prior written consent; provided, however, that the
indemnifying party shall not unreasonably withhold, delay or condition its
consent.  No indemnifying party shall, without the prior written
consent of the Indemnified Party or Indemnified Person, consent to entry of any
judgment or enter into any settlement or other compromise which does not include
as an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party or Indemnified Person of a release from all liability in
respect to such claim or litigation.  Following indemnification as
provided for hereunder, the indemnifying party shall be subrogated to all rights
of the Indemnified Party or Indemnified Person with respect to all third
parties, firms or corporations relating to the matter for which indemnification
has been made.  The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 6, except to the
extent that the indemnifying party is prejudiced in its ability to defend such
action.

     

    (d)    The
indemnification required by this Section 6 shall be made by periodic payments of
the amount thereof during the course of the investigation or defense, as and
when bills are received or Indemnified Damages are incurred.

     

    (e)    The
indemnity agreements contained herein shall be in addition to (i) any cause
of action or similar right of the Indemnified Party or Indemnified Person
against the indemnifying party or others, and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    7.    CONTRIBUTION.

     

    To the
extent any indemnification by an indemnifying party is prohibited or limited by
law, the indemnifying party agrees to make the maximum contribution with respect
to any amounts for which it would otherwise be liable under Section 6 to the
fullest extent permitted by law; provided, however, that:  (i) no
seller of Registrable Securities guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any seller of Registrable Securities who was not guilty of
fraudulent misrepresentation; and (ii) contribution by any seller of Registrable
Securities shall be limited in amount to the net amount of proceeds received by
such seller from the sale of such Registrable Securities.

     

    8.    REPORTS UNDER THE EXCHANGE
ACT.

     

    With a
view to making available to the Buyers the benefits of Rule 144 promulgated
under the Securities Act or any similar rule or regulation of the SEC that may
at any time permit the Buyers to sell securities of the Company to the public
without registration (“Rule 144”) the
Company agrees to:

     

    (a)    make and
keep public information available, as those terms are understood and defined in
Rule 144;

     

    (b)    file with
the SEC in a timely manner all reports and other documents required of the
Company under the Securities Act and the Exchange Act so long as the Company
remains subject to such requirements (it being understood that nothing herein
shall limit the Company’s obligations under Section 4(c) of the Securities
Purchase Agreement) and the filing of such reports and other documents as
are  required by the applicable provisions of Rule 144;
and

     

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

     

    9.    AMENDMENT OF REGISTRATION
RIGHTS.

     

    Provisions
of this Agreement may be amended and the observance thereof may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and Buyers who then
hold at least two-thirds (2/3) of the Registrable Securities.  Any
amendment or waiver effected in accordance with this Section 9 shall be
binding upon each Buyer and the Company.  No such amendment shall be
effective to the extent that it applies to fewer than all of the holders of the
Registrable Securities.  No consideration shall be offered or paid to
any Person to amend or consent to a waiver or modification of any provision of
any of this Agreement unless the same consideration also is offered to all of
the parties to this Agreement.

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    10.    MISCELLANEOUS.

     

    (a)    A Person
is deemed to be a holder of Registrable Securities whenever such Person owns or
is deemed to own of record such Registrable Securities or owns the right to
receive the Registrable Securities.  If the Company receives
conflicting instructions, notices or elections from two (2) or more Persons with
respect to the same Registrable Securities, the Company shall act upon the basis
of instructions, notice or election received from the registered owner of such
Registrable Securities.

     

    (b)    No Piggyback on
Registrations.  Except as set forth on Schedule 10(b)
attached hereto, neither the Company nor any of its security holders (other than
the Buyers in such capacity pursuant hereto) may include securities of the
Company in the initial Registration Statement required by Section 2(a) hereof
other than the Registrable Securities.  The Company shall not file any
other registration statements until the initial Registration Statement required
by Section 2(a) hereof is declared effective by the SEC, provided that this
Section 10(b) shall not prohibit the Company from filing amendments to
registration statements already filed.

     

    (c)    Piggy-Back
Registrations.  If at any time during the Registration Period
there is not an effective Registration Statement covering all of the Registrable
Securities and the Company shall determine to prepare and file with the SEC a
registration statement relating to an offering for its own account or the
account of others under the Securities Act of any of its equity securities,
other than on Form S-4 or Form S-8 (each as promulgated under the Securities
Act) or their then equivalents relating to equity securities to be issued solely
in connection with any acquisition of any entity or business or equity
securities issuable in connection with the stock option or other employee
benefit plans, then the Company shall send to each Buyer a written notice of
such determination and, if within fifteen (15) days after the date of such
notice, any such Buyer shall so request in writing, the Company shall include in
such registration statement all or any part of such Registrable Securities such
Buyer requests to be registered; provided, however, that, the
Company shall not be required to register any Registrable Securities pursuant to
this Section 10(c) that are eligible for resale pursuant to Rule 144(k)
promulgated under the Securities Act or that are the subject of a then effective
Registration Statement.

     

    (d)    Any
notices, consents, waivers or other communications required or permitted to be
given under the terms of this Agreement must be in writing and will be deemed to
have been delivered:  (i) upon receipt, when delivered personally;
(ii) upon receipt, when sent by facsimile (provided confirmation of transmission
is mechanically or electronically generated and kept on file by the sending
party); or (iii) one (1) business day after deposit with a nationally recognized
overnight delivery service, in each case properly addressed to the party to
receive the same.  The addresses and facsimile numbers for such
communications shall be:

     

    
      	
              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

            

    

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

    
      	
              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 an
Buyer, to its address and facsimile number on the Schedule of Buyers attached
hereto, with copies to such Buyer’s representatives as set forth on the Schedule
of Buyers or to such other address and/or facsimile number and/or to the
attention of such other person as the recipient party has specified by written
notice given to each other party five (5) days prior to the effectiveness of
such change.  Written confirmation of receipt (A) given by the
recipient of such notice, consent, waiver or other communication, (B)
mechanically or electronically generated by the sender’s facsimile machine
containing the time, date, recipient facsimile number and an image of the first
page of such transmission or (C) provided by a courier or overnight courier
service shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.

     

    (e)    Failure
of any party to exercise any right or remedy under this Agreement or otherwise,
or delay by a party in exercising such right or remedy, shall not operate as a
waiver thereof.

     

    (f)    The laws
of the State of New Jersey shall govern all issues concerning the relative
rights of the Company and the Buyers as its stockholders.  All other
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by the internal laws of the State of New
Jersey, without giving effect to any choice of law or conflict of law provision
or rule (whether of the State of New Jersey or any other jurisdiction) that
would cause the application of the laws of any jurisdiction other than the State
of New Jersey.  Each party hereby irrevocably submits to the
non-exclusive jurisdiction of the Superior Courts of the State of New Jersey,
sitting in Hudson County, New Jersey and federal courts for the District of New
Jersey sitting Newark, New Jersey, for the adjudication of any dispute hereunder
or in connection herewith or with any transaction contemplated hereby or
discussed herein, and hereby irrevocably waives, and agrees not to assert in any
suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper.  Each party hereby irrevocably waives personal service of
process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address for such
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.  If any provision of this Agreement
shall be invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other
jurisdiction.  EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY
HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY
DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR
ANY TRANSACTION CONTEMPLATED HEREBY.

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    (g)    This
Agreement shall inure to the benefit of and be binding upon the permitted
successors and assigns of each of the parties hereto.

     

    (h)    This
Agreement, the other Transaction Documents (as defined in the Securities
Purchase Agreement) and the instruments referenced herein and therein constitute
the entire agreement among the parties hereto with respect to the subject matter
hereof and thereof.  There are no restrictions, promises, warranties
or undertakings, other than those set forth or referred to herein and
therein.  This Agreement, the other Transaction Documents and the
instruments referenced herein and therein supersede all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof and thereof.

     

    (i)    The
headings in this Agreement are for convenience of reference only and shall not
limit or otherwise affect the meaning hereof.

     

    (j)    This
Agreement may be executed in identical counterparts, each of which shall be
deemed an original but all of which shall constitute one and the same
agreement.  This Agreement, once executed by a party, may be delivered
to the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.

     

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

     

    (l)    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.

     

    (m)    This
Agreement is intended for the benefit of the parties hereto and their respective
permitted successors and assigns, and is not for the benefit of, nor may any
provision hereof be enforced by, any other Person.

     

    

    [REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]

    

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

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

     

     

    
      	 
      	
              COMPANY:

            
	 
      	
              TELKONET,
      INC.

            
	 
      	 
      
	 
      	
              By:           /s/ Richard J.
      Leimbach                      

            
	 
      	
              Name: Richard
      J. Leimbach

            
	 
      	
              Title: Chief
      Financial Officer

            

    

    

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

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

     

     

    
      	 
      	
              BUYER:

            
	 
      	
              YA
      GLOBAL INVESTMENTS, L.P.

            
	 
      	 
      
	 
      	
              By: Yorkville
      Advisors, LLC

            
	 
      	
              Its: Investment
      Manager

            
	 
      	 
      
	 
      	 
      
	 
      	
              By:           /s/ Mark
      Angelo                            
      

            
	 
      	
              Name: Mark
      Angelo

            
	 
      	
              Title: Portfolio
      Manager

            

    

    

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

    SCHEDULE
I

     

     

    SCHEDULE OF
BUYERS

     

    

    
      	
              
                Buyer

              

            	 	
              
                Address/Facsimile

                Number
      of Buyer

              

            	 	
              
                Address/Facsimile

                Number
      of Buyer’s Representative

              

            
	 
      	 	 
      	 	 
      
	 
      	 	 
      	 	 
      
	
              YA
      Global Investments, L.P.

            	 	
              101
      Hudson Street – Suite 3700

            	 	
              101
      Hudson Street – Suite 3700

            
	 
      	 	
              Jersey
      City, NJ  07303

            	 	
              Jersey
      City, NJ  07303

            
	 
      	 	
              Facsimile: (201)
      985-8266

            	 	
              Facsimile: (201)
      985-8266

            
	 
      	 	 
      	 	
              Attention: David
      Gonzalez, Esq.

            
	 
      	 	 
      	 	 
      
	 
      	 	 
      	 	 
      
	 
      	 	 
      	 	 
      

    

    

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

    

    EXHIBIT
A

     

    SELLING
STOCKHOLDERS

     

     

    AND PLAN OF
DISTRIBUTION

     

    

    Selling
Stockholders

    

    The
shares of Common Stock being offered by the selling stockholders are issuable
upon conversion of the convertible debentures and upon exercise of the
warrants.  For additional information regarding the issuance of those
convertible notes and warrants, see “Private Placement of Convertible Debentures
and Warrants” above.  We are registering the shares of Common Stock in
order to permit the selling stockholders to offer the shares for resale from
time to time.  Except as otherwise notes and except for the ownership
of the convertible Debentures and the warrants issued pursuant to the Securities
Purchase Agreement, the selling stockholders have not had any material
relationship with us within the past three years.

     

    The table
below lists the selling stockholders and other information regarding the
beneficial ownership of the shares of Common Stock by each of the selling
stockholders.  The second column lists the number of shares of Common
Stock beneficially owned by each selling stockholder, based on its ownership of
the convertible debentures and warrants, as of ________, 200_, assuming
conversion of all convertible debentures and exercise of the warrants held by
the selling stockholders on that date, without regard to any limitations on
conversions or exercise.

     

    The third
column lists the shares of Common Stock being offered by this prospectus by the
selling stockholders.

     

    In
accordance with the terms of a registration rights agreement with the selling
stockholders, this prospectus generally covers the resale of at least (i) 300%
of the number of Conversion Shares issued and issuable pursuant to the
convertible debentures as of the trading day immediately preceding the date the
registration statement is initially filed with the SEC, and (ii) 100% of the
number of warrant shares issued and issuable pursuant to the warrants as of the
trading day immediately preceding the date the registration statement is
initially filed with the SEC.  Because the
conversion price of the convertible debentures and the exercise price of the
warrants may be adjusted, the number of shares that will actually be issued may
be more or less than the number of shares being offered by this
prospectus.  The fourth column assumes the sale of all of the shares
offered by the selling stockholders pursuant to this prospectus.

     

    Under the
terms of the convertible debentures and the warrants, a selling stockholder may
not convert the convertible debentures or exercise the warrants to the extent
such conversion or exercise would cause such selling stockholder, together with
its affiliates, to beneficially own a number of shares of Common Stock which
would exceed 4.99% of our then outstanding shares of Common Stock following such
conversion or exercise, excluding for purposes of such determination shares of
Common Stock issuable upon conversion of the convertible debentures which have
not been converted and upon exercise of the warrants which have not been
exercised.  The number of shares in the second column does not reflect
this limitation.  The selling stockholders may sell all, some or none
of their shares in this offering.  See "Plan of
Distribution."

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
      	
               

              Name of Selling
      Stockholder

            	
              Number of Shares Owned

              Prior to
      Offering

            	
              Maximum Number of Shares to be Sold Pursuant to this
      Prospectus

            	
              Number of Shares Owned

              After
      Offering

            
	 	 	 	 
	
              YA
      Global Investments, L.P. (1)

            	 
      	 
      	 
      

    

     

    
 

    (1)    YA Global Investments, L.P. is a Cayman
Island exempt limited partnership.  Cornell is managed by Yorkville
Advisors, LLC.  Investment decisions for Yorkville Advisors are made
by Mark Angelo, its portfolio manager.

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    Plan of
Distribution

     

    Each
Selling Stockholder (the “Selling
Stockholders”) of the common stock and any of their pledgees, assignees
and successors-in-interest may, from time to time, sell any or all of their
shares of common stock on the __________ or any other stock exchange, market or
trading facility on which the shares are traded or in private
transactions.  These sales may be at fixed or negotiated
prices.  A Selling Stockholder may use any one or more of the
following methods when selling shares:

     

    
      	
              ·   
       

            	
              ordinary
      brokerage transactions and transactions in which the broker-dealer
      solicits purchasers;

            

    

     

    
      	
              ·   
       

            	
              block
      trades in which the broker-dealer will attempt to sell the shares as agent
      but may position and resell a portion of the block as principal to
      facilitate the transaction;

            

    

     

    
      	
              ·   
       

            	
              purchases
      by a broker-dealer as principal and resale by the broker-dealer for its
      account;

            

    

     

    
      	
              ·     

            	
              an
      exchange distribution in accordance with the rules of the applicable
      exchange;

            

    

     

    
      	
              ·   
       

            	
              privately
      negotiated transactions;

            

    

     

    
      	
              ·   
       

            	
              broker-dealers
      may agree with the Selling Stockholders to sell a specified number of such
      shares at a stipulated price per
share;

            

    

     

    
      	
              ·   
       

            	
              through
      the writing or settlement of options or other hedging transactions,
      whether through an options exchange or
  otherwise;

            

    

     

    
      	
              ·   
       

            	
              a
      combination of any such methods of sale;
or

            

    

     

    
      	
              ·     
      

            	
              any
      other method permitted pursuant to applicable
  law.

            

    

     

    The
Selling Stockholders may also sell shares under Rule 144 under the Securities
Act of 1933, as amended (the “Securities Act”), if
available, rather than under this prospectus.

     

    Broker-dealers
engaged by the Selling Stockholders may arrange for other brokers-dealers to
participate in sales.  Broker-dealers may receive commissions or
discounts from the Selling Stockholders (or, if any broker-dealer acts as agent
for the purchaser of shares, from the purchaser) in amounts to be negotiated,
but, except as set forth in a supplement to this Prospectus, in the case of an
agency transaction not in excess of a customary brokerage commission in
compliance with NASDR Rule 2440; and in the case of a principal transaction a
markup or markdown in compliance with NASDR IM-2440.

     

    In
connection with the sale of the common stock or interests therein, the Selling
Stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the Common
Stock in the course of hedging the positions they assume.  The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    The
Selling Stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales.  In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.  Each Selling
Stockholder has informed the Company that it does not have any written or oral
agreement or understanding, directly or indirectly, with any person to
distribute the Common Stock. In no event shall any broker-dealer receive fees,
commissions and markups which, in the aggregate, would exceed eight percent
(8%).

     

    The
Company is required to pay certain fees and expenses incurred by the Company
incident to the registration of the shares.  The Company has agreed to
indemnify the Selling Stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.

     

    Because
Selling Stockholders may be deemed to be “underwriters” within the meaning of
the Securities Act, they will be subject to the prospectus delivery requirements
of the Securities Act including Rule 172 thereunder.  In addition, any
securities covered by this prospectus which qualify for sale pursuant to Rule
144 under the Securities Act may be sold under Rule 144 rather than under this
prospectus.  There is no underwriter or coordinating broker acting in
connection with the proposed sale of the resale shares by the Selling
Stockholders.

     

    We agreed
to keep this prospectus effective until the earlier of (i) the date on which the
shares may be resold by the Selling Stockholders without registration and
without regard to any volume limitations by reason of Rule 144(k) under the
Securities Act or any other rule of similar effect or (ii) all of the shares
have been sold pursuant to this prospectus or Rule 144 under the Securities Act
or any other rule of similar effect.  The resale shares will be sold
only through registered or licensed brokers or dealers if required under
applicable state securities laws. In addition, in certain states, the resale
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.

     

    Under
applicable rules and regulations under the Exchange Act, any person engaged in
the distribution of the resale shares may not simultaneously engage in market
making activities with respect to the common stock for the applicable restricted
period, as defined in Regulation M, prior to the commencement of the
distribution.  In addition, the Selling Stockholders will be subject
to applicable provisions of the Exchange Act and the rules and regulations
thereunder, including Regulation M, which may limit the timing of purchases and
sales of shares of the common stock by the Selling Stockholders or any other
person.  We will make copies of this prospectus available to the
Selling Stockholders and have informed them of the need to deliver a copy of
this prospectus to each purchaser at or prior to the time of the sale (including
by compliance with Rule 172 under the Securities Act).

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    
EXHIBIT
B

     

    OTHER
DISCLOSURES

     

    

    See
attachment provided separately.

     

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    EXHIBIT
C

     

    FORM
OF NOTICE OF EFFECTIVENESS

     

     

    OF REGISTRATION
STATEMENT

     

    

    Attention:

    

    
      	
               
      

            	
              Re:

            	
              TELKONET,
      INC.

            

    

    

    Ladies
and Gentlemen:

    

    We are
counsel to Telkonet, Inc., a Utah corporation (the “Company”), and have
represented the Company in connection with that certain Securities Purchase
Agreement (the “Securities Purchase
Agreement”) entered into by and among the Company and the Buyers named
therein (collectively, the “Buyers”) pursuant to
which the Company issued to the Buyers shares of its Common Stock, par value
$0.001 per share (the “Common
Stock”).  Pursuant to the Purchase Agreement, the Company also
has entered into a Registration Rights Agreement with the Buyers (the “Registration Rights
Agreement”) pursuant to which the Company agreed, among other things, to
register the Registrable Securities (as defined in the Registration Rights
Agreement) under the Securities Act of 1933, as amended (the “Securities
Act”).  In connection with the Company’s obligations under the
Registration Rights Agreement, on ____________ ____, the Company filed a
Registration Statement on Form ________ (File No. 333-_____________) (the
“Registration
Statement”) with the Securities and Exchange Commission (the “SEC”) relating to the
Registrable Securities which names each of the Buyers as a selling stockholder
there under.

     

    In
connection with the foregoing, we advise you that a member of the SEC’s staff
has advised us by telephone that the SEC has entered an order declaring the
Registration Statement effective under the Securities Act at [ENTER TIME OF EFFECTIVENESS]
on [ENTER DATE OF
EFFECTIVENESS] and we have no knowledge, after telephonic inquiry of a
member of the SEC’s staff, that any stop order suspending its effectiveness has
been issued or that any proceedings for that purpose are pending before, or
threatened by, the SEC and the Registrable Securities are available for resale
under the Securities Act pursuant to the Registration Statement.

    
    

     

    
      	 	Very truly
      yours,
	 	
               

               

              [Law Firm]

               

               

              By:____________________________

            

    

     

    
cc:    YA GLOBAL INVESTMENTS,
L.P.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),

       

      
        
           

        

        
          2

          
            

          

        

        
           

        

      

       

      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”):

     

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

     

    (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.

    

     

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

     

    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.

       

      
        
           

        

        
          5

          
            

          

        

        
           

        

      

       

      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

       

      
        
           

        

        
          6

          
            

          

        

        
           

        

      

       

      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.

     

    
      
         

      

      
        7

        
          

        

      

      
         

      

    

     

    (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.

     

    
      
         

      

      
        8

        
          

        

      

      
         

      

    

     

    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).

       

      
        
           

        

        
          9

          
            

          

        

        
           

        

      

       

      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.

       

      
        
           

        

        
          10

          
            

          

        

        
           

        

      

       

      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

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