ESCROW AGREEMENT
 
THIS ESCROW AGREEMENT (this “Agreement”) is made and entered into as of the 16th
day of July, 2007 by and among U.S. Bank National Association (the “Escrow
Agent”), Microwave Satellite Technologies, Inc., (the “Purchaser”), and Newport
Telecommunications Co. (the “Seller”). The Seller, the Purchaser and the Escrow
Agent may be individually referred to herein as a “Party” and collectively as
the “Parties”.
 
W I T N E S S E T H:
 
WHEREAS, Seller and Purchaser are parties to an Asset Purchase Agreement of even
date herewith whereby the Seller is to sell and the Purchaser is to purchase
certain assets of Seller in connection with Seller’s operation of its
telecommunications business (the “Purchase Agreement”), as more specifically
provided for therein; and
 
WHEREAS, in connection with the consummation of the transactions described in
the Purchase Agreement, Purchaser is to deposit: (a) $510,000.00 (the “Cash
Consideration”); (b) stock certificates (the “Stock Certificates”) representing
an aggregate amount of shares (the “Shares”) of $0.001 par value common stock of
Telkonet, Inc., a Delaware corporation (“Telkonet”) equal to $1,530,000.00,
(which is acknowledged to be based on the average of the closing price for one
share of Telkonet common stock for the ten (10) trading days occurring
immediately prior to the date hereof) (the “Stock Consideration”); and (c) stock
powers for the Shares duly endorsed by Telkonet, with the Escrow Agent; and
 
WHEREAS, Purchaser and Seller wish to engage the Escrow Agent as the escrow
agent for the deposit of the Cash Consideration, the Stock Certificates and the
Stock Powers; and
 
WHEREAS, a copy of the Purchase Agreement has been delivered to the Escrow
Agent, and the Escrow Agent is willing to act as the Escrow Agent hereunder.
 
NOW, THEREFORE, in consideration of the mutual covenants herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound, Seller, Purchaser and
Escrow Agent hereby agree as follows:
 
1.    Escrow Account and Deposit. The Escrow Agent has established, or
simultaneously with the execution hereof will establish, an account (the “Escrow
Account”) into which Purchaser has deposited, or simultaneously with the
execution hereof will deposit: (a) the Cash Consideration; (b) the Stock
Certificates; and (c) the Stock Powers. The Cash Consideration shall be
deposited by wire transfer in immediately available funds to the account
designated in, and pursuant to, the instructions set forth on Exhibit A attached
hereto. The Cash Consideration shall be invested pursuant to Section 3 hereof.
The deposit of the Stock Certificates, Stock Powers and Cash Consideration is
referred to herein as the “Deposit.” Upon receipt of the Deposit, the Escrow
Agent shall provide Purchaser and Seller confirmation thereof, and shall hold
and disburse such Deposit (plus any increase in the Cash Consideration due to
investment earnings) as set forth in this Agreement.
 
2.    Maintenance of Escrow Deposit. During the term of this Agreement, the
Escrow Agent shall hold and safeguard the Deposit (including the earnings on the
Cash Consideration) in accordance with this Agreement and shall release and
disburse the Deposit (and any earnings on the Cash Consideration) only in
accordance with this Agreement. Neither the Cash Consideration (or any earnings
thereon), the Stock Certificates nor the Stock Powers shall be subject to any
lien, attachment, trustee process or any other judicial process of any creditor
of any third party, and shall be held and distributed solely for purposes of and
in accordance with this Agreement. In furtherance thereof, Purchaser and
Telkonet covenant and agree that they shall not directly or indirectly assign,
pledge, encumber or hypothecate the Deposit (including any earnings on the Cash
Consideration) held in escrow by Escrow Agent.
 

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3.    Investment of Cash Consideration. The Cash Consideration held by Escrow
Agent shall be invested by the Escrow Agent, to the extent permitted by law and
as directed, in writing, by Seller from time to time, in a high yield interest
bearing account until released pursuant to this Agreement. Any income received
by the Escrow Agent with respect to said investment shall become part of the
Cash Consideration and held, safeguarded, invested, released and disbursed by
Escrow Agent only in accordance with the terms of this Agreement.
 
4.    Calculation of Subscribers and Adjustment to Purchase Price. Within
fifteen (15) days following the date hereof, Seller shall deliver to Purchaser
and Escrow Agent written notice which shall identify: (a) all of the Subscribers
in good standing (as defined in Section 2(b) of the Purchase Agreement); (b) all
credits to be provided to Purchaser or additional consideration to be provided
to Seller, if any, as calculated in accordance with Section 2(b) of the Purchase
Agreement; and (c) if any credits or additional consideration is to be provided
to Purchaser or Seller, as applicable, the amount of such credits or additional
consideration to be paid in cash and the amount that shall be paid in Telkonet
Shares as determined in accordance with Section 2(b) of the Purchase Agreement
(the information and calculations set forth in Sections 4(a), 4(b) and 4(c)
above, the “Subscriber Calculation”). Purchaser shall have sixty (60) days after
receipt of the Subscriber Calculation (the “Review Period”) to review the
Subscriber Calculation provided by Seller. The Subscriber Calculation provided
by Seller shall be conclusive and binding on Seller and Purchaser unless
Purchaser delivers written notification to Seller and Escrow Agent of
Purchaser’s disagreement with the Subscriber Calculation provided by Seller (the
“Notice of Disagreement”) prior to the expiration of the Review Period.
Purchaser’s Notice of Disagreement, if any, must state Purchaser’s specific
objections to the Subscriber Calculation provided by Seller and Purchaser’s
proposed calculation of the Subscriber Calculation. In the event that the Escrow
Agent does not receive Purchaser’s Notice of Disagreement prior to the
expiration of the Review Period, the Escrow Agent shall rely on the Subscriber
Calculation provided by Seller and release the Deposit (including any earnings
on the Cash Consideration) in accordance with the applicable provisions of
Section 5 of this Agreement. If Purchaser notifies the Seller and the Escrow
Agent of its disagreement with Seller’s prepared Subscriber Calculation prior to
the expiration of the Review Period, then Purchaser and Seller shall use their
good faith efforts to agree on the Subscriber Calculation and to execute Joint
Written Instructions (as hereinafter defined) within ten (10) days following
Seller’s receipt of Purchaser’s Notification of Disagreement (the “Negotiating
Period”). Any such Joint Written Instructions executed by Purchaser and Seller
within the Negotiation Period shall be delivered to the Escrow Agent no later
than 120 days after the date hereof and in the event that any such Joint Written
Instructions have not been delivered to the Escrow Agent prior to 120 days after
the date hereof, the Purchaser and Seller agree that the Seller shall be
entitled to deliver any such Joint Written Instructions 120 days after the date
hereof. In the event Purchaser and Seller are unable to resolve their
disagreement with respect to any issue relating to the Subscriber Calculation
within the Negotiating Period, Purchaser and Seller hereby agree that they shall
jointly engage the accounting firm of JH Cohen, LLP (the “Independent
Accountants”) to resolve the issues in dispute and that they each shall provide
the Independent Accountants with all documents and information used by Seller in
calculating the Subscriber Calculation or used by Purchaser in disputing
Seller’s Subscriber Calculation, as applicable, no later than ten (10) days
after the expiration of the Negotiating Period. Based upon the information and
documents provided by Seller and Purchaser to the Independent Accountants, the
Independent Accountants shall, within a commercially reasonable time, determine
the Subscriber Calculation by determining (the “Accountants’ Determination”):
(a) all of the Subscribers in good standing (as defined in Section 2(b) of the
Purchase Agreement); (b) all credits to be provided to Purchaser or additional
consideration to be provided to Seller, if any, as calculated in accordance with
Section 2(b) of the Purchase Agreement; and (c) if any credits or additional
consideration is to be provided to Purchaser or Seller, as applicable, the
amount of such credits or additional consideration to be paid in cash and the
amount that shall be paid in Telkonet Shares as determined in accordance with
Section 2(b) of the Purchase Agreement. The Independent Accountants shall
provide Seller, Purchaser and Escrow Agent written notice of the Accountants’
Determination promptly after it has completed all applicable calculations.
Absent fraud, the Accountants’ Determination shall be final, binding and
conclusive upon Purchaser and Seller and shall be the sole and exclusive remedy
regarding any dispute concerning the Subscriber Calculation. Purchaser and
Seller shall share equally the fees and expenses of the Independent Accountants.
Upon the request of the Independent Accountants, Seller and Purchaser shall
promptly furnish to the Independent Accountants such additional work papers and
other documents and information that has not been previously provided to the
Independent Accountants relating to the issues in dispute as the Independent
Accountants may request and that are available to such Party.
 

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5.    Release by Escrow Agent.
 
(a)    The “Triggering Event” shall be the first to occur of: (i) the Escrow
Agent’s receipt of joint written instructions from Seller and Purchaser
instructing the Escrow Agent to release the Deposit (including all earnings on
the Cash Consideration) (the “Joint Written Instructions”); (ii) the expiration
of the 120 day period following the date hereof (the “Escrow Period”) if: (A)
the Purchaser has not delivered its Notice of Disagreement to both the Escrow
Agent and Seller during the Review Period; or (B) the Purchaser has delivered
its Notice of Disagreement to both the Escrow Agent and Seller during the Review
Period and the Escrow Agent has received the Accountants’ Determination during
the Escrow Period; or (iii) the Escrow Agent’s receipt of the Accountants’
Determination if such receipt occurs after the Escrow Period.
 
(b)    Upon the occurrence of the Triggering Event, the Escrow Agent shall
release and disburse the Deposit (including all earnings on the Cash
Consideration) in accordance with the terms of this Section 5 and the
instructions provided for in: (i) the Joint Written Instructions in the event
that the Triggering Event is set forth in subsection 5(a)(i) above, (ii) the
Subscriber Calculation provided by Seller to Purchaser which commenced the
Review Period in the event that the Triggering Event is set forth in subsection
5(a)(ii)(A) above, and (iii) the Accountants’ Determination in the event that
the Triggering Event is set forth in subsection 5(a)(ii)(B) or 5(a)(iii) above.
The instructions provided to the Escrow Agent in the Joint Written Instructions
in the event that the Triggering Event is set forth in subsection 5(a)(i) above
or the Subscriber Calculation provided by Seller to commence the Review Period
in the event that the Triggering Event is set forth in subsection 5(a)(ii)(A)
above or the Accountants’ Determination in the event that the Triggering Event
is set forth in subsection 5(a)(ii)(B) or 5(a)(iii) above shall be referred to
herein as the “Release Instructions.”
 
(i) In the event that the Release Instructions do not provide for any credits or
additional consideration to be provided to Purchaser or Seller, as applicable,
the Escrow Agent shall, immediately upon the Triggering Event, release to
Seller: (A) the Cash Consideration (plus all earnings thereon), in immediately
available funds; and (B) the Stock Certificates and Stock Powers.
 
(ii) In the event that the Release Instructions notifies the Escrow Agent that
additional consideration shall be delivered to Seller: (A) the Escrow Agent
shall release to Seller immediately upon the Triggering Event: (1) the Cash
Consideration (plus all earnings thereon) in immediately available funds; and
(2) the Stock Certificates and Stock Powers; and (B) Purchaser shall immediately
upon the Triggering Event deliver to Seller: (1) new Stock Certificates
representing the additional Telkonet Shares to be paid to Seller as additional
Stock Consideration and new Stock Powers for such additional Telkonet Shares;
and (2) an additional amount equal to the cash portion of the additional
consideration to be provided to Seller in immediately available funds.
 

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(iii) In the event that the Release Instructions notifies the Escrow Agent that
a credit shall be provided to Purchaser and a portion of the credit is to be
satisfied by Telkonet Shares in accordance with Section 2(b) of the Purchase
Agreement, the Purchaser shall on or prior to the Triggering Event, deliver to
the Escrow Agent new Stock Certificates which shall represent an amount of
Shares equal to the Stock Consideration less all credits to the Stock
Consideration to be provided to Purchaser and new Stock Powers corresponding to
such new Stock Certificates. Immediately upon the Triggering Event, the Escrow
Agent shall: (A) deliver to Seller: (1) new Stock Certificates which shall
represent an amount of Shares equal to the Stock Consideration less all credits
to the Stock Consideration and the new Stock Powers for these new Stock
Certificates; and (2) an amount equal to the Cash Consideration (plus any
earnings thereon) less any credits to be provided to Purchaser, as provided for
in the Release Instructions and to be paid in immediately available funds; and
(B) deliver to Purchaser: (1) the Stock Certificates and Stock Powers which have
been deposited with the Escrow Agent as part of the Deposit; and (2) an amount
equal to all credits to the Cash Consideration, as provided for in the Release
Instructions and to be paid in immediately available funds.
 
(iv) In the event that the Release Instructions notifies the Escrow Agent that a
credit shall be provided to Purchaser but no portion of the credit is to be
satisfied by Telkonet Shares, the Escrow Agent shall immediately upon the
Triggering Event: (A) deliver to Seller, (1) the Stock Certificates and Stock
Powers; and (2) an amount equal to the Cash Consideration (plus any earnings
thereon) less any credits to the Cash Consideration to be provided to Purchaser,
as provided for in the Release Instructions and to be paid in immediately
available funds; and (B) deliver to Purchaser, an amount equal to all credits to
the Cash Consideration, as provided for in the Release Instructions which
reflects a credit to the Cash Consideration to be provided to the Purchaser and
to be paid in immediately available funds.
 
(c)    Notwithstanding anything contained in this Agreement to the contrary, the
Escrow Agent shall release all or any portion of the Cash Consideration (plus
any earnings thereof), the Stock Certificates and Stock Powers upon the Escrow
Agent’s receipt of a final order of a court of competent jurisdiction
authorizing the Escrow Agent to make any such release even if such authorization
is received by the Escrow Agent prior the Escrow Agent’s receipt of the Release
Instructions.
 
6.    Reliance by Escrow Agent. The Escrow Agent shall be entitled to rely upon
and act in accordance with any of: (a) the Release Instructions; and (b) a final
order of a court of competent jurisdiction authorizing the Escrow Agent to
release the Deposit, or any portion thereof, to Purchaser or Seller.
 
7.    Conflicting Demands. If conflicting demands are made upon the Escrow
Agent, the Escrow Agent shall not be required to resolve such controversy or
take any action, but may await resolution of the controversy; provided; however,
that upon the occurrence of a Triggering Event, the Escrow Agent shall be
required to release and disburse the Deposit (including all earnings on the Cash
Consideration) in accordance with the Release Instructions and Section 5 of this
Agreement.
 
8.    Indemnification; Fees of Escrow Agent. Purchaser and Seller shall jointly
and severally pay, and hold the Escrow Agent harmless against, all costs,
charges, damages and attorneys’ fees which the Escrow Agent in good faith may
incur or suffer in connection with or arising out of this Agreement; provided,
however, that, if either Purchaser and Seller shall act in bad faith and cause
Escrow Agent to incur any costs, charges, damages or other expenses, including,
but not limited to, any costs incurred by Escrow Agent due to a Party’s failure
to act in good faith or in a timely manner with respect to the calculation and
review of the Subscriber Calculation, such Party acting in bad faith shall
indemnify and hold the Escrow Agent harmless from all such costs and the other
Party shall have no obligation to pay any amounts to or otherwise indemnify the
Escrow Agent or the other Party.
 

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9.    Rights and Duties of Escrow Agent.
 
(a)    No assignment of the interest of any of the parties hereto shall be
binding upon the Escrow Agent unless and until written evidence of such
assignment in a form reasonably satisfactory to the Escrow Agent shall be
delivered to the Escrow Agent.
 
(b)    The Escrow Agent may rely or act upon orders or directions signed by the
proper parties, or bearing a signature or signatures reasonably believed by the
Escrow Agent to be genuine.
 
(c)    The Escrow Agent shall have no duties other than those expressly imposed
on it herein and shall not be liable for any act or omission except for its own
gross negligence or willful misconduct.
 
(d)    In the event that the Deposit or any proceeds thereof shall be attached,
garnished, or levied upon by an order of any court, or the delivery thereof
shall be stayed or enjoined by an order of court, or any order, judgment or
decree shall be made or entered by any court affecting the property deposited
under this Agreement, or any part thereof, the Escrow Agent is hereby expressly
authorized in its sole discretion to obey and comply with all writs, orders or
decrees so entered or issued, which it is advised by legal counsel of its own
choosing is binding upon it, whether with or without jurisdiction, and in case
the Escrow Agent obeys or complies with any such writ, order or decree it shall
not be liable to any of the parties hereto or to any other person, firm or
corporation, by reason of such compliance notwithstanding that such writ, order
or decree be subsequently reversed, modified, annulled, set aside or vacated.
 
(e)    The Escrow Agent may resign by giving sixty (60) days written notice of
resignation, specifying the effective date thereof. Within thirty (30) days
after receiving the aforesaid notice, Seller and Purchaser agree to appoint a
successor escrow agent to which the Escrow Agent shall transfer the Deposit or
any proceeds thereof then held in escrow under this Agreement. If a successor
escrow agent has not been appointed and/or has not accepted such appointment by
the end of the 30-day period, the Escrow Agent may at its sole option: (i) apply
to a court of competent jurisdiction for the appointment of a successor escrow
agent, and the costs, expenses and reasonable attorneys’ fees which are incurred
in connection with such a proceeding shall be paid one-half by Seller and
one-half by Purchaser, or (ii) continue to hold the Deposit until the occurrence
of a Triggering Event (in such event the Escrow Agent must release and disburse
the Deposit in accordance with the Release Instructions and Section 5 of this
Agreement) or it receives an order from a court of competent jurisdiction
directing the Escrow Agent to release the Deposit.
 
10.    Notices. Any notice or other correspondence to be given in connection
with this Agreement shall be in writing and shall be delivered by hand,
overnight courier or by facsimile (provided that the sender receives printed
confirmation of receipt) to the addresses and/or facsimile numbers set forth
below or to such other address or facsimile number as a party may designate by
notice given to the other party in accordance with the terms hereof. Any notice
to be given by a party may be given by such party’s counsel. Each notice shall
be deemed effective upon its receipt or refusal.

(a) if to Seller:
James Lavin
 
Newport Telecommunications Co.
 
111 Town Square Place
 
Jersey City, New Jersey 07310

 

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with a copy (which shall
 
not constitute notice) to:
James T. LeFrak
 
LeFrak Organization, Inc.
 
40 West 57th Street, 23rd Floor
 
New York, New York 10019
   
with a copy (which shall
 
not constitute notice) to:
   
Riker, Danzig, Scherer, Hyland & Perretti, LLP
 
Headquarters Plaza
 
One Speedwell Avenue
 
Morristown, New Jersey 07962
 
Attention: James Meyer
 
Facsimile (973) 538-1984
   
(b) if to Purchaser:
Frank T. Matarazzo
 
259-263 Goffle Road
 
Hawthorne, New Jersey 07506
 
Fax: (973) 304-6081
   
with a copy (which shall
 
not constitute notice) to:
Womble Carlyle Sandridge & Rice, PLLC
 
1401 I Street, N.W. 7th Floor
 
Washington, DC 20005
 
Attention: Howard J. Barr
 
Facsimile: (202) 261-0006

(c) if to Escrow Agent: 
 
or to such other address as may be specified by any party in a written notice to
the other parties. Notices and other communications so delivered personally
shall be deemed delivered when actually received. Notices and other
communications so sent by certified mail or by reputable overnight air delivery
service shall be deemed delivered and received on the first to occur of
(x) three business days following deposit in the United States mail or one
business day following delivery of the same to such delivery service, as
applicable, (y) written acceptance of delivery by the recipient thereof or (z)
written rejection of delivery by the recipient thereof. Notices and other
communications sent by a Party’s counsel shall be deemed duly and properly given
in accordance with the terms hereof so long as all of the other requirements
contained herein are satisfied. Notices and other communications so transmitted
by telecopier shall be deemed delivered upon telephone or electronic
confirmation of receipt. If a notice or other communication is received on a day
that is not a business day, it shall be deemed received on the next business day
following such day.
 
11.    Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of New Jersey without giving effect to the principles
of conflicts of laws.
 

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12.    Waiver. This Agreement may be amended or modified, and any term may be
waived, only if such amendment, modification or waiver is in writing and signed
by all parties.
 
13.    No Third Party Beneficiaries. This Agreement is a personal one, the duty
of the Escrow Agent being only to the parties hereto, their successors or
assigns, and to no other person whatsoever.
 
14.    Counterparts. This Agreement may be executed in counterparts that
together shall constitute a single instrument. A facsimile copy of any signature
hereto and to any amendment or supplement hereto shall be valid. 
 
[Remainder of Page Intentionally Omitted; Signature Page Follows]
 
 

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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
by their respective duly authorized officers all as of the day and year first
above written.
 

      PURCHASER:  MICROWAVE SATELLITE TECHNOLOGIES, INC.  
   
   
    By:   /s/ Frank T. Matarazzo  

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  Name: Frank T. Matarazzo   Title: President 

 

      SELLER:  NEWPORT TELECOMMUNICATIONS CO.  
   
   
    By: Newport Telecommunications Company, Inc., its partner       By:    /s/
James T. LeFrak  

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  Name: James T. LeFrak   Title: Vice President

 

      ESCROW AGENT: U.S. BANK NATIONAL ASSOCIATION  
   
   
    By:    /s/ Christopher E. Golabek  

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  Name: Christopher E. Golabek   Title: Vice President

 

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