Exhibit 99.2
 
TELKONET, INC.
 
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
 
 
The following unaudited pro forma condensed combined financial statements are based on the historical financial statements of Telkonet, Inc. (“Telkonet,” “we,” “us,” or “our”) and Smart Systems International (“SSI”) after giving effect to our Asset Purchase Agreement and the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements. We acquired the operations, substantially all of the assets and liabilities of SSI on March 9, 2007. The proforma balance sheet was prepared as if the acquisition occurred on December 31, 2006 and the statements of operations were prepared as if the acquisition had occurred on the first day of each period presented.
 
The pro forma data is for informational purposes only and may not necessarily reflect future results of operations or financial position or what the results of operations or financial position would have been had Telkonet and SSI been operating as combined entities for the periods presented. The unaudited pro forma condensed combined financial statements should be read in conjunction with the historical financial statements, including the notes thereto, of Telkonet included in our Form 10-K for the year ended December 31, 2006, and the historical financial statements included elsewhere in this Form 8-K/A.
 
1
 
Telkonet, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
As of December 31, 2006
 
 
   
Historical
        
Pro Forma
  
   
Telkonet, Inc.
 
Smart Systems International
 
Combined Total
  
Adjustments
     
Combined
 
ASSETS
  
Current Assets:
                                   
Cash and cash equivalents
 
$
1,644,037
  
$
24,527
  
$
1,668,564
  
$
(875,000
)
(1)
 
$
793,564
  
Income tax receivable
   
291,000
   
-
   
291,000
   
-
        
291,000
 
Accounts Receivable, net of allowance for doubtful accounts of $69,911
   
295,116
   
162,126
   
457,242
   
-
        
457,242
 
Inventory
   
1,306,593
   
622,397
   
1,928,990
   
-
        
1,928,990
 
Other
   
229,333
   
202,169
   
431,502
   
-
       
431,502
 
Total current assets
   
3,766,079
   
1,011,219
   
4,777,298
   
(875,000
)
      
3,902,298
 
                                     
Long Term Assets:
                                   
Property and equipment, net
   
1,628,788
   
32,052
   
1,660,840
   
-
       
1,660,840
 
Equipment under operating leases, net
   
2,621,767
   
-
   
2,621,767
   
-
       
2,621,767
 
Intangible assets, net
   
2,181,602
   
39,378
   
2,220,980
   
-
        
2,220,980
 
Goodwill
   
1,977,768
   
-
   
1,977,768
   
6,258,660
 
(1)
 
  
8,236,428
 
Other
   
340,512
   
8,238
   
348,750
   
-
       
348,750
 
Total other assets
   
8,750,437
   
79,668
   
8,830,105
   
6,258,660
       
15,088,765
 
                                     
 
  
$
12,516,516
  
$
1,090,887
  
$
13,607,403
  
$
5,383,660
      
$
18,991,063
  
                                     
LIABILITIES AND STOCKHOLDERS’ EQUITY
  
Current Liabilities:
                                   
Credit Line Payable
 
$
-
  
$
1,388,455
  
$
1,388,455
  
$
(1,388,455
)
(2)
 
$
-
  
Note payables including accrued interest    
-
    
1,476,126
    
1,476,126
    
(1,476,126
 )       
-
  
Accounts payable and accrued liabilities
   
2,865,144
   
265,328
   
3,130,472
   
100,000
 
(1)
 
  
3,230,472
 
Note payable - officer
   
980,444
   
-
   
980,444
   
-
       
980,444
 
Deferred Revenue
   
202,144
   
-
   
202,144
   
-
       
202,144
 
Income tax refund due to officer
   
291,000
   
-
   
291,000
   
-
       
291,000
 
Total current liabilities
   
4,338,732
   
3,129,909
   
7,468,641
   
(2,764,581
)
      
4,704,060
 
                                     
Long Term Liabilities:
                                   
Other
   
42,561
   
-
   
42,561
   
-
       
42,561
 
Total long term liabilities
   
42,561
   
-
   
42,561
    
-
 
      
42,561
 
                                     
Commitments and Contingencies
   
-
   
-
   
-
   
-
       
-
 
Minority Interest
   
-
    
-
    
-
   
-
        
-
 
                                     
Stockholders’ equity
   
8,135,223
   
(2,039,022
)
  
6,096,201
   
8,148,241
 
(1)(2)
 
  
14,244,442
 
                                     
 
  
$
12,516,516
  
$
1,090,887
  
$
13,607,403
  
$
5,383,660
      
$
18,991,063
  

2
 
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 2006
 
 
   
Historical
  
Pro Forma
  
   
Telkonet
  
Smart Systems International
 
Pro-forma Adjustments
 
Combined Balances
 
Total Revenue
  
$
5,181,328
  
$
1,563,223
  
$
-
  
$
6,744,551
  
Cost of Sales
    
4,480,659
   
897,665
   
-
   
5,378,324
 
                           
Gross Profit
    
700,669
   
665,558
   
-
   
1,366,227
 
                           
Costs and Expenses:
                          
Research and Development
    
1,925,746
   
433,645
   
-
   
2,359,391
 
Selling, General and Administrative
    
14,346,364
   
1,162,012
   
-
   
15,508,376
 
Impairment write-down in investment in affiliate
    
92,000
   
-
   
-
   
92,000
 
Non-Employee Stock Options and Warrants
    
277,344
   
-
   
-
   
277,344
 
Employee stock options
    
1,080,895
   
10,898
   
-
   
1,091,793
 
Depreciation and Amortization
    
540,906
   
27,608
   
-
   
568,514
 
Total Operating Expense
    
18,263,255
   
1,634,163
   
-
   
19,897,418
 
                           
Loss from Operations
    
(17,562,586
)
  
(968,605
)
  
-
   
(18,531,191
)
                           
Other Income (Expenses):
                          
Financing activities
    
(4,626,679
)
  
-
   
-
   
(4,626,679
)
Interest Income
    
327,184
   
-
   
-
   
327,184
 
Interest Expense
    
(5,594,604
)
  
(219,025
)
  
218,342
(2)
 
(5,595,287
)
Total Other Income (Expenses)
    
(9,894,099
)
  
(219,025
)
  
218,342
   
(9,894,782
)
                           
Loss Before Minority Interest and Provision for Income Taxes
    
(27,456,685
)
  
(1,187,630
)
  
218,342
   
(28,425,973
)
 
     -     -     -    
-
 
                           
Minority Interest
    
19,569
   
-
   
-
   
19,569
 
                           
Loss before income taxes
    
(27,437,116
)
  
(1,187,630
)
  
218,342
   
(28,406,404
)
Provision for Income Taxes
    
-
   
-
    -    
-
 
Net Loss
  
$
(27,437,116
)
$
(1,187,630
)
$
218,342
  
$
(28,406,404
)
                           
Loss per common share (basic and dilutive)
    
($0.54
)
              
($0.54
)
Weighted average common shares outstanding
    
50,823,652
          
2,227,273
   
53,050,925
  

3
 
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
 
 
1.  Basis of Presentation
 
The following unaudited pro forma condensed combined balance sheet is derived from the balance sheets of Smart Systems International, a Nevada corporation (“SSI”), and Telkonet, Inc. at December 31, 2006. The unaudited pro forma condensed combined balance sheet reflects our purchase of the operations and substantially all the assets and liabilities of SSI by Telkoent, Inc. The proforma balance sheet was prepared as if the acquisition occurred on December 31, 2006 and the statements of operations were prepared as if the acquisition occurred on the first day of each period presented.
 
In accordance with the rules and regulations of the SEC, unaudited financial statements may omit or condense information and disclosures normally required for a complete set of financial statements prepared in accordance with generally accepted accounting principles. However, management believes that the notes to the financial statements as presented contain disclosures adequate to make the information presented not misleading.
 
The adjustments necessary to fairly present the unaudited pro forma condensed combined financial statements have been made based on available information and in the opinion of management are reasonable. Assumptions underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with these unaudited pro forma condensed combined financial statements.
 
The unaudited pro forma condensed combined financial data is for comparative purposes only and does not purport to represent what our financial position or results of operations would actually have been had the events noted above in fact occurred on the assumed dates or to project the financial position or results of operations for any future date or future period. The unaudited pro forma condensed combined financial data should be read in conjunction with the notes hereto.
 
2.  Smart Systems International Acquisition
 
On March 9, 2007, Telkonet, Inc. acquired substantially all of the assets of the SSI for cash and Telkonet, Inc. common stock having an aggregate value of $6,875,000. The purchase price was comprised of $875,000 in cash and 2,227,273 shares of the Telkonet Inc’s common stock. Telkonet, Inc. holds 1,090,909 shares in an escrow account for a period of one year following the date of acquisition from which certain potential indemnification obligations under the purchase agreement may be satisfied. The aggregate number of shares held in escrow is subject to adjustment upward or downward depending upon the trading price of the Telkonet’s common stock during the one year period following the closing date.

The acquisition of SSI was accounted for using the purchase method in accordance with SFAS 141, “Business Combinations.” The value of Telkonet’s common stock issued as a part of the acquisition was determined based on the most recent price of Telkonet's common stock on the day immediately preceding the acquisition date. The results of operations for SSI have been included in the Consolidated Statements of Operations since the date of acquisition.  The components of the purchase price were as follows:

 
  
As Reported
March 9, 2007
  
Common stock
 
$
6,000,000
  
Cash
   
875,000
 
Direct acquisition costs
   
100,000
 
Total Purchase Price
 
$
6,975,000
  
 
3.  Allocation of Purchase Price:

Current assets
  
$
1,229,957
  
Property, plant and equipment
    
36,020
  
Other assets 
    
8,237
  
Goodwill 
    
6,258,660
  
Total assets acquired 
    
7,532,874
  
 
      
Accounts payable and accrued liabilities 
    
557,874
  
Total liabilities assumed 
    
557,874
  
Net assets acquired
  
$
6,975,000
  
 
4.  Pro Forma Adjustments
 
The following pro forma adjustments are included in the unaudited pro forma condensed combined financial statements:
 
(1) Adjustment for the $6,875,000 acquisition of Smart Systems International comprised of $875,000 cash and 2,227,273 shares of common stock and accrued acquisition costs.
 
(2) Adjustments for certain notes payable not assumed by Telkonet, Inc. in the acquisition and reduction of interest expense of $218,342.
 
 
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