Telkonet Segment Revenue Increases 24%, Gross Margins Increases by 12%; Operating Results Improve by $2.2 million

GERMANTOWN, Md.--

Telkonet, Inc. (AMEX:TKO), the leading provider of innovative, centrally managed solutions for integrated energy management, networking, building automation and proactive support services, announced today third quarter results for the period ended September 30, 2008. The results of operations include the acquisitions of EthoStream, LLC, Smart Systems International and Newport Telecommunications Co, (acquired by MSTI Holdings, Inc.) on March 15, March 9, 2007, and July 18, 2007, respectively and also includes the operations of the Company's majority-owned subsidiary MSTI Holdings, Inc. (OTCBB: MSHI) or "MST."

For the 2008 third quarter, Telkonet, Inc. had revenue of $5.7 million, an increase of 24% compared to $4.6 million in the 2007 third quarter. The increase was a result of organic growth in the Company's energy and hospitality management businesses. Excluding revenue from its MST subsidiary, Telkonet had revenue of $4.7 million, an increase of 24% compared to $3.8 million in the year-earlier period and $4.6 million in the 2008 second quarter.

Telkonet, Inc. reported gross margins of 39% for the third quarter of 2008 compared to the prior year period of 27%, and 34% in the second quarter 2008. All of the profit was generated from the Telkonet segment's operations. Excluding gross margins from MST, Telkonet reported gross margins of 47% for the third quarter of 2008 compared to the prior year period of 35%, and 42% in the second quarter 2008.

Selling, general and administrative expenses were $3.1 million, compared to $4.6 million in the 2007 third quarter. Excluding expenses from its MST subsidiary, Telkonet's selling, general and administrative expenses were $2.1 million in the 2008 third quarter, compared to $3.3 million in the 2007 third quarter.

Telkonet, Inc. reported a third quarter 2008 net loss of $(2.9) million, or $(0.04) per share, compared to a net loss of $(5.0) million or $(0.07) per share in the 2007 third quarter. During the period ended September 30, 2008, the Company recorded a non-cash expense of $1.6 million in connection with the sale of certain debentures. Telkonet (excluding the results of MST) had a negative adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Stock-Based Compensation), a non-GAAP measure, in the third quarter of 2008 of $(0.4) million compared to negative adjusted EBITDA of $(2.6) million in the 2007 third quarter. Telkonet had a negative adjusted EBITDA in the second quarter of 2008 of $(1.2) million.

"Despite a challenging economic environment, Telkonet took tangible measures to reach the Company's goal of being cash-flow break-even by the end of 2008, as reflected by the $800,000 reduction in EBITDA loss compared to the 2008 second quarter," said Jason Tienor, Telkonet's president and CEO. "While our business, like many others, has been impacted by a slowing economy and a credit crisis which has delayed some projects like our energy solutions, the Company was able to generate solid year-over-year and sequential revenue growth, reflecting the near-term return that our energy solutions deliver customers. Due to increased sales of energy management products, as well as streamlining engineering costs and driving purchasing efficiencies, we were also able to improve gross margins. Recent contract awards from Americas Best Value Inn Las Vegas and Columbia Sussex Hotel Group reflect the demand in the hospitality industry to lower energy costs. While we can not control the timing of purchases by our customers, we have been relentlessly focused on managing those areas we can control. Recently, we announced a long-range plan to streamline operations and rationalize the Company's cost structure, by reducing its corporate headcount at all levels, by approximately 5%. The Company expects this recent action to result in estimated annualized cost savings of approximately $1.2 million per year. We continue to focus on driving near-term revenue growth, while remaining relentlessly focused on reaching profitability."

For the nine months ended September 30, 2008, Telkonet had revenue of $16.3 million, an increase of 72% compared to $9.5 million in the nine months ended September 30, 2007. Excluding revenue from its MST subsidiary, Telkonet had revenue of $13.4 million, an increase of 74% compared to $7.7 million in the year-earlier period.

Telkonet, Inc. reported gross margins of 32% for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 of 19%. All of the profit was generated from the Telkonet segment's operations. Excluding gross margins from MST, Telkonet reported gross margins of 40% for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 of 32%.

Selling, general and administrative expenses were $10.3 million for the nine months ended September 30, 2008, compared to $13.1 million for the nine months ended September 30, 2007. Excluding expenses from its MST subsidiary, Telkonet's selling, general and administrative expenses were $7.3 million for the nine months ended September 30, 2008, compared to $10.1 million for the nine months ended September 30, 2007.

Telkonet, Inc. reported a net loss of $(12.2) million, or $(0.16) per share, for the nine months ended September 30, 2008, compared to a net loss of $(14.9) million, or $(0.23) per share for the nine months ended September 30, 2007. Telkonet (excluding the results of MST) had a negative adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Stock-Based Compensation), a non-GAAP measure, of $(3.6) million for the nine months ended September 30, 2008, compared to negative adjusted EBITDA of $(9.4) million for the nine months ended September 30, 2007.

Conference Call

The Company will hold a conference call today at 4:30 p.m. Eastern Time to discuss these results. Interested parties should dial 866-454-4205 (domestically) or 913-981-5597 (internationally). Please use 3451112 as the conference confirmation number. There will be a replay of the call available until December 10, 2008. The replay is available by dialing 888-203-1112 (domestically) or 719-457-0820 (internationally). Please use passcode 3451112.

NON-GAAP Financial Measures

To comply with Regulation G promulgated pursuant to the Sarbanes-Oxley Act, Telkonet, Inc. attached to this news release and will post to the company's investor relations web site (www.telkonet.com) any reconciliations of differences between non-GAAP financial information that may be required in connection with issuing the company's quarterly financial results.

The Company, as is common in its industry, uses EBITDA as a measure of performance to demonstrate earnings exclusive of interest and non-cash events. The Company manages its business based on its cash flows. The Company, in its daily management of its business affairs and analysis of its monthly, quarterly and annual performance, makes its decisions based on cash flows, not on the amortization of assets obtained through historical activities. The Company, in managing its current and future affairs, cannot affect the amortization of the intangible assets to any material degree, and therefore uses EBITDA as its primary management guide. Since an outside investor may base its evaluation of the Company's performance based on the Company's net loss not its cash flows, there is a limitation to the EBITDA measurement. EBITDA is not, and should not be considered, an alternative to net loss, loss from operations, or any other measure for determining operating performance of liquidity, as determined under accounting principals generally accepted in the United States (GAAP). The most directly comparable GAAP reference in the Company's case is the removal of interest, depreciation, amortization, taxes and other non-cash expense. In assessing the overall health of its business during the second quarter of 2008 and 2007, The Company excluded items in the following general categories, each of which are described below:

    --  Loss on Derivative Liability. During the period ended
        September 30, 2008, the Company recorded a non-cash expense of
        $1,594,609 in connection with the sale of the Convertible
        Debentures in May and July 2008. These Debentures have
        embedded derivatives and the accounting treatment of
        derivative financial instruments requires that the Company
        record all derivatives and related warrants, and classify all
        other non-employee stock options and warrants as derivative
        liabilities and mark them to market at each reporting date.
        The fair value of such derivatives that were reclassified as
        liabilities from additional paid-in capital in the period
        ended September 30, 2008 totaled $2,993,615. The Company
        considers this a financing transaction, and it is not an
        indication of current or future operating performance.
        Therefore the Company does not consider the inclusion of this
        transaction helpful in assessing its current financial
        performance compared to previous periods as well as prospects
        for the future.

    --  Other Expense. In the first quarter of 2008, the Company
        recorded a one-time non-cash expense of $1,598,203 in
        connection with an amendment to 3,380,000 stock purchase
        warrants held by private placement investors which reduced the
        exercise price under such warrants from $4.17 per share to
        $0.6978258 per share. The Company considers this a financing
        transaction, and it is not an indication of current or future
        operating performance. Therefore the Company does not consider
        the inclusion of this transaction helpful in assessing its
        current financial performance compared to previous periods as
        well as prospects for the future.

    --  Impairment write-down in investment in affiliate. In the
        second quarter of 2008, the Company recorded a one-time
        non-cash expense of $380,000 in connection with the issuance
        of 600,000 shares of Company stock attributable to the release
        of shares from a purchase price contingency escrow. The
        Company considers this an investment transaction, and it is
        not an indication of current or future operating performance.
        Therefore the Company does not consider the inclusion of this
        transaction helpful in assessing its current financial
        performance compared to previous periods as well as prospects
        for the future.

    --  Stock-Based Compensation. The Company believes that because of
        the variety of equity awards used by companies, varying
        methodologies for determining stock-based compensation and the
        assumptions and estimates involved in those determinations,
        the exclusion of non-cash stock-based compensation enhances
        the ability of management and investors to understand the
        impact of non-cash stock-based compensation on our operating
        results. Further, the Company believes that excluding
        stock-based compensation expense allows for a more transparent
        comparison of its financial results to previous periods.

    About Telkonet

Telkonet's unique broadband networking solutions currently support more than 1.8 million network users per month, with its energy management systems optimizing energy consumption in over 90,000 rooms. Telkonet's technology innovation is underpinned by the highest level of end-to-end quality of service, with comprehensive technical customer support. Its systems deliver wide-ranging functionality, from wired and wireless high-speed Internet access to energy management, IP surveillance and local area networking. Telkonet's platforms are widely deployed on the global stage - in single buildings and ships, in multi-building complexes, hospitality venues and multi-dwelling units, and at government, education and defense locations.

Telkonet's innovations include the revolutionary Telkonet Series 5 and the Telkonet iWire System(TM), which convert a site's existing internal electrical infrastructure into an IP network backbone - quickly, cost-effectively and without disruption. The portfolio also includes the integrated EthoStream product suite, providing a comprehensive and advanced technology management platform for the hospitality industry, differentiated by outstanding remote management tools and a dedicated customer support facility. Networked Telkonet SmartEnergy(TM) completes the line-up, delivering typical bottom line savings of up to 30% by controlling in-room energy consumption according to occupancy. For more information, please visit www.telkonet.com.

All company, brand or product names are registered trademarks or trademarks of their respective holders.

Statements included in this release may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve a number of risks and uncertainties such as competitive factors, technological development, market demand and the Company's ability to obtain new contracts and accurately estimate net revenues due to variability in size, scope and duration of projects, and internal issues in the sponsoring client. Further information on potential factors that could affect the Company's financial results, can be found in the Company's Registration Statement and in its Reports on Forms 8-K filed with the Securities and Exchange Commission (SEC).

                            TELKONET, INC.
        RECONCILIATION OF NET INCOME (LOSS) TO ADJUSTED EBITDA
                          (Telkonet Segment)
   FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
                             (Unaudited)

                    Three Months Ended          Nine Months Ended
                  September    September   September 30, September 30,
                   30, 2008     30, 2007        2008          2007
Net (loss), as
 reported        $(2,878,757) $(4,955,630) $(12,231,629) $(14,941,974)
Net loss
 attributed to
 MSTI segment      1,370,896    1,056,299     3,412,656     3,542,562
                  -----------  -----------  ------------  ------------
Net loss
 attributed to
 Telkonet
 segment          (1,507,861)  (3,899,331)   (8,818,973)  (11,399,412)
Interest
 (income)
 expense, net        243,424      591,242       593,228       481,970
Depreciation and
 amortization        103,056      130,711       318,210       317,935
                  -----------  -----------  ------------  ------------
EBITDA
 attributed to
 Telkonet
 segment          (1,161,381)  (3,177,378)   (7,907,535)  (10,599,507)
Adjustments:
Other expense              -            -     1,598,203             -
Loss on
 derivative
 liability           576,156            -     1,594,609             -
Impairment
 write-down in
 investment in
 affiliate                 -            -       380,000             -
Stock based
 compensation        194,483      555,509       704,613     1,217,120
                  -----------  -----------  ------------  ------------
Adjusted EBITDA  $  (390,742) $(2,621,869) $ (3,630,110) $ (9,382,387)
                  ===========  ===========  ============  ============
                            TELKONET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                             (Unaudited)

                  For The Three Months
                           Ended           For The Nine Months Ended
                      September 30,              September 30,
                    2008         2007          2008          2007
                 -----------  -----------  ------------  ------------
Revenues, net:
Product          $ 3,964,419  $ 3,005,144  $ 11,333,574  $  6,269,079
Rental             1,763,396    1,583,633     4,977,799     3,232,574
                 -----------  -----------  ------------  ------------
Total Revenue      5,727,815    4,588,777    16,311,373     9,501,653

Cost of Sales:
Product            2,165,379    2,139,034     7,124,696     4,503,983
Rental             1,355,985    1,229,985     3,975,648     3,177,386
                 -----------  -----------  ------------  ------------
Total Cost of
 Sales             3,521,364    3,369,019    11,100,344     7,681,369

Gross Profit       2,206,451    1,219,758     5,211,029     1,820,284

Costs and
 Expenses:
Research and
 Development         509,418      646,848     1,667,229     1,736,656
Selling, General
 and
 Administrative    3,111,570    4,553,161    10,317,209    13,057,979
Impairment
 Write-Down in
 Investment in
 Affiliate                 -            -       380,000             -
Impairment
 Write-Down in
 Long Lived
 Assets of
 Subsidiary          330,000            -       330,000             -
Non-Employee
 Stock Based
 Compensation              -      400,220        81,500       400,220
Employee Stock
 Based
 Compensation        194,483      294,859       623,113       941,900
Employee Stock
 Based
 Compensation of
 Subsidiary          128,507      130,941       395,904       173,967
Depreciation and
 Amortization        251,587      275,611       764,157       638,131
                 -----------  -----------  ------------  ------------
Total Operating
 Expense           4,525,565    6,301,640    14,559,112    16,948,853

Loss from
 Operations       (2,319,114)  (5,081,882)   (9,348,083)  (15,128,569)

Other Income
 (Expenses):
Interest Income          405       37,883        28,946       110,343
Financing
 Expense            (789,021)    (328,611)   (2,494,888)     (529,168)
Gain (Loss) on
 Derivative
 Liability          (576,156)           -    (1,594,609)            -
Registration
 rights
 liquidated
 damages of
 subsidiary                -     (500,000)      500,000      (500,000)
Other income               -            -       270,950             -
Other expense              -            -    (1,598,203)            -
                 -----------  -----------  ------------  ------------
Total Other
 Income
 (Expenses)       (1,364,772)    (790,728)   (4,887,804)     (918,825)

Loss Before
 Provision for
 Income Taxes     (3,683,886)  (5,872,610)  (14,235,887)  (16,047,394)
Provision for
 Income Taxes              -            -             -             -
                 -----------  -----------  ------------  ------------

Loss Before
 Minority
 Interest         (3,683,886)  (5,872,610)  (14,235,887)  (16,047,394)
Minority
 Interest            805,129      916,980     2,004,258     1,105,420
                 -----------  -----------  ------------  ------------
Net Loss         $(2,878,757) $(4,955,630) $(12,231,629) $(14,941,974)
                 ===========  ===========  ============  ============

Loss per common
 share (basic
 and assuming
 dilution)       $     (0.04) $     (0.07) $      (0.16) $      (0.23)
                 ===========  ===========  ============  ============

Weighted average
 common shares
 outstanding      81,422,404   67,520,571    76,880,047    64,324,325

Comprehensive
 Loss:

Net Loss         $(2,878,757) $(4,955,630) $(12,231,629) $(14,941,974)

Unrecognized
 loss on
 investment       (1,218,100)           -    (2,776,304)            -
                 -----------  -----------  ------------  ------------

Comprehensive
 Loss            $(4,096,857) $(4,955,630) $(15,007,933) $(14,941,974)
                 ===========  ===========  ============  ============

Source: Telkonet, Inc.