LOAN AGREEMENT

DEFINITIONS.   For the purposes of this Agreement, the following terms shall have the meanings set forth below:

“Agreement” means this Agreement between the Department and the Borrower, together with any future amendments thereto.

“Application” means the Commerce application submitted by the Borrower.

“Borrower” means Telkonet, Inc., together with its lawful successors and assigns.

“Collateral” means the property described in Exhibit A.

“Department” means the Wisconsin Department of Commerce, together with its lawful successors and assigns.

“Effective Date” means the date this Agreement is executed by the Department.

“Eligible Project Costs” means the costs and expenditures incurred by the Borrower in connection with the Project as described in Exhibit A, over the time period described in Exhibit A.

“Existing Full-Time Positions” means the currently existing Full-Time Positions that will be retained by the Borrower in Wisconsin in connection with the Project as described in Exhibit A.

“Full-Time Position” means any permanent position where an employee is required, as a condition of employment, to work at least 40 hours per week and 2,080 hours per year including paid leave and holidays.

“GEDL” and “Loan” each mean the Department’s Gaming Economic Development Loan to the Borrower under this Agreement.

“Project” means the activities described in Exhibit A.

“Promissory Note” means the Promissory Note attached as Exhibit D

“Term of this Agreement” means until the Borrower’s obligations hereunder are fully satisfied.

DISBURSEMENT OF LOAN PROCEEDS.      Loan disbursements to the Borrower hereunder for Eligible Project Costs (defined in Exhibit A) shall be made on a periodic basis upon the Department’s receipt and approval of a completed Request for Disbursement Form (attached as Exhibit C) and required supporting documentation.

Prior to the disbursement of any Loan funds, the Borrower shall execute and deliver to the Department:

A borrowing resolution.

A security agreement, granting the Department a subordinate security interest on all assets now owned or hereinafter acquired. Authentication of this agreement by the Borrower authorizes the Department to file a UCC financing statement for the stated Collateral.

An intercreditor agreement.

Disbursements by the Department to the Borrower shall be made after a nonrefundable origination fee of $6,000.00, two (2.0) percent of the award amount, is paid to the Department.

INSURANCE.   The Borrower covenants that it will maintain insurance in such amounts and against such liabilities and hazards as customarily is maintained by other companies operating similar businesses.

“EVENT OF DEFAULT” DEFINED.   The occurrence of any one or more of the following events shall constitute an “Event of Default” for the purposes of this Agreement:

The Borrower’s failure to pay, within ten (10) calendar days of the due date, any of the principal payments or interest due under the Promissory Note (Attached as Exhibit D);

The Borrower's failure to comply with or perform any of its material obligations under this Agreement; provided that the Borrower's failure to comply with the terms and conditions of Exhibit A, Section 3. a), b), and d) hereunder shall not be considered an “Event of Default”.

Any assignment for the benefit of the Borrower's creditors or commission of any other act amounting to a business failure;

The filing, by or against the Borrower, of a petition under any chapter of the U.S. Bankruptcy Code or for the appointment of a receiver;

Any uncured material default or breach of the Borrower’s obligations under the terms and conditions of its loan agreements, leases, or financing arrangements with other creditors;

Any material misrepresentation with respect to the Borrower's warranties and representations under this Agreement or the Application; or

Any other action or omission by the Borrower, which in the Department’s reasonable discretion, jeopardizes the Borrower's ability to fulfill its obligations under this Agreement or otherwise causes the Department to deem itself insecure.

REMEDIES IN EVENT OF DEFAULT.

Upon the occurrence of any Event of Default, the Department shall send a written notice of default to the Borrower, and to the creditors, Thermo Credit, LLC and YA Global Investments, L.P., setting forth with reasonable specificity the nature of the default.  If the Borrower fails to cure the default to the reasonable satisfaction of the Department within ten (10) calendar days, the Department may, without further written notice to the Borrower, declare the Borrower in default, terminate this Agreement effective immediately, and accelerate the principal balance, accrued interest, and other amounts owed by the Borrower hereunder.

Upon the termination of this Agreement:

The Borrower shall be liable for the full unpaid principal balance together with interest at the annual rate of twelve (12) percent from the date of the Event of Default to the date the Borrower's obligations hereunder are paid in full.

Subject to the rights of other creditors, the Department shall be entitled to exercise any and all remedies available to the Department under this Agreement, related loan documents, and applicable laws.

In addition to the rights and remedies available to the Department at law, in equity, or in bankruptcy, the Department shall be entitled to recover from the Borrower an amount equal to the sum of:

The unpaid principal balance, accrued interest, and other amounts owed by the Borrower hereunder;

All court costs and reasonable attorney’s fees incurred by the Department in the enforcement of its rights and remedies under this Agreement, including all costs incurred in foreclosing upon, repossessing, storing, repairing, selling, leasing or otherwise disposing of the Collateral; and

Any other damages arising from the Borrower's default.

The Department’s foreclosure upon, repossession of, and subsequent sale, lease, or disposition of the Collateral shall not affect the Department’s right to recover from the Borrower any and all damages caused by the Borrower's breach