Exhibit 99.3

For the year ended December 31, 2004 for Telkonet, Inc.
and for the year ended January 31, 2005 for MST
 
   
Telkonet
  
MST
  
Pro-forma Adjustments
 
Pro Forma Note Reference
 
Pro Forma Combined Balances (Unaudited)
 
Revenue
  
$
698,652
  
$
2,766,372
  
$
-
        
$
3,465,024
  
Cost of Sales
    
542,859
   
1,864,488
   
-
         
2,407,347
 
                                 
Gross Profit
    
155,793
   
901,884
               
1,057,677
 
                                 
Costs and Expenses:
                                
Research and Development
    
1,852,309
   
-
               
1,852,309
 
Selling, General and Administrative
    
7,663,369
   
1,420,722
               
9,084,091
 
Consulting fees
    
2,500,000
   
-
               
2,500,000
 
Non-Employee Stock Options and Warrants
    
1,180,875
   
-
               
1,180,875
 
Depreciation and Amortization
    
71,514
   
53,451
   
342,087
         
467,052
 
Total Operating Expense
    
13,268,067
   
1,474,173
   
342,087
         
15,084,327
 
                                 
Loss from Operations
    
(13,112,274
)
  
(572,289
)
  
(342,087
)
        
(14,026,650
)
                                 
Other Income (Expenses):
                                
Equity in income of limited liability company
    
-
   
13,908
               
13,908
 
Interest Income
    
128,938
   
32,441
               
161,379
 
Interest Expense
    
(109,324
)
  
(32,359
)
  
 
          
(141,683
)
Total Other Income (Expenses)
    
19,614
   
13,990
   
-
         
33,604
 
                                 
Loss Before Discontinued Operations and Provision for Income Taxes
    
(13,092,660
)
  
(558,299
)
  
(342,087
)
        
(13,993,046
)
Discontinued operations (Analog Subscribers)
    
-
   
2,174,735
   
 
          
2,174,735
 
                                 
Minority Interest
                            
(161,644
)
Provision for Income Taxes
    
-
   
-
               
-
 
Net Loss
  
$
(13,092,660
)
$
1,616,436
  
$
(342,087
)
      
$
(11,979,955
)
                                 
Loss per common share (basic and dilutive)
    
($0.32
)
                    
($0.28
)
Weighted average common shares outstanding
    
41,384,074
          
1,600,000
         
42,984,074
  
 
 
1
 

Unaudited Pro Forma Condensed Combined Statement of Operations
For the nine months ended September 30, 2005 for Telkonet, Inc.
and for the nine months ended October 31, 2005 for MST
 
   
Telkonet
  
MST
  
Pro-forma Adjustments
 
Pro Forma Note Reference
 
Pro Forma Combined Balances (Unaudited)
 
Revenue
  
$
1,341,058
  
$
1,359,078
   $ -        
$
2,700,136
  
Cost of Sales
    
918,720
   
1,200,346
    -          
2,119,066
 
                                 
Gross Profit
    
422,338
   
158,732
   
-
         
581,070
 
                                 
Costs and Expenses:
                                
Research and Development
    
1,475,109
   
-
    -          
1,475,109
 
Selling, General and Administrative
    
8,476,703
   
648,706
     -          
9,125,409
 
Non-Employee Stock Options and Warrants
    
960,822
   
-
     -          
960,822
 
Depreciation and Amortization
    
137,494
   
33,905
   
256,565
         
427,964
 
Total Operating Expense
    
11,050,128
   
682,611
   
256,565
         
11,989,304
 
                                 
Loss from Operations
    
(10,627,790
)
  
(523,879
)
  
(256,565
)
        
(11,408,234
)
                                 
Other Income (Expenses):
                                
Equity in loss of limited liability company
    
-
   
(34,157
)
   -          
(34,157
)
Interest Income
    
89,012
   
9,320
     -          
98,332
 
Interest Expense
    
(93,495
)
  
(6,194
)
  
-
          
(99,689
)
Total Other Income (Expenses)
    
(4,483
)
  
(31,031
)
  
-
         
(35,514
)
 
                                
Loss Before Discontinued Operations and Provision for Income Taxes
    
(10,632,273
)
  
(554,910
)
  
(256,565
)
        
(11,443,748
)
Discontinued operations (Analog Subscribers)
    
-
   
311,955
   
-
          
311,955
 
                                 
Minority Interest
                      
24,296
   
24,296
 
Loss before income taxes
    
(10,632,273
)
  
(242,955
)
  
(256,565
)
        
(11,107,498
)
Provision for Income Taxes
    
-
   
-
   
-
          
-
 
Net Loss
  
$
(10,632,273
)
$
(242,955
)
$
(256,565
)
      
$
(11,107,498
)
                                 
Loss per common share (basic and dilutive)
    
($0.24
)
                    
($0.24
)
Weighted average common shares outstanding
    
44,658,467
          
1,600,000
         
46,258,467
  
 
 
2
 
As of September 30, 2005 for Telkonet, Inc. and as of October 31, 2005 for MST
 
   
Telkonet, Inc.
 
Microwave Satelitte Technologies, Inc.
 
Combined Total
 
Pro-forma Adjustments
 
Pro Forma Note Reference
 
Pro Forma Balance Sheet
 
ASSETS
                                     
Current Assets:
                                     
Cash and cash equivalents
   $
2,305,190
   $
46,528
   $
2,351,718
   $ -          $
2,351,718
 
Accounts Receivable: net
   
151,430
   
95,660
   
247,090
    -          
247,090
 
Inventory
   
1,689,214
   
-
   
1,689,214
     -          
1,689,214
 
Prepaid expenses and deposits
   
219,290
   
362,727
   
582,017
   
-
         
582,017
 
Total current assets
   
4,365,124
   
504,915
   
4,870,039
   
-
         
4,870,039
 
                                       
Property and equipment, net
   
759,596
   
1,183,582
   
1,943,178
   
-
         
1,943,178
 
Equipment under operating leases, net
   
815,477
   
-
   
815,477
   
-
         
815,477
 
                                       
Other Assets:
                                     
Long-term investments
   
600,000
   
59,751
   
659,751
    -          
659,751
 
Intangible assets, net
   
-
   
43,394
   
43,394
   
2,736,697
         
2,780,091
 
Goodwill
               
-
   
6,263,303
         
6,263,303
 
Deposits & other assets
   
154,216
   
84,536
   
238,752
   
62,000
         
300,752
 
Total other assets
   
754,216
   
187,681
   
941,897
   
9,062,000
         
10,003,897
 
                                       
TOTAL ASSETS
   
6,694,413
   
1,876,178
   
8,570,591
   
9,062,000
         
17,632,591
 
                               
LIABILITIES AND STOCKHOLDERS’ EQUITY
                             
Current Liabilities:
                                     
Notes payable bank
   
-
   
200,000
   
200,000
    -          
200,000
 
Current portion of long-term debt
   
-
   
6,555
   
6,555
    -          
6,555
 
Accounts payable and accrued liabilities
   
1,305,995
   
251,998
   
1,557,993
     -          
1,557,993
 
Convertible debentures, net of discounts
   
191,979
   
-
   
191,979
     -          
191,979
 
Senior notes payable
   
450,000
   
-
   
450,000
     -          
450,000
 
Other current liabilities
   
67,009
   
172,207
   
239,216
   
-
         
239,216
 
Total current liabilities
   
2,014,983
   
630,760
   
2,645,743
   
-
         
2,645,743
 
                                       
Long Term Liabilities:
                                     
Deferred lease liability
   
41,949
   
-
   
41,949
    -          
41,949
 
Long-term debt - less current portion
   
--
   
8,194
   
8,194
   
-
         
8,194
 
Total long term liabilities
   
41,949
   
8,194
   
50,143
   
-
         
50,143
 
 
3
                                       
Commitments and Contingencies
   
-
   
-
   
-
    -          
-
 
                                       
Minority Interest
               
-
   
982,593
         
982,593
 
                                       
Stockholders’ Equity :
                                     
Preferred stock, par value $.001 per share; 15,000,000 shares authorized; none issued and outstanding at September 30, 2005 and December 31, 2004
   
-
   
-
   
-
   
-
         
-
 
Common stock, par value $.001 per share; 100,000,000 shares authorized; 44,910,908 and 44,335,989 shares issued and outstanding at September 30, 2005 and December 31, 2004, respectively
   
44,911
   
-
   
44,911
   
1,600
         
46,511
 
Common stock, no par value, authorized 1,000 shares, issued 300 shares and outstanding 125 shares
   
-
   
1,000
   
1,000
   
(1,000
)
        
-
 
Additional paid-in-capital
   
42,434,115
   
-
   
42,434,115
   
9,290,735
         
51,724,850
 
(Accumulated deficit) retained earnings
   
(37,841,545
)
  
1,311,224
   
(36,530,321
)
  
(1,286,929
)
        
(37,817,250
)
Treasury stock, 175 shares at cost
   
-
   
(75,000
)
  
(75,000
)
  
75,000
         
-
 
Stockholders’ equity
   
4,637,481
   
1,237,224
   
5,874,705
   
8,079,407
         
13,954,112
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $
6,694,413
 
$
1,876,178
 
$
8,570,591
 
$
9,062,000
       
$
17,632,591
 
                                       
                                       
Purchase Price
  
$
9,062,000
                                
100% of MST
  
$
10,068,889
                                
10% of minority interest
  
$
1,006,889
                                
Net loss to minority shareholders:
  
$
(24,296
)
                              
Minority Interest 10/31/2005:
  
$
982,593
                                


4
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

This Current Report on Form 8-K/A contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and other risks detailed in our Annual Report on Form 10-K for the year December 31, 2005 and other reports filed with the Securities Exchange Commission from time to time. Actual results could differ materially from those projected in these forward-looking statements as a result of the risks described above as well as other risk factors set forth in our periodic reports both previously and hereafter filed with the Securities Exchange Commission.

 
Note 1 - Basis of Presentation

On January 31, 2006, Telkonet, Inc. (Amex: TKO), acquired a 90% interest in Microwave Satellite Technologies, Inc. (MST) from Frank Matarazzo, the sole stockholder of MST. MST is a communications technology company that offers complete sales, installation, and service of VSAT and business television networks, and is a full-service national Internet Service Provider (ISP). The $9 million cash and stock transaction will enable Telkonet to provide a complete “triple-play” solution to subscribers of HDTV, VoIP telephony and NuVision Broadband Internet access, to commercial multi-dwelling units and hotels.

The purchase method of accounting has been used in the preparation of the accompanying unaudited pro forma condensed combined financial statements. Under this method of accounting, the purchase consideration is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed according to their respective fair values, with the excess purchase consideration being recorded as goodwill. For the purposes of pro forma adjustments, Telkonet has followed Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Intangible Assets.”

The unaudited pro forma condensed combined statements of operations are presented combining Telkonet’s condensed consolidated statement of operations for the year ended December 31, 2004 and Telkonet’s unaudited condensed statement of operations for the nine months ended September 30, 2005 with MST’s statements of operations for the year ended January 31, 2005 and for the nine months ended October 31, 2005 assuming the transaction occurred on January 1, 2004. The unaudited pro forma condensed combined balance sheet gives effect to the acquisition as if the transaction had taken place on September 30, 2005 and combines Telkonet’s unaudited September 30, 2005 condensed balance sheet amounts with MST’s unaudited balance sheet as October 31, 2005. These pro forma statements are based on such condensed financial statements after giving effect to the transaction under the purchase method of accounting and the assumptions and adjustments described below. The pro forma information does not purport to be indicative of the results, which would have been reported if the purchase had been in effect for the periods presented or which may result in the future.

There are no significant differences between the accounting policies of Telkonet and MST.

Note 2 - Pro forma purchase price adjustments

Pursuant to the Stock Purchase Agreement which provides for the payment of $1.8 million in cash and 1.6 million unregistered shares of the Company’s common stock. The cash portion of the purchase price is payable $900,000 at closing and $900,000 payable in January 2007. The stock portion is payable from shares held in escrow 400,000 shares at closing and the remaining 1,200,000 shares issued based on the achievement of 3,300 “Triple Play” subscribers over a three year period. For purposes of the unaudited pro forma condensed combined financial statements, the fair value of the Company’s common stock issued as a part of the acquisition was determined based on the average price of the Company's common stock for several days before the acquisition of MST.

The components of the purchase price were as follows:

Common stock
  
$
7,200,000
  
Cash
    
1,800,000
  
Direct acquisition costs
    
62,000
  
         
Total
  
$
9,062,000
  


5
 
In accordance with Financial Accounting Standard (SFAS) No. 141, Business Combinations, the total purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed. The fair value of the assets acquired was based on management’s best estimates. The total purchase price was allocated to the assets and liabilities acquired as follows:

       
Cash and other current assets
  
$
504,915
  
Equipment and other assets
    
1,371,263
  
Subscriber lists
    
2,736,697
  
Goodwill and other intangible assets
    
5,088,079
  
Current liabilities
    
(638,954
)
         
Total
  
$
9,062,000
  
         

Goodwill and other intangible assets of $5,088,079 represent the excess of the purchase price over the fair value of the net tangible assets acquired. The Company has hired an independent firm to assist in allocating the excess purchase price to the intangible assets and goodwill as appropriate. In accordance with SFAS 142, goodwill is not amortized and will be tested for impairment at least annually. The subscriber list was independently valued at $2,736,697 with a remaining estimated useful like of eight years.

Amortization expense associated with the subscriber list of $342,087 and $256,565 has been included for the twelve months and nine months proforma financial statements. This transaction had no other effect on the Company’s earnings at the date of acquisition as the assets and liabilities were acquired at the same cost bases for which they were listed in the previous MST financial statements, except for subscriber lists, goodwill and other intangible assets which were recorded at the excess of the purchase price over the net assets. There were no assets that were required to be written down at the acquisition.

The Company, each quarter, will carefully evaluate the potential impairment of goodwill recorded at the acquisition date as required by Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Intangible Assets.”

 
6