telkonet_ex9902.htm

The following unaudited pro forma condensed combined financial statements are based on the historical financial statements of Telkonet, Inc. (“Telkonet”) and Newport Telecommunication Co. (“NTC”) 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. Telkonet acquired the operations and substantially all of the assets of NTC on July 18, 2007. The pro forma balance sheet was prepared as if the acquisition occurred on June 30, 2007 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 NTC 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.

	Historical						Pro Forma
			Newport		Combined
	Telkonet		Telecommunication		Total		Adjustments				Combined
	(unaudited)		(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	6,023,299	$	109,962	$	6,133,261	$	(109,962	)	(1)	$	5,003,299
								(1,020,000	)	(1)
Accounts Receivable		1,902,060		230,441		2,132,501		(230,441	)	(1)		1,902,060
Inventory		2,289,759		-		2,289,759		-				2,289,759
Income tax receivable		291,000		-		291,000		-				291,000
Note receivable		27,408		-		27,408		-				27,408
Other current assets		366,461		-		366,461		-				366,461
Total current assets		10,899,987		340,403		11,240,390		(1,360,403	)			9,879,987

Property and cable equipment, installation and other, net		4,625,081		635,849		5,260,930		32,258				5,293,188

Other Assets:
Long-term investments		193,847		-		193,847		-				193,847
Intangible assets, net		4,857,120		-		4,857,120		1,981,893		(1)		6,839,013
Financing costs, net		841,764		-		841,764		-				841,764
Due from affiliates		-		239,855		239,855		(239,855	)	(1)		-
Goodwill		17,074,690		-		17,074,690						17,074,690
Note receivable		17,974		-		17,974		-				17,974
Deposits and other		160,137		-		160,137		-				160,137
Total other assets		23,145,532		239,855		23,385,387		1,742,038				25,127,425

TOTAL ASSETS	$	38,670,600	$	1,216,107	$	39,886,707	$	413,893			$	40,300,600

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued liabilities	$	4,556,434		$	326,675	$	4,883,109		$	(326,675	)	(1)	$	4,656,434
										100,000		(1)
Due to affiliates		-			369,561		369,561			(369,561	)	(1)		-
Notes payable – officer		80,444			-		80,444			-				80,444
Income tax refund due		291,000			-		291,000			-				291,000
Deferred revenue		225,502			-		225,502			-				225,502
Customer deposits and other		36,150			-		36,150			-				36,150
Total current liabilities		5,189,530			696,236		5,885,766			(596,236	)			5,289,530

Long Term Liabilities:
Deferred revenue		20,903			-		20,903			-				20,903
Deferred lease liability		63,397			-		63,397			-				63,397
Long-term debt		4,377,611			-		4,377,611			-				4,377,611
Total long term liabilities		4,461,911			-		4,461,911			-				4,461,911

Commitments and Contingencies		-			-		-			-				-

Minorty Interest		4,388,300			-		4,388,300			-				4,388,300

Stockholders’ Equity :
Preferred stock, par value $0.001		-			-		-			-				-
Common stock, par value $0.001		66,807			-		66,807			867		(1)		67,674
Partners Capital		-			519,871		519,871			(519,871	)	(1)		-
Additional paid-in capital		104,975,067			-		104,975,067			1,529,133		(1)		106,504,200
(Accumulated deficit) retained earnings		(80,411,015	)		-		(80,411,015	)		-				(80,411,015	)
Stockholders’ equity		24,630,859			519,871		25,150,730			1,010,129				26,160,859

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	38,670,600		$	1,216,107	$	39,886,707		$	413,893			$	40,300,600

	Historical					Pro Forma
				Newport
	Telkonet			Telecommunication		Adjustments				Combined
	(unaudited)			(unaudited)

Total Revenue	$	4,912,876		$	1,102,028	$	-			$	6,014,904

Cost of Sales		4,312,350			245,461		-				4,557,811

Gross Profit		600,526			856,567		-				1,457,093

Costs and Expenses:
Research and Development		1,089,808			-		-				1,089,808
Selling, General and Administrative		8,504,818			785,254		-				9,290,072
Employee Stock Options		690,067			-		-				690,067
Depreciation and Amortization		362,520			48,558		125,884		(2)		536,962
Total Operating Expense		10,647,213			833,812		125,884				11,606,909

Income (Loss) from Operations		(10,046,687	)		22,755		(125,884	)			(10,149,816	)

Other Income (Expenses):
Interest Income		72,458			-		-				72,458
Interest Expense		(200,557	)		-		-				(200,557	)
Total Other Income (Expenses)		(128,099	)		-		-				(128,099	)

Income (Loss) Before Minority Interest and Provision for Income Taxes		(10,174,786	)		22,755		(125,884	)			(10,277,915	)

Minority Interest		188,440			-		38,158		(3)		226,598
Provision for Income Taxes		-			-		-				-
Net Income (Loss)	$	(9,986,346	)	$	22,755	$	87,726			$	10,051,317

Loss per common share (basic and dilutive)		($0.16	)		-		-				($0.16	)
Weighted average common shares outstanding		62,699,631			-		866,856		(1)		63,566,487

	Historical					Pro Forma
				Newport
	Telkonet			Telecommunication		Adjustments				Combined

Total Revenue	$	5,181,328		$	1,851,135	$	-			$	7,032,463

Cost of Sales		4,480,659			416,067		-				4,896,726

Gross Profit		700,669			1,435,068		-				2,135,737

Costs and Expenses:
Research and Development		1,925,746			-		-				1,925,746
Selling, General and Administrative		14,346,364			1,271,327		-				15,617,691
Impairment Write Down in Investment in Affiliate		92,000			-		-				92,000
Non-Employee Stock Compensation		277,344			-		-				277,344
Employee Stock Compensation		1,080,895			-		-				1,080,895
Depreciation and Amortization		540,906			97,738		251,469		(2)		890,113
Total Operating Expense		18,263,255			1,369,065		251,469				19,883,789

Income (Loss) from Operations		(17,562,586	)		66,003		(251,469	)			(17,748,052	)

Other Income (Expenses):
Loss on Early Extinguishment of Debt		(4,626,679	)		-		-				(4,626,679	)
Interest Income		327,184			-		-				327,184
Interest Expense		(5,594,604	)		-		-				(5,594,604	)
Total Other Income (Expenses)		(9,894,099	)		-		-				(9,894,099	)

Income (Loss) Before Minority Interest and Provision for Income Taxes		(27,456,685	)		66,003		(251,469	)			(27,642,151	)

Minority interest		19,569			-		18,547		(3)		38,116
Provision for Income Taxes		-			-		-				-
Net Income (Loss)	$	(27,437,116	)	$	66,003	$	232,922			$	(27,604,035	)

Loss per common share (basic and dilutive)		($0.54	)								($0.53	)
Weighted average common shares outstanding		50,823,652					866,856		(1)		51,690,508

The following unaudited pro forma condensed combined balance sheet is derived from the balance sheets of Newport Telecommunications Co., a New Jersey general partnership (“NTC”) and Telkonet at June 30, 2007. The unaudited pro forma condensed combined balance sheet reflects our purchase of the operations and substantially all the assets of NTC. The proforma balance sheet was prepared as if the acquisition occurred on June 30, 2007 and the statements of operations were prepared as if the acquisition had 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.

On July 18, 2007, MSTI Holdings, Inc. (“MSTI”), Telkonet’s majority-owned subsidiary, acquired substantially all of the assets of Newport Telecommunications Co. (“NTC”), a New Jersey general partnership, relating to NTC’s business of providing broadband internet and telephone services to customers at certain residential and commercial properties in the development known as Newport in Jersey City, New Jersey (the “Acquisition”).

The consideration paid in the Acquisition was $2,550,000 (excluding direct acquisition costs), consisting of (i) 866,856 unregistered shares of Telkonet, Inc., which owns 63% interest in MSTI, equal to $1,530,000 (based on the average closing prices for Telkonet Common Stock for the ten trading days immediately prior to the closing date), and (ii) $1,020,000 in cash, subject to adjustments. The total consideration will be increased or decreased depending on the number of subscriber accounts acquired in the Acquisition that were in good standing at that time. The number will be determined within 120 days of the closing of the Acquisition. The stock certificates representing the Telkonet Common Stock, and $510,000 of the cash consideration were paid to U.S. Bank National Association, as escrow agent, to be released after the final determination of the number of subscriber accounts in good standing acquired in the Acquisition. In connection with the Acquisition, MSTI has agreed to either (a) pay Telkonet, Inc. $1,530,000 in cash or (b) issue to Telkonet, Inc. unregistered shares of our common stock equal to $1,530,000 (based at a price per share of MSTI common stock equal to the lesser of (i) the closing price for MSTI common stock on the day of the issuance of the shares of common stock to Telkonet, Inc. and (ii) $1.00 per share) as consideration for Telkonet, Inc.’s issuance of the Telkonet Common Stock to NTC.

The acquisition of NTC was accounted for using the purchase method in accordance with SFAS 141, “Business Combinations.” The results of operations for NTC have been included in the Consolidated Statements of Operations since the date of acquisition. The components of the purchase price were as follows:

(*) As of July 18, 2007, $1,981,893 excess of fair value of the purchase price over the carrying amount of NTC’s net assets has been allocated to NTC’s subscriber list and a restrictive covenant. No allocation to other intangible assets has been included in the pro forma unaudited condensed consolidated balance sheet as such amount is currently believed to be immaterial. The final allocation of the purchase price is subject to adjustment upon detailed review of the net assets acquired and their fair values.

(1) Reflects the $2,650,000 acquisition of the assets and operations of Newport Telecommunications Co. by MSTI comprised of $1,020,000 cash and 866,856 shares of Telkonet common stock and accrued acquisition costs.

(2) Reflects the annualized amortization expense of the Newport Telecommunications Co. intangible assets based upon an eight-year amortization.

(3) Reflects the effect of the 10% minority interest in Newport Telecommunications Co., for the year ended December 31, 2006 and 37% minority interest for the six months ended June 30, 2007, on a pro forma basis.

Current assets	$	-
Property, plant and equipment		668,107
Restrictive Covenant		100,000
Subscriber List (*)		1,881,893

Total assets acquired		2,650,000
Net assets acquired	$	2,650,000

Telkonet, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year ended December 31, 2006

	As Reported June 30, 2007
Telkonet’s Common stock	$	1,530,000
Cash		1,020,000
Direct acquisition costs		100,000
Total Purchase Price	$	2,650,000