Telkonet (TKOI) 8-K/A Financial Statements and Exhibits

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.

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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

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Telkonet, Inc.

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

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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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