Re: Telkonet, Inc. ("Client")

Re:            Telkonet, Inc. (“Client”)

Dear Sirs:

Thermo Credit, LLC (“ Thermo Credit ”) and the above-referenced Client have entered into a Factoring Agreement dated as of January 28, 2008 (as amended and in effect, and together with all other documents, instruments and agreements executed in connection therewith, the “ Factoring Agreement ”).  The Client’s obligations under the Factoring Agreement (the “ Factoring Obligations ”) are secured by a security interest (the “ Factoring Lien ”) in all Receivables and Accounts of the Client, whether now owned or hereafter acquired, consisting of “Purchased Receivables” and “Records” (as defined in the Factoring Agreement) relating to the same, and proceeds and payments related to the same and all deposit accounts set up under or pursuant to the Factoring Agreement to receive such proceeds or payments (the “ TCL Collateral ”).

YA Global Investments, L.P. (“ YA Global ”) and the Client have entered into a Securities Purchase Agreement (the “ Securities Purchase Agreement ”) pursuant to which YA Global has purchased certain secured convertible debentures in the original principal amount of $3,500,000 (the “ Debentures ”).  In connection with the Securities Purchase Agreement, YA Global has been granted a security interest (the “ YA Global Liens ”) in all business assets of the Client (the “ YA Global Collateral ”), pursuant to and as set forth in that certain Security Agreement between YA Global and the Client dated May 30, 2008 (the “ YA Global Security Agreement ”) and that such collateral includes Thermo Inventory Collateral (as defined below) and the TCL Collateral.  As amended and in effect, the Securities Purchase Agreement, the Debentures, the Security Agreement, and all other documents, agreements, and instruments executed in connection therewith are collectively referred to herein as the “ YA Global Documents ” and all current and future obligations and liabilities of any kind of the Client to YA Global are referred to herein collectively as the “ YA Global Obligations ”.

In connection with the foregoing, YA Global and Thermo Credit have entered into that certain Intercreditor Agreement dated May 30, 2008 (the “ May 30 Agreement ”), pursuant to which any lien or security interest that YA Global may have in the TCL Collateral shall be subordinate to Thermo Credit’s lien and security interest in the TCL Collateral upon the terms set forth in the May 30 Agreement.

Thermo Credit and the Client have entered into a Line of Credit Agreement dated as of September 9, 2008 (the “ Line of Credit Agreement ”) in an amount of up to ONE MILLION AND NO/100 Dollars ($1,000,000.00) (the “ Thermo Line of Credit ”).  The Client’s obligations under the Line of Credit Agreement (the “ LOC Obligations ”, and together with the Factoring Obligations, the “ TCL Obligations ”) are secured by a security interest (the “ LOC Lien ”, and together with the Factoring Lien, the “ TCL Liens ”) in favor of Thermo Credit in inventory of the Client, as more fully defined in the Security Agreement between Thermo Credit and the Client dated as of September 9, 2008 (the “ Thermo Security Agreement ”).  In connection with such Line of Credit Agreement, YA Global, Thermo Credit and the Client have entered into that certain Tri-Party Agreement dated as of September 9, 2008 (the “ Tri-Party Agreement ”) pursuant to which the parties agreed that (i) Thermo Credit would have a first priority security interest in inventory of the Client with a value of Two Million Dollars ($2,000,000), as reported in the books and records and financial statements of the Client maintained in conformity with generally accepted accounting principles (the “ Thermo Inventory Collateral ”) and (ii) YA Global acknowledged that, to the extent set forth therein, its security interest in Thermo Inventory Collateral became, effective with the execution of the Tri-Party Agreement, junior to Thermo Credit’s first priority security interest in Thermo Inventory Collateral.

Thermo Credit and YA Global have been advised by the Department of Commerce of the State of Wisconsin (“ Wisconsin ”) that Wisconsin will be providing financing to the Client pursuant to a line of credit agreement of even date herewith (the “ Wisconsin Financing ”) with the Client in the maximum principal amount of THREE HUNDRED THOUSAND AND NO/100 Dollars ($300,000.00) (the “ Wisconsin Line of Credit ”), which is to be secured by a subordinate security interest in favor of Wisconsin on all of the Client’s business assets (the “ Wisconsin Lien ”) as more fully defined in the Security Agreement between Wisconsin and the Client of even date herewith and that such security interest includes the TCL Collateral, the Thermo Inventory Collateral, and the YA Global Collateral.

The parties hereby execute this Intercreditor Agreement (“ Agreement ”) to set forth their respective rights and obligations and affirm the following: