UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

[X]     Annual Report Pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934

                  FOR THE FISCAL YEAR ENDED: December 31, 2000

                                       OR

[ ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934

               For the transition period from ________ to________

                        Commission file number: 333-47986

                                 TELKONET, INC.
                                 --------------
        (Exact name of small business issuer as specified in its charter)

                 Utah                                   87-0627421
             ------------                               ----------
   (State or other jurisdiction of           (IRS Employee Identification No.)
    incorporation or organization)

                  902 A Commerce Road Annapolis, Maryland 21401
                  ---------------------------------------------
                    (Address of principal executive offices)

                                 (410) 897-5900
                                 --------------
                           (Issuer's telephone number)

Securities Registered pursuant to section 12(g) of the Act:   None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [X]         No [ ]

Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]

State issuer's revenues for its most recent fiscal year:     none

Aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 31, 2000: $4,939,275

Number of outstanding shares of the registrant's par value $0.001 common stock
as of April 11, 2001:  21,815,371

<PAGE>

                                 TELKONET, INC.
                                   FORM 10-KSB
                                      INDEX
                                                                           PAGE
                                                                           ----
                                     Part I

Item 1.  Business............................................................3

Item 2.  Properties..........................................................6

Item 3.  Legal Proceedings...................................................6

Item 4.  Submission of Matters of a Vote of Security Holders.................6

                                Part II

Item 5.  Market for Registrant's Common Equity and Related
         Stockholder Matters.................................................6

Item 6.  Management's Discussion and Analysis of Financial
         Condition and Results of Operation..................................6

Item 7.  Financial Statements and Supplementary Data........................14

Item 8.  Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosure................................14

                               Part III

Item 9.  Directors and Executive Officers of the Registrant.................14

Item 10. Executive Compensation.............................................15

Item 11. Security Ownership of Certain Beneficial Owners and Management.....16

Item 12. Certain Relationships and Related Transactions.....................17

                                Part IV

Item 13. Exhibits, Financial Statement Schedule and Reports on Form 8-K.....17

Signatures..................................................................17

                                       2
<PAGE>

                                     Part I

ITEM 1. BUSINESS

When used in this Form 10-KSB, the words "expects," "anticipates," "estimates"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to risks and uncertainties, including those set
forth below under "Risks and Uncertainties," that could cause actual results to
differ materially from those projected. These forward-looking statements speak
only as of the date hereof. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions or circumstances on
which any statement is based. This discussion should be read together with the
financial statements and other financial information included in this Form
10-KSB.

General
-------

Telkonet, Inc. (hereinafter "The Company"), a development stage company, was
incorporated on November 1999 under the laws of the State of Utah. Its Articles
of Incorporation provided for authorized capital of One hundred million
(100,000,000) shares of Common Stock, par value $0.001.

There have been no bankruptcy, receiverships, or similar proceedings by or
against the Company. There has been no material reclassification, merger,
consolidation, or purchase or sale of any significant asset(s).

The Company's principal executive offices are located at: 902 A Commerce Road
Annapolis, Maryland 21401.

Business History
----------------

The Company was formed to develop applications for emerging power-line carrier
technologies. The Company believes that the power line represents an attractive
opportunity to deliver Internet and telephony connectivity to consumers. Because
the power line is the most ubiquitous wired network in the home, service
providers and consumers avoid the expense, time and inconvenience of installing
new wiring. Consumers can achieve reliable, secure communications simply by
plugging our devices into electrical outlets. Many of the difficulties
associated with power-line communications that historically have prevented the
achievement of high data transmission rates can now be overcome with TCI's
solutions. TCI's solutions would bring cost-effective communication services
where the telecommunication backbone infrastructure is not mature and service is
not readily available.

On August 30th, 2000, a Utah Corporation formerly known as Comstock Coal
Company, Inc. was merged into Telkonet, Inc., OTCBB: "TLKO", which has 21.8
million shares of common stock outstanding. Telkonet Communications, Inc. is a
wholly owned subsidiary of Telkonet, Inc.

The Company has applied for patents that cover its unique technology, and
intends to utilize recently announced advancements in transmission speeds to
build next generation devices for field tests and marketing demonstrations.
TCI's technology would be licensed or sold to strategic customers and partners
with vertical markets where TCI's products and services would satisfy demand for
communication services. TCI has developed working prototypes for two products
designed to provide telephony services and Internet connectivity through
transmission over existing power line networks.

Telephony Product
-----------------

The first product combines digital signaling equipment to deliver telephony
services to end users via existing standard power-line infrastructure. The TCI
telephony solution uses hybrid system and voice-over-Internet-protocol (VOIP)
equipment. The telephony product uses the existing power lines as the carrier

                                       3
<PAGE>

from the transformer to the home or business. The central office of the Public
Service Telephone Network provides the wide band (E1 Line) to each transformer
for interconnectivity to the TCI power line carrier telephony system. This
approach greatly reduces the cost and time required to bring telecommunication
services to geographic locations that do not have such services.

Internet Product
----------------

The second product provides Internet connectivity via geosynchronous satellite,
or alternative medium, to a very small aperture terminal (VSAT) and then
distributes the Internet service along power lines connected to end users. Use
of the power line substantially improves the cost effectiveness of this Internet
delivery system, and avoids the traditional per minute telecom charges that are
incurred in geographic locations such as Europe. Interfacing TCI's solution to
the backbone of the Internet and bypassing the telephone system avoid these per
minute charges. By taking the Internet signal to the satellite and downloading
the signal to a Vsat terminal for distribution purposes, the TCI proprietary
solution unburdens the telephone system and provides cost savings to end users
and service providers.

In 1999, Telkonet Communications, Inc. was formed to develop applications for
the emerging power line carrier technologies.

Business Development
--------------------

Though in its developmental stage, the Company believes that it has refined a
business model that will provide Internet services to small and medium size
businesses. The Telkonet solution interfaces to the backbone of the Internet by
taking the signal from any of these sources, and through its own Telkonet
Powerline Router distributing the Internet to the residents over the existing
electrical power lines in the building by simply plugging the Telkonet Router
into the nearest outlet. Every existing electrical outlet in the structure would
yield immediate access to the Internet for the end user. The second generation
of this product has been developed and tested by the Company and is being
prepared for beta testing in the second quarter of 2001.

Marketing Strategy
------------------

The Company will market its products principally through service providers who
have already been looking for solutions to the access problem. Our products will
allow them to reach whole new classes of users. We will continue to examine,
select and approach entities with existing distribution channels that will be
enhanced by the Telkonet offerings.

Another opportunity for creating product recognition is through opportunities
associated with The Digital Divide. The Telkonet solution requires a strategic
relationship to be developed with an Internet service provider that can provide
service to underserved rural locations. Telkonet has begun discussions with a
major provider of ISP products and services regarding the domestic introduction
of the Internet product designed for multi-users that would be compatible with
and complimentary to the Digital Divide solution. We intend to continue to
target Internet Service Providers (ISP's) who would provide service to these and
other clients.

                                       4
<PAGE>

Competition
-----------

A few companies, such as Oneline and Mainnet have announced products that are
adapted to the European 220 volt topology but in all cases these products are
not in commercial use and are not immediately available. In the US, powerline
communications companies are focused on the single-family home networking
market. Indirect competitors are solutions which require stringing new wiring
and connections, or which utilize radio frequency (RF) signaling. Costs and
physical limitations restrict these methodologies in many conditions currently.

Employees
---------

Currently, the Company has 4 full time and 1 part time employees. Additional
staff will be added, as the success of the business demands it.

Government Regulations
----------------------

The FCC regulates RF emission levels for all electrical equipment. The silicon
providers to the powerline industry are currently completing FCC certification
testing of the devices that they will provide Telkonet and will make any changes
necessary to their devices that the testing will mandate. No such problems are
anticipated

Raw Materials
-------------

The Company does not rely on any one or more raw materials or raw material
suppliers for the normal course of business.

Patents
-------

The Company filed two Provisional Patent Applications with the U.S. Patent
Office. "Methods and Apparatus for Providing Telephone Communications Services"
was files on February 10 2000, and "Digital Signal Communications for Computers"
was filed on March 7, 2000.

On February 12, 2001 the Company filed a Standard Patent Application for its
"Methods and Apparatus for Providing Telephone Communications Services" and on
March 7,2001 filed a Utility Patent Application for its "Power Line Telephony
Exchange". Both the Standard and the utility patents claim priority for
provisional patents that were submitted.

Customers
---------

The Company currently does not rely on one or a few customers to continue
business nor does the Company believe such a dependency shall evolve in the
future for the Company. Potential customers include: 1) General Use applications
such as multi-occupant residences, businesses, office buildings, schools and
universities, to provide basic service or as a revenue generator for the
building owner. 2) Hotels- for fast economically favorable rollout of Internet
access offerings to guests as a revenue generator, at low capital cost. 3)
Western Europe- to avoid per minute tariff structures. 4) Any Location
world-wide with limited telecom infrastructure, through Satellite link.

                                       5
<PAGE>

ITEM 2. PROPERTIES

The Company currently leases office space at 902A Commerce Drive, Annapolis, MD
21401. The Company currently occupies approximately 3,000 square feet of
designated office space, designed to provide short term/temporary accommodation
solution to emerging and growing businesses. The facility allows businesses to
lease spaces on a project basis or short-term lease until a more permanent
solution can be sought out. The Company believes the ability to expand into
these facilities as the business plan is executed, will be adequate for its
current requirements.

The Company's future plans will likely require more permanent additional space
as its business plan progresses. If, and when, this should occur, the Company
will look into expansion into target markets that will be able to financially
support the additional office space and manpower required.

(a)     Real Estate                        None

(b)     Computer and Office Equipment      $75,000

ITEM 3. LEGAL PROCEEDINGS

The Company is not, and does not anticipate being a party to any legal
proceedings in the foreseeable future.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted during the fiscal year covered by this report to a
vote of security holders of the Company, through the solicitation of proxies or
otherwise.

                                     Part II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a)      The Company's Common Shares are currently quoted on the over the
         counter bulletin board market under the ticker symbol TLKO

(b)      As of December 31, 2000, the Company had approximately 114 shareholders
         of record of the common stock.

(c)      No dividends on outstanding common stock have been paid within the last
         two fiscal years, and interim periods. The Company does not anticipate
         or intend upon paying dividends for the foreseeable future.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATION

The following discussion contains forward-looking statements that are subject to
significant risks and uncertainties. There are several important factors that
could cause actual results to differ materially from historical results and
percentages and results anticipated by the forward-looking statements. The
Company has sought to identify the most significant risks to its business, but
cannot predict whether or to what extent any of such risks may be realized nor
can there be any assurance that the Company has identified all possible risks
that might arise. Investors should carefully consider all of such risks before
making an investment decision with respect to the Company's stock. In
particular, investors should refer to the section entitled, "Factors that May
Affect Future Results and Market Price of Stock".

                                       6
<PAGE>

Plan of Operation
-----------------

The Company is still in the development stage and is yet to earn revenues from
operations. The Company may experience fluctuations in operating results in
future periods due to a variety of factors including, but not limited to, market
acceptance of the Internet and power line communication technologies as a medium
for customers to purchase the Company's products, the Company's ability to
acquire and deliver high quality products at a price lower than currently
available to consumers, the Company's ability to obtain additional financing in
a timely manner and on terms favorable to the Company, the Company's ability to
successfully attract customers at a steady rate and maintain customer
satisfaction, Company promotions, branding and sales programs, the amount and
timing of operating costs and capital expenditures relating to the expansion of
the Company's business, operations and infrastructure and the implementation of
marketing programs, key agreements and strategic alliances, the number of
products offered by the Company, the number of returns experienced by the
Company, and general economic conditions specific to the Internet, power-line
communications, and the communications industry.

Revenues
--------

The Company generated no revenues from operations from its inception. The
Company believes it will begin earning revenues from operations within the next
twelve months as it transitions from a development stage company to that of an
active growth and acquisition stage company.

On October 3, 2000 the Company entered into a Sales/Marketing Agreement with
Medical Advisory Systems, Inc. (MAS) (AMEX:DOC) that provides for MAS to perform
international business development, marketing (including demographic analysis),
and sales/support services for the Company's products and services through an
international network of call centers owned by CORIS Group International of
Paris, France. Through its agreement with CORIS, MAS will market the Company's
power-line technology in up to 38 countries located on six continents. This
geographic focus would include all the former Soviet Republics in Eastern Europe
where the need for basic telephony exists for most rural citizens. Also, MAS
would provide legal, business, regulatory and technical consulting for countries
targeted by the Company where MAS is positioned. MAS would make introductions
with other potential partners for the Company for the purpose of increasing the
scope and deployment of its power-line technology. The Company would reimburse
MAS for all costs associated with pursuing the agreed upon services plus an
administrative fee for sales contracts that are successfully completed on behalf
of the Company.

Costs and Expenses
------------------

From its inception on November 3, 1999 through December 31, 2000, the Company
has not generated any revenues. The Company has incurred expenses of $963,693
during this period. These expenses were associated principally with compensation
to employees, product development costs and professional services.

                                       7
<PAGE>

Liquidity and Capital Resources
-------------------------------

As of December 31, 2000, the Registrant had a deficiency in working capital
$248,511. As a result of the Company's operating losses from its inception
through December 31, 2000, the Registrant generated a cash flow deficit of
$680,350 from operating activities. Cash flows used in investing activities was
$89,029 during the period November 3, 1999 through December 31, 2000. The
Company met its cash requirements during this period through the private
placement of $726,846 of the Company's common stock and loan proceeds of $
235,000.

While the Company has raised capital to meet its working capital and financing
needs in the past, additional financing is required in order to meet the
Company's current and projected cash flow deficits from operations and
development. The Company is seeking financing in the form of equity in order to
provide the necessary working capital. The Company currently has no commitments
for financing. There are no assurances the Company will be successful in raising
the funds required.

Product Research and Development
--------------------------------

Company-sponsored research and development costs related to both present and
future products are expended in the period incurred. Total expenditures on
research and product development for the period November 3, 1999 (date of
inception) through December 31, 2000 were approximately $120,000.

Telkonet has designed and constructed our second generation of a powerline
communication system for high speed Internet provision that can be implemented
more quickly and inexpensively than any other existing method. Our current
generation powerline communication systems, operating at speeds in excess of 2
Mega bits per second (Mbps), will allow users throughout multi-dwelling units,
schools, hotels or office buildings to share high speed Internet access
facilities. This product is not only operating as a prototype in our facility,
but is being used as our reliable day-to-day communication backbone

Acquisition or Disposition of Plant and Equipment
-------------------------------------------------

The Company does not anticipate the sale of any significant property, plant or
equipment during the next twelve months. The Company does not anticipate the
acquisition of any significant property, plant or equipment during the next 12
months, other than computer equipment and peripherals used in the Company's
day-to-day operations. The Company believes it has sufficient resources
available to meet these acquisition needs.

                                       8
<PAGE>

Number of Employees
-------------------

During the period ended December 31, 2000, the Company had five (5) employees.
In order for the Company to attract and retain quality personnel, the Company
anticipates it will continue to offer competitive salaries to current and future
employees. The Company anticipates increasing its employment base to ten (10) to
fifteen (15) employees during the next 12 months. As the Company continues to
expand, the Company will incur additional costs for personnel. This projected
increase in personnel is dependent upon the Company generating revenues and
obtaining sources of financing. There are no assurances the Company will be
successful in raising the funds required or generating revenues sufficient to
fund the projected increase in the number of employees.

Trends, Risks and Uncertainties
-------------------------------

The Company has sought to identify what it believes to be the most significant
risks to its business, but cannot predict whether or to what extent any of such
risks may be realized nor can there be any assurances that the Company has
identified all possible risks that might arise. Investors should carefully
consider all of such risk factors before making an investment decision with
respect to the Company's stock.

Limited Operating History; Anticipated Losses; Uncertainly of Future Results
----------------------------------------------------------------------------

Telkonet, Inc. has only a limited operating history upon which an evaluation of
the Company and its prospects can be based. The Company's prospects must be
evaluated with a view to the risks encountered by a company in an early stage of
development, particularly in light of the uncertainties relating to the new and
evolving distribution methods with which the Company intends to operate and the
acceptance of the Company's business model. The Company will be incurring costs
to develop, introduce and enhance its interactive website, to establish
marketing relationships, to acquire and develop products that will compliment
each other and to build an administrative organization. To the extent that such
expenses are not subsequently followed by commensurate revenues, the Company's
business, results of operations and financial condition will be materially
adversely affected. There can be no assurance that the Company will be able to
generate sufficient revenues from the sale of their first product suite, and
other product candidates. The Company expects negative cash flow from operations
to continue for the next 12 months as it continues to develop and market its
business. If cash generated by operations is insufficient to satisfy the
Company's liquidity requirements, the Company may be required to sell additional
equity or debt securities. The sale of additional equity or convertible debt
securities would result in additional dilution to the Company's stockholders.

Potential Fluctuations in Quarterly Operating Results
-----------------------------------------------------

The Company's quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, most of which are outside the
Company's control, including: the level of use of the Internet; the demand for

                                       9
<PAGE>

high-tech goods; seasonal trends in both Internet use, the amount and timing of
capital expenditures and other costs relating to the expansion of the Company's
Internet operations; price competition or pricing changes in the industry;
technical difficulties or system downtime; general economic conditions, and
economic conditions specific to the Internet and Communications Industry. The
Company's quarterly results may also be significantly impacted by the impact of
the accounting treatment of acquisitions, financing transactions or other
matters. Particularly at the Company's early stage of development, such
accounting treatment can have a material impact on the results for any quarter.
Due to the foregoing factors, among others, it is likely that the Company's
operating results will fall below the expectations of the Company or investors
in some future quarter.

Limited Public Market, Possible Volatility of Share Price
---------------------------------------------------------

The Company's Common Stock is currently quoted on the NASD OTC Bulletin Board
under the ticker symbol TLKO.OB. As of December 31, 2000, there were
approximately 21,815,371 shares of Common Stock outstanding. There can be no
assurance that a trading market will be sustained in the future. Factors such
as, but not limited to, technological innovations, new products, acquisitions or
strategic alliances entered into by the Company or its competitors, failure to
meet security analysts' expectations, government regulatory action, patent or
proprietary rights developments, and market conditions for technology stocks in
general could have a material effect on the volatility of the Company's stock
price.

Recent Accounting Pronouncements
--------------------------------

The Company adopted Statement of Financial Accounting Standards No. 132,
Employers' Disclosures about Pension and Other-Post Employment Benefits ("SFAS
132"). SFAS No. 132 establishes disclosure requirements regarding pension and
post employment obligations. SFAS No. 132 does not effect the company as of
December 31, 2000.

In March 1998, Statement of Position No. 98-1 was issued, which specifies the
appropriate accounting for costs incurred to develop or obtain computer software
for internal use. The new pronouncement provides guidance on which costs should
be capitalized, and over what period such costs should be amortized and what
disclosures should be made regarding such costs. This pronouncement is effective
for fiscal years beginning after December 15, 1998, but earlier application is
acceptable. Previously capitalized costs will not be adjusted. The Company
believes that it is already in substantial compliance with the accounting
requirements as set forth in this new pronouncement, and therefore believes that
adoption will not have a material effect on financial condition or operating
results.

The Company adopted Statement of Financial Standards No. 133, Accounting for
Derivative Instruments and for Hedging Activities ("SFAS No. 133") in the year
ended December 31, 2000. SFAS No.133 requires that certain derivative
instruments be recognized in balance sheets at fair value and for changes in
fair value to be recognized in operations. Additional guidance is also provided
to determine when hedge accounting treatment is appropriate whereby hedging
gains and losses are offset by losses and gains related directly to the hedged
item. SFAS No. 133's impact on the Company's financial statements is not
expected to be material as the Company has not historically used derivative and
hedge instruments.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements, which
will become effective December 31, 2000. The Company does not expect the
standard to have a material effect on its financial condition or operating
results.

                                       10
<PAGE>

In March 2000, the FASB issued interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25". FIN 44 clarifies the application of APB No. 25 for (a) the
definition of employee for purposes of applying APB No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 2, 2000 but certain
conclusions cover specific events that occur after either December 15, 1998 or
January 12, 2000. The adoption of FIN 44 did not have an affect on the Company's
financial statements but may impact the accounting for grants or awards in
future periods.

Risk Factors That May Affect Future Results and Market Price of Stock
---------------------------------------------------------------------

The business of the Company involves a number of risks and uncertainties that
could cause actual results to differ materially from results projected in any
forward-looking statement, or statements, made in this report. These risks and
uncertainties include, but are not necessarily limited to the risks set forth
below. The Company's securities are speculative and investment in the Company's
securities involves a high degree of risk and the possibility that the investor
will suffer the loss of the entire amount invested.

LIMITED OPERATING HISTORY; ANTICIPATED LOSSES; UNCERTAINLY OF FUTURE RESULTS

The Company was organized in 1999, and has no operating history upon which an
evaluation of its business and prospects can be based. The Company's prospects
must be evaluated with a view to the risks encountered by a company in an early
stage of development, particularly in light of the uncertainties relating the
acceptance of the Company's business model.

The Company will be incurring costs to develop and market its IT solutions, to
establish marketing relationships, and to build an administrative organization.
There can be no assurance that the Company will be profitable on a quarterly or
annual basis. In addition, as the Company expands its business network and
marketing operations it will likely need to increase its operating expenses,
broaden its customer support capabilities, and increase its administrative
resources. To the extent that such expenses are not subsequently followed by
commensurate revenues, the Company's business, results of operations and
financial condition will be materially adversely affected.

POSSIBLE NEED FOR ADDITIONAL FINANCING

It is possible that revenues from the Company's operations may not be sufficient
to finance its initial operating cost to reach breakeven. If this were to occur,
the Company would need to raise or find additional capital. While the Company
expects to be able to meet its financial obligations for approximately the next
twelve months, there is no assurance that, after such period, the Company will
be operating profitably. If they are not, there can be no assurance that any
required capital will be obtained on terms favorable to the Company. Failure to
obtain adequate additional capital on favorable terms could result in
significant delays in the expansion of new services and market share and could
even result in the substantial curtailment of existing operations and services
to clients.

UNPREDICTABILITY OF FUTURE REVENUES; POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS

As a result of the Company's lack of operating history and the emerging
nature of the market in which it competes, the Company is unable to forecast its
revenues accurately. The Company's current and future expense levels are based
largely on its investment/operating plans and estimates of future revenue and
are to a large extent based on the Company's own estimates. Sales and operating
results generally depend on the volume of, timing of, and ability to obtain
customers, orders for services received, and revenues therefrom generated. These
are, by their nature, difficult at best to forecast.

The Company may be unable to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall or delay. Accordingly, any significant
shortfall or delay in revenue in relation to the Company's planned expenditures
would have an immediate adverse affect on the Company's business, financial
condition, and results of operations. Further, in response to changes in the
competitive environment, the Company may from time to time make certain pricing,
service, or marketing decisions that could have a material adverse effect on the
Company's business, financial condition, operating results, and cash flows.

                                       11
<PAGE>

DEVELOPING MARKET; ACCEPTANCE OF THE INTERNET AS A MEDIUM FOR COMMERCE JUST NOW
BEING PROVEN

The Company's long-term viability is substantially dependent upon the continued
widespread acceptance and use of the Internet as a medium for business commerce,
in terms of the sales of both products and services to businesses and
individuals. The use of the Internet as a means of business sales and commerce
has only recently reached a point where many companies are making reasonable
profits from their endeavors therein, and there can be no assurance that this
trend will continue.

The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. There can be no
assurance that the Internet infrastructure will continue to be able to support
the demands placed on it by this continued growth. In addition, delays in the
development or adoption of new standards and protocols to handle increased
levels of Internet activity or increased governmental regulation could slow or
stop the growth of the Internet as a viable medium for business commerce.
Moreover, critical issues concerning the commercial use of the Internet
(including security, reliability, accessibility and quality of service) remain
unresolved and may adversely affect the growth of Internet use or the
attractiveness of its use for business commerce.

The failure of the necessary infrastructure to further develop in a timely
manner, or the failure of the Internet to continue to develop rapidly as a valid
medium for business would have a material adverse effect on the Company's
business, financial condition, operating results, and cash flows.

UNPROVEN ACCEPTANCE OF THE COMPANY'S SERVICES AND/OR PRODUCTS

The Company is still in its development stage. As a result, it does not know
with any certainty whether its services and/or products will be accepted within
the business marketplace. If the Company's services and/or products prove to be
unsuccessful within the marketplace, or if the Company fails to attain market
acceptance, it could materially adversely affect the Company's financial
condition, operating results, and cash flows.

DEPENDENCE ON KEY PERSONNEL

The Company's performance and operating results are substantially dependent on
the continued service and performance of its officer and directors. The Company
intends to hire additional technical, sales, and other personnel as they move
forward with their business model. Competition for such personnel is intense,
and there can be no assurance that the Company can retain its key technical
employees, or that it will be able to attract or retain highly qualified
technical and managerial personnel in the future. The loss of the services of
any of the Company's key employees or the inability to attract and retain the
necessary technical, sales, and other personnel could have a material adverse
effect upon the Company's business, financial condition, operating results, and
cash flows. The Company does not currently maintain "key man" insurance for any
of its key employees.

DEPENDENCE ON THE INTERNET

Online companies have experienced interruptions in their services as a result of
outages and other delays occurring due to problems with the Internet network
infrastructure, disruptions in Internet access provided by third-party providers
or failure of third party providers to handle higher volumes of user traffic. If
Internet usage grows, the Internet infrastructure or third-party service
providers may be unable to support the increased demands which may result in a
decline of performance, reliability or ability to access the Internet. If
outages or delays frequently occur in the future, Internet usage, as well as
usage of the Company's Internet Web-sites, could grow more slowly or decline.

COMPETITION

The IT solutions market in which the Company will operate is very competitive.
Many competitors have substantially greater, financial, technical, marketing,
and distribution resources than the Company.

In all its markets, the Company competes against a large number of companies of
varying sizes and resources. There are an increasing number of competitive
services and products offered by a growing number of companies. Increased
competition in any service or product area may result in a loss of a client,
reduction in sales revenue, or additional price competition, any of which could

                                       12
<PAGE>

have a material adverse effect on the Company's operating results. In addition,
existing competitors may continue to broaden their service and/or product lines
and other potential competitors may enter or increase their presence in the IT
solutions market, resulting in greater competition for the Company.

Most of the Company's current and potential competitors have substantially
longer operating histories, larger customer bases, greater name and service
recognition, and significantly greater financial, marketing, and other resources
than the Company. In addition, competitors may be acquired by, receive
investments from or enter into other commercial relationships with larger,
well-established and well-financed companies as the use of the Internet and
other online services increases. Many of the Company's competitors may be able
to respond more quickly to changes in customer preferences/needs, devote greater
resources to marketing and promotional campaigns, adopt more aggressive pricing
policies and devote substantially more resources to Internet site and systems
development than the Company.

It is possible that new competitors or alliances among competitors may emerge
and rapidly acquire market share. Increased competition may result in reduced
operating margins and/or loss of market share, either of which could materially
adversely affect the Company's business, results of operations and financial
condition. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or alliances of such
competitors, or that competitive pressures faced by the Company will not
materially adversely affect its business, financial condition, operating results
and cash flows.

INTELLECTUAL PROPERTY RIGHTS

As part of its confidentiality procedures, the Company expects to enter into
nondisclosure and confidentiality agreements with its key employees, and any
consultants and/or business partners and will limit access to and distribution
of its technology, documentation, and other proprietary information.

Despite the Company's efforts to protect any intellectual property rights it may
have, unauthorized third parties, including competitors, may from time to time
copy or reverse-engineer certain portions of the Company's technology and use
such information to create competitive services and/or products.

It is possible that the scope, validity, and/or enforceability of the Company's
intellectual property rights could be challenged by other parties, including
competitors. The results of such challenges before administrative bodies or
courts depend on many factors which cannot be accurately assessed at this time.
Unfavorable decisions by such administrative bodies or courts could have a
negative impact on the Company's intellectual property rights. Any such
challenges, whether with or without merit, could be time consuming, result in
costly litigation and diversion of resources, and cause service or product
delays. If such events should occur, the Company's business, operating results
and financial condition could be materially adversely affected.

RISKS OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS

The Company's success will depend on its ability to develop Information
Technology solutions that will meet customers' changing requirements. The IT
solutions industry is characterized by rapidly changing technology, evolving
industry standards, and changes in customer need and frequent new service and
product introductions. The Company's future success will depend, in part, on its
ability to effectively use leading edge technologies, to continue to develop its
technological expertise, to enhance its current service, to develop new products
that meet changing customer preferences and to influence and respond to merging
industry standards and other technological changes on a timely and
cost-effective basis.

DEPENDENCE OF LICENSED TECHNOLOGY

The Company may rely on certain technology licensed from third parties, and
there can be no assurance that these third party technology licenses will be
available to the Company on acceptable commercial terms or at all.

                                       13
<PAGE>

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements attached to this Report on Form 10-KSB as pages F-1 to
F-14 are incorporated herein by reference.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

None.

                                    Part III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a) The following table furnishes the information concerning the Company's
directors and officers as of December 31, 2000. The directors of the Company are
elected every year and serve until their successors are elected and qualify.

     NAME               AGE            TITLE             TERM
     ----               ---            -----             ----
L. Peter Larson         51      President and CEO       3 years
David Grimes            63      Chairman and CTO        3 years
Stephen Sadle           55      Executive VP/COO        3 years
Robert P. Crabb         53      Corporate Secretary     3 years

The following table sets forth the portion of their time the Officers and
Directors devote to the Company:

L. Peter Larson                         100%
David Grimes                            50%
Stephen Sadle                           100%
Robert P. Crabb                         40%

The term of office for each director is one (1) year, or until his/her successor
is elected at the Company's annual meeting and is qualified. The term of office
for each officer of the Company is at the pleasure of the board of directors.

The board of directors does not have a nominating committee. Therefore, the
selection of persons or election to the board of directors was neither
independently made nor negotiated at arm's length.

(b)      Identification of Certain Significant Employees.

Strategic matters and critical decisions are handled by the directors and
executive officers of the Company.

(c)      Family Relationships.

None

(d)      Business Experience.

L. PETER LARSON, PRESIDENT & CHIEF EXECUTIVE OFFICER has an extensive background
in engineering and finance. After completing his BSEE and MS in Operations
Research at Rensselaer Polytechnic, he began his career with General Dynamics
Corporation. During his 20+-year career at GD, Larson served in various
executive positions including Vice President and Controller of their
international Services Company and Senior Vice President for Finance and CFO for

                                       14
<PAGE>

the Cessna Aircraft Company. While at Cessna he developed their European and
South American financing programs. Larson served as COO of Integrated
Communications System Networks, Inc. from 1995 to 1997, and was most recently a
consultant in several start-up and turn-around assignments for clients in
electronics manufacturing, software, Internet application development and
telecommunications, including CFO of Telepad Corporation and Financial advisor
to The Windermere Group.

DAVID W. GRIMES, CHAIRMAN, is a co-founder of the company. From 1963-1982 Grimes
was the Senior Executive with NASA for the Delta Program, heading the $200
Million per annum program. From 1982-1989 he was Founder and CEO of Transpace
Carriers Inc., a venture to commercialize the delta launch vehicle. From
1989-1992 he was the Engineering Division Director at EER Inc., of Seabrook
Maryland with responsibility for over 100 engineers and technicians on
electrical mechanical and thermal tasks for Goddard Space Flight Center. From
1992-1999, Chief Engineer for Final Analysis, Inc. and led the design and
development of the Low Earth Orbit constellation of 38 satellites for use in
global store and forward communications. Grimes is a recognized expert in space
and ground communications systems and brings this expertise to bear on the
implementation of the hybrid telephony and high speed Internet technology.

STEPHEN L. SADLE, CHIEF OPERATING OFFICER, is a co-founder of the
company.1970-1986 Sadle co-founder and was president of a successful
infrastructure construction and development company in the Washington D.C. metro
area and was awarded Small Businessman of the Year in 1980.1986-1999 He was Vice
President of Business Development and Sales for The Driggs Corporation, a major
heavy and infrastructure firm interfacing with both government and the private
sectors.1999-2000 Sadle was Vice President and General Sales Manager of
Internos, a provider of web based vertical intranet applications and developed
operating extranets in the transportation and construction industries. He brings
significant management, contracting and entrepreneurial skills to the company.

ROBERT P. CRABB, CORPORATE SECRETARY, has over 30 years of sales, marketing and
public and private corporate management experience. His entrepreneurial
expertise includes marketing consulting and commercial and residential real
estate development. Mr. Crabb's experience includes a career of sales management
with MetLife; he is the President and Managing Director of Susquehanna
Development L.L.C. a marketing consulting firm. He is the Corporate Secretary
and serves on the Board of Directors of Medical Advisory Systems, Inc.

(e)      Directors Compensation

Directors who are also officers of the Registrant receive no cash compensation
for services as a director.

ITEM 10. EXECUTIVE COMPENSATION

Section 16(a) of the Securities Exchange Act of 1934, as amended (The "Exchange
Act"), requires the Registrant's officers and directors, and persons who own
more than 10% of a registered class of the Registrant's equity securities, to
file reports of ownership and changes in ownership of equity securities of the
Registrant with the Securities and Exchange Commission and NASDAQ. Officers,
directors and greater-than 10% shareholders are required by the Securities and
Exchange Commission regulation to furnish to Registrant with copies of all
Section 16(a) that they file.

Some of the officers and directors of the Company will not devote more than a
portion of their time to the affairs of the Company. There will be occasions
when the time requirements of the Company's business conflict with the demands
of their other business and investment activities. Such conflict may require
that the company attempt to employ additional personnel. There is no assurance
that the services of such persons will be available or that they can be obtained
upon terms favorable to the Company.

                                       15
<PAGE>

EXECUTIVE COMPENSATION

(a)      Cash Compensation.

Compensation paid by the Company for all services provided up to December 31,
2000 to each of its executive officers

<TABLE>
                                    SUMMARY COMPENSATION TABLE OF EXECUTIVES
<CAPTION>

                                         Annual Compensation                      Long Term Compensation
                                      --------------------------                 ------------------------

(a)                           (b)     (c)           (d)              (e)         (f)          (g)            (h)
Name and Principal Position   Year    Salary        Bonus Annual     Other       Restricted   Underlying/    LTIP
                                      ($)           Compensation     Awards      Stock        Options        or
                                                    ($)                                       Securities     other
<S>                           <C>     <C>           <C>              <C>         <C>          <C>            <C>
L. Peter Larson, CEO          2000    $76,747                                                 200,000
David Grimes, Chairman        2000    $60,918                                                 160,000
Stephen Sadle, COO            2000    $76,747                                                 200,000
Robert P Crabb, Secretary     2000                                                            100,000
</TABLE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

a)      Beneficial owners of five percent (5%) or greater, of the Company's
common stock: No preferred stock is outstanding at the date of this offering.
The following sets forth information with respect to ownership by holders of
more than five percent (5%) of the Registrant's common stock known by the
Registrant based upon 21,815,371 shares outstanding at December 31, 2000.

<TABLE>
<CAPTION>

Title of Class          Name and Address of Beneficial Owner    Amount of Beneficial    Percent
                                                                Interest                of Class
<S>                     <C>                                           <C>               <C>
Common                  David Grimes, 1621 John Ross Lane,            5,131,917         21.3%
                        Crownsville MD
                        Stephen Sadle, 1200 John Ross Court,          5,922,694         24.6%
                        Crownsville, MD
                        Donald Erat, 13700 Canal Vista Court,         2,861,347         11.9%
                        Patomac, MD
                        L. Peter Larson, 125 SpaView Ave,             1,705,285         7.1%
                        Annapolis, MD
                        Ron Pickett, 2321 Ocean Point Drive,          2,658,964         11.0%
                        Wilmington, NC
                        FERST for St. Mary's Inc. 2321 Ocean          1,958,549         8.1%
                        Point Drive, Wilmington, NC
</TABLE>

b) The following sets forth information with respect to the Company's common
stock beneficially owned by each Officer and Director, and by all Directors and
Officers as a group, at December 31, 2000.

<TABLE>
<CAPTION>

Title of Class          Name and Address of Beneficial Owner    Amount of Beneficial    Percent
                                                                Interest                of Class
<S>                     <C>                                           <C>               <C>
Common                  David Grimes, 1621 John Ross Lane,            5,131,917         21.3%
                        Crownsville MD
                        Stephen Sadle, 1200 John Ross Court,          5,922,694         24.6%
                        Crownsville, MD
                        Robert P Crabb, 583 Lombard Rd. Rising Sun,   379,793           1.6%
                        MD
                        L. Peter Larson, 125 SpaView Ave,             1,705,285         6.8%
                        Annapolis, MD
</TABLE>

                                       16
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.
                                     Part IV

ITEM 13. EXHIBITS  AND REPORTS ON FORM 8-K

        (A) Exhibits

                The exhibits listed below are required by Item 601 of Regulation
S-K. Each management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K has been identified.

Exhibit
Number            Description of Document
------            -----------------------

3.1 (a)           Articles of Incorporation of the Registrant

3.2 (a)           By-laws of the Registrant

----------

(a)      Included as an Exhibit to the Company's Form 8-K dated August 30, 2000


        (B) Reports On Form 8-K.

                  The Company did not file any current reports on Form 8-K
during the reporting period.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Date:  April 16, 2001                    Telkonet, Inc.


                                     By: /S/ L. PETER LARSON
                                         ------------------------------------
                                         L. Peter Larson
                                         President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.



/s/ David Grimes                    Director                      April 16, 2001
-----------------------------
    David Grimes



/s/ Stephen Sadle                   Director                      April 16, 2001
-----------------------------
    Stephen Sadle



                                       17
<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                       FINANCIAL STATEMENTS AND SCHEDULES
                           DECEMBER 31, 2000 AND 1999

                         FORMING A PART OF ANNUAL REPORT
                 PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934

                                 TELKONET, INC.

                                      F-1

<PAGE>

                                 TELKONET, INC.

                          INDEX TO FINANCIAL STATEMENTS

--------------------------------------------------------------------------------


Report of Independent Certified Public Accountants                       F-2

Consolidated Balance Sheet at December 31, 2000 and 1999                 F-3

Consolidated Statement of Losses for the Years ended
December 31, 2000 and 1999 and for the Period November 3, 1999
(Date of Inception) through December 31, 2000                            F-4

Consolidated Statement of Deficiency in Stockholders' Equity
for the Period November 3, 1999 (Date of Inception) through
December 31, 2000                                                        F-5

Consolidated Statement of Cash Flows for the Years ended
December 31, 2000 and 1999 and for the Period November 3, 1999
(Date of Inception) through December 31, 2000                            F-6

Notes to Consolidated Financial Statements                        F-7 - F-13

                                      F-2

<PAGE>

                             STEFANOU & COMPANY, LLP
                          CERTIFIED PUBLIC ACCOUNTANTS

                                1360 Beverly Road
                                    Suite 305
                              McLean, VA 22101-3621
                                  703-448-9200
                               703-448-3515 (fax)
                                                               Philadelphia, PA
--------------------------------------------------------------------------------

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
               --------------------------------------------------

Board of Directors
Telkonet, Inc.
Annapolis, MD

         We have audited the accompanying consolidated balance sheets of
Telkonet, Inc. (a development stage company) as of December 31, 2000 and 1999
and the related consolidated statements of losses, deficiency in stockholders'
equity, and cash flows for the years ended December 31 ,2000 and 1999 and for
the period November 3, 1999 (date of inception) to December 31, 2000. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based upon
our audit.

         We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Telkonet, Inc. as of
December 31, 2000 and 1999, and the results of its operations and its cash flows
for the two years then ended, and from November 3, 1999 (date of inception), to
December 31, 2000, in conformity with generally accepted accounting principles.

         The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As shown in the financial
statements, the Company has incurred net losses since its inception. This raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to this matter are described in Note I. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

                                         /s/ STEFANOU & COMPANY, LLP
                                            ----------------------------
                                             Stefanou & Company, LLP
                                             Certified Public Accountants

McLean, Virginia
March 23, 2001

                                       F-3
<PAGE>
<TABLE>
                                         TELKONET, INC.
                                 (A DEVELOPMENT STAGE COMPANY)
                                   CONSOLIDATED BALANCE SHEET
                                   DECEMBER 31, 2000 AND 1999
<CAPTION>
                                                                             2000         1999
                                                                          ----------   ----------
<S>                                                                       <C>          <C>
                                     ASSETS
                                     ------

CURRENT ASSETS:
     Cash and equivalent                                                  $  10,450    $       -
     Deposits                                                                 4,625            -
                                                                          ----------   ----------
          Total Current Assets                                               15,075            -

PROPERTY AND EQUIPMENT-AT COST:
     Furniture, equipment and leasehold improvements                         89,029            -
     Less accumulated depreciation                                           22,080            -
                                                                          ----------   ----------
                                                                             66,949            -
                                                                          ----------   ----------
                                                                          $  82,024    $       -
                                                                          ==========   ==========

               LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
               --------------------------------------------------

CURRENT LIABILITIES:

     Accounts payable and accrued expenses                                $ 253,586    $  33,973
     Due to Shareholder (Note C)                                             10,000            -
                                                                          ----------   ----------
          Total current liabilities                                         263,586       33,973

COMMITMENTS AND CONTINGENCIES (NOTE F)

DEFICIENCY IN STOCKHOLDERS' EQUITY (NOTE D)
Common stock, par value $.001 per share; 100,000,000 shares authorized;
21,815,371 issued at December 31, 2000 and none at December 31, 1999         21,815            -
Additional paid in capital                                                  760,316            -
Deficit accumulated during development stage                               (963,693)     (33,973)
                                                                          ----------   ----------
          Deficiency in  stockholders' equity                              (181,562)     (33,973)
                                                                          ----------   ----------
                                                                          $  82,024    $       -
                                                                          ==========   ==========

                See accompanying notes to consolidated financial statements
</TABLE>
                                       F-4
<PAGE>
<TABLE>
                                           TELKONET, INC.
                                   (A DEVELOPMENT STAGE COMPANY)
                                  CONSOLIDATED STATEMENT OF LOSSES
<CAPTION>
                                                                                         For the Period
                                                                                           November 3,
                                                          For the Year    For the Year   1999, (Date of
                                                             Ended           Ended       Inception) to
                                                          December 31,    December 31,    December 31,
                                                             2000             1999           2000
                                                         -------------   -------------   -------------
<S>                                                      <C>             <C>             <C>
Cost and expenses:
     Research and development                            $    119,000    $          -    $    119,000
     General and administrative                               773,336          33,973         807,309
     Interest                                                  15,576               -          15,576
     Depreciation and amortization                             21,808               -          21,808
                                                         -------------   -------------   -------------

Loss before income taxes                                     (929,720)        (33,973)       (963,693)

Income (taxes) benefit                                              -               -               -
                                                         -------------   -------------   -------------

Net loss                                                 $   (929,720)   $    (33,973)   $   (963,693)
                                                         =============   =============   =============

Loss Per Common Share (basic and assuming dilution)      $      (0.04)   $      (0.00)   $      (0.05)
                                                         =============   =============   =============

Weighted Average Common Shares Outstanding (NOTE G)        20,891,349               -      20,757,454

                             See accompanying notes to consolidated financial statements
</TABLE>

                                       F-5
<PAGE>
<TABLE>
                                                       TELKONET, INC.
                                                (A DEVELOPMENT STAGE COMPANY)
                               CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY
                         FOR THE PERIOD NOVEMBER 3, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 2000
<CAPTION>
                                                                                                    Deficit
                                                                                                  Accumulated
                                                                                                     During
                                                         Common         Stock        Additional    Development
                                                         Shares         Amount     Paid-in-capital    Stage          Total
                                                      ------------   ------------   ------------  ------------   ------------
<S>                                                   <C>            <C>            <C>           <C>            <C>
Net Loss                                                        -    $         -    $         -   $   (33,973)   $   (33,973)
                                                      ------------   ------------   ------------  ------------   ------------
Balance at December 31, 1999                                    -              -              -       (33,973)       (33,973)
Shares issued to founders January, 2000, in
exchange for services and costs valued at $ .60
per share                                                  19,300            193         11,387             -         11,580
Shares issued in June 2000, for cash in
connection with private placement at $375 per
share, net of costs                                         1,735             17        644,219             -        644,236
Shares issued in July 2000, for warrants
exercised at a price of $ 375.00 per share                    190              -         71,250             -         71,250
Shares issued in August 2000, in connection
with the merger of Comstock Coal and Telkonet
Communications, Inc.                                   21,775,335         21,775              -             -         21,775
August 2000, retirement of Telkonet
Communications, Inc. shares                               (21,225)          (210)             -             -           (210)
Shares issued in October 2000, in exchange for
warrants exercised at a price of $1.00 per
share                                                      29,145             29         29,115             -         29,145
Shares issued in October 2000, in exchange for
warrants exercised at a price of $.40 per share            10,891             11          4,345             -          4,356
Net loss                                                        -              -              -      (929,720)      (929,720)
                                                      ------------   ------------   ------------  ------------   ------------
Balance at December 31, 2000                           21,815,371    $    21,815    $   760,316   $  (963,693)   $  (181,562)
                                                      ============   ============   ============  ============   ============

                         See accompanying notes to consolidated financial statements
</TABLE>

                                       F-6

<PAGE>
<TABLE>
                                                       TELKONET, INC.
                                                (A DEVELOPMENT STAGE COMPANY)
                                            CONSOLIDATED STATEMENT OF CASH FLOWS

<CAPTION>
                                                                                          For the period     For the Period
                                                                        For the Year     November 3, 1999    November 3, 1999,
                                                                           ended             (Date of           (Date of
                                                                        December 31,      Inception) to      Inception) to
                                                                            2000        December 31, 1999  December 31, 2000
                                                                      ----------------   ----------------   ----------------
<S>                                                                   <C>                <C>                <C>
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
         Net loss from development stage operations                   $      (929,720)   $       (33,973)   $      (963,693)
         Adjustments to reconcile net loss from  development
         stage operations to cash used for operating activities:
     Common Stock issued in exchange for services rendered                     11,387                  -             11,387
     Depreciation and amortization                                             21,808                  -             21,808
     Increase (decrease) in:
         Deposits                                                              (4,625)                 -             (4,625)
         Accounts payable and accrued expenses, net                           220,800             33,973            254,773
                                                                      ----------------   ----------------   ----------------
NET CASH USED BY OPERATING ACTIVITIES                                        (680,350)                 -           (680,350)

CASH FLOWS USED IN INVESTING ACTIVITIES:
         Capital expenditures, net of disposals                               (89,029)                 -            (89,029)
                                                                      ----------------   ----------------   ----------------
NET CASH USED IN INVESTING ACTIVITIES                                         (89,029)                 -            (89,029)

CASH FLOWS USED IN FINANCING ACTIVITIES:
         Proceeds from sale of common stock, net of costs                     748,929                  -            748,929
         Proceeds from stockholder advances                                    10,000                  -             10,000
         Proceeds from shareholder loans                                      235,000                  -            235,000
         Repayment of shareholder loans                                      (235,000)                 -           (235,000)
                                                                      ----------------   ----------------   ----------------
NET CASH, PROVIDED (USED) IN FINANCING ACTIVITIES                             758,929                  -            758,929
                                                                      ----------------   ----------------   ----------------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS                                10,450                  -             10,450
Cash and equivalents at beginning of period                                         -                  -                  -
                                                                      ----------------   ----------------   ----------------
CASH AND EQUIVALENTS AT END OF PERIOD                                 $        10,450    $             -    $        10,450
                                                                      ================   ================   ================

Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest                              $             -    $             -    $             -
Income taxes paid                                                                   -                  -                  -
Common stock issued for services                                               11,387                  -             11,387
Acquisition:
         Assets Acquired                                                            1                  -                  1
         Accumulated Deficit                                                    2,643                  -              2,643
         Liabilities Assumed                                                   (2,642)                 -             (2,642)
                                                                      ----------------   ----------------   ----------------
                                                                      $             1    $             -    $             1
                                                                      ================   ================   ================

                                    See accompanying notes to consolidated financial statements
</TABLE>
                                       F-7
<PAGE>

                                 TELKONET, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 1999

NOTE A - SUMMARY OF ACCOUNTING POLICIES

A summary of the significant accounting policies applied in the preparation of
the accompanying consolidated financial statements follows.

Business and Basis of Presentation
----------------------------------

Telkonet Communications, Inc., a wholly owned subsidiary of Telkonet, Inc.
("Company"), formerly Comstock Coal Company, Inc., was formed on November 3,
1999 under the laws of the state of Delaware. The Company is a development stage
enterprise, as defined by Statement of Financial Accounting Standards No. 7
("SFAS No. 7") and is seeking to develop, produce and market equipment enabling
the transmission of voice and data over electric utility lines. From its
inception through the date of these financial statements the Company has
recognized no revenues and has incurred significant operating expenses.

The consolidated financial statements include the accounts of the Company, and
its wholly-owned subsidiary, Telkonet Communications, Inc. Significant
intercompany transactions have been eliminated in consolidation.

Advertising
-----------

The Company follows the policy of charging the costs of advertising to expenses
incurred. The Company incurred no advertising costs during the year ended
December 31, 2000 and for the period November 3, 1999 (date of inception)
through December 31, 1999.

Property and Equipment
----------------------

For financial statement purposes, property and equipment are depreciated using
the straight-line method over their estimated useful lives (three to five years
for furniture, fixtures and equipment). The straight-line method of depreciation
is also used for tax purposes.

Marketable Securities
---------------------

Marketable securities consist primarily of corporate equity securities. The
Company's marketable securities are considered to be "available for sale" and
accordingly, are carried on the balance sheet at fair market value, which
approximates cost. Gains and losses from securities have not been material.

Income Taxes
------------

Income taxes are provided based on the liability method for financial reporting
purposes in accordance with the provisions of Statements of Financial Standards
No. 109, "Accounting for Income Taxes". Under this method deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be removed or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the consolidated statements of operations
in the period that includes the enactment date.

                                       F-8
<PAGE>

                                 TELKONET, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 1999

NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

Cash Equivalents
----------------

For purposes of the Statements of Cash Flows, the Company considers all highly
liquid debt instruments purchased with a maturity date of three months or less
to be cash equivalents.

Impairment of Long-lived Assets
-------------------------------

The Company has adopted Statement of Financial Accounting Standards No. 121
(SFAS 121). The Statement requires that long-lived assets and certain
identifiable intangibles held and used by the Company be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. SFAS No.121 also requires assets to be disposed
of be reported at the lower of the carrying amount or the fair value less costs
to sell.

Use of Estimates
----------------

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly actual results
could differ from those estimates.

Research and Development
------------------------

Company-sponsored research and development costs related to both present and
future products are expended in the period incurred. Total expenditures on
research and product development for 2000 and 1999 were $ 119,000 and $ 0,
respectively.

Concentrations of Credit Risk
-----------------------------

Financial instruments and related items which potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
trade receivables. The Company places its cash and temporary cash investments
with credit quality institutions. At times, such investments may be in excess of
the FDIC insurance limit. The Company currently has no customers.

                                       F-9
<PAGE>

                                 TELKONET, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31 ,2000 AND 1999

NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

Stock Based Compensation
------------------------

The Company accounts for stock transactions in accordance with APB Opinion 25,
"Accounting for Stock Issued to Employees." In accordance with statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation," the Company has adopted the proforma disclosure requirements.

Liquidity
---------

As shown in the accompanying financial statements, the Company incurred a net
loss of $ 929,720 at December 31, 2000 and $ 33,973 at December 31 ,1999. The
company's current liabilities exceed its current assets by $ 248,511 at December
31, 2000.

Comprehensive Income
--------------------

The Company does not have any items of comprehensive income in any of the
periods presented.

Segment Information
-------------------

The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS 131")
in the year ended December 31, 1998. SAFAS establishes standards for reporting
information regarding operating segments in annual financial statements and
requires selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS 131 also establishes standards
for related disclosures about products and services and geographic areas.
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the chief
operating decision maker, or decision making group, in making decisions how to
allocate resources and assess performance. The information disclosed herein,
materially represents all of the financial information related to the Company's
principal operating segment.

New Accounting Pronouncements
-----------------------------

The Company adopted Statement of Financial Accounting Standards No. 132,
Employers' Disclosures about Pension and Other -Post Employment Benefits ("SFAS
132") in the year ended December 31, 2000. SFAS No. 132 establishes disclosure
requirements regarding pension and post employment obligations. SFAS No. 132
does not effect the Company as of December 31, 2000.

                                      F-10
<PAGE>

                                 TELKONET, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 1999

NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

In March 1998, Statement of Position No. 98-1 was issued, which specifies the
appropriate accounting for costs incurred to develop or obtain computer software
for internal use. The new pronouncement provides guidance on which costs should
be capitalized, and over what period such costs should be amortized and what
disclosures should be made regarding such costs. This pronouncement is effective
for fiscal years beginning after December 15, 1998, but earlier application is
acceptable. Previously capitalized costs will not be adjusted. The Company
believes that it is already in substantial compliance with the accounting
requirements as set forth in this new pronouncement, and therefore believes that
adoption will not have a material effect on financial condition or operating
results.

In April 1998, Statement of Position No. 98-5 was issued which requires that
companies expense defined previously capitalized start-up costs including
organization costs and expense future start-up costs as incurred. Adoption of
this statement does not have an effect on financial condition or operating
results.

The Company adopted Statement of Financial Standards No. 133, Accounting for
Derivative Instruments and for Hedging Activities ("SFAS No. 133") in the six
months ended December 31, 2000. SFAS No. 133 requires that certain derivative
instruments be recognized in balance sheets at fair value and for changes in
fair value to be recognized in operations. Additional guidance is also provided
to determine when hedge accounting treatment is appropriate whereby hedging
gains and losses are offset by losses and gains related directly to the hedged
item. SFAS No. 133's impact on the Company's consolidated financial statements
is not expected to be material as the Company has not historically used
derivative and hedge instruments.

In December, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (" SAB 101"), Revenue Recognition in Financial
Statements, which will become effective December 31, 2000. The Company does not
expect the standard to have a material effect on its results.

NOTE B - MERGER

On August 25, 2000, Telkonet Communications, Inc. ("TCI") completed an Agreement
and Plan of Reorganization ("Agreement") with Comstock Coal Company, Inc.
("Comstock") in a transaction accounted for using the purchase method of
accounting. The total purchase price and carrying value of net assets acquired
of Comstock was $1. From Comstock's inception, until the date of the merger,
Comstock was an inactive corporation with no assets and liabilities. As a result
of the acquisition, there was a change in control of the public entity.
Subsequent to the date of the merger, Comstock Coal Company, Inc. changed its
name to Telkonet, Inc. ("Company"), with Telkonet Communications, Inc. becoming
a wholly owned subsidiary of the Company.

Effective with the Agreement, all previously outstanding common stock, preferred
stock, options and warrants owned by former Comstock stockholders were exchanged
for an aggregate of 1,980,000 shares of Telkonet Communications, Inc.'s common
stock. The value of the stock that was issued was the historical cost of
Comstock's net tangible assets, which did not differ materially from their fair
value. The results of operations subsequent to the date of acquisition are
included in the Company's consolidated statement of losses. In accordance with
Accounting Principles Opinion No. 16, Telkonet Communications, Inc. is the
acquiring entity.

                                      F-11
<PAGE>

                                 TELKONET, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 1999

NOTE B - MERGER (CONTINUED)

The total purchase price and carrying value of net assets acquired of Comstock
was $1. The net assets acquired were as follows:

                     Net Assets               $     1
                     Accumulated Deficit        2,643
                     Net Liabilities           (2,642)
                                              --------
                                              $     1
                                              ========

NOTE C - RELATED PARTY TRANSACTION

The amount due to the Company's shareholders at December 31, 2000 and 1999
represents aggregate advances to the Company (net of repayments). No formal
agreements or repayment terms exist.

NOTE D - CAPITAL STOCK

The Company was incorporated under the laws of the State of Delaware on November
3, 1999 under the name of Telkonet Communications, Inc. The Company is a
successor to Telkonet Communications, Inc., a company formed under the laws of
the State of Maryland ("Predecessor"). The Predecessor was an inactive
corporation entity with no significant assets or operations.  The Company has
authorized 100,000,000 shares of common stock, with a par value of $.001 per
share.

In January, the Company issued 19,300 shares to its founders, in exchange for
costs and services, valued at $11,580. In June, the Company issued a Private
Offering Memorandum for the sale of common stock at a purchase price of $ 375.00
per share. As of December 31, 2000, the Company had received $ 644,236, net of
costs, for 1,735 shares sold under this offering. In July, the Company issued
190 shares in exchange for exercised warrants, with an exercise price of $ 375
per share.  In August, the Company issued 21,775,335 shares in conjunction with
the merger of Comstock Coal Company, Inc. (Note B). In connection with the
transaction, the Company retired 21,225 shares of previously issued Telkonet
Communications, Inc. common stock. In October, the Company issued 29,145 and
10,891 shares in exchange for exercised warrants, with and exercise price of
$1.00 and $0.40 per share, respectively.

As of December 31, 2000, the Company had the following outstanding warrants to
purchase the Company's common stock:

     Number of Shares     Exercise Price Per Share       Date of Expiration
     ----------------     ------------------------       ------------------
          69,948                   $ 0.40                   June 1, 2001
         221,502                   $ 1.00                  June 30, 2001
          34,974                   $ 1.00                  July 31, 2001
         125,907                   $ 0.40                  July 31, 2001

                                      F-12

<PAGE>

                                 TELKONET, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 1999

NOTE E - INCOME TAXES

The Company has adopted Financial Accounting Standard number 109 which requires
the recognition of deferred tax liabilities and assets for the expected future
tax consequences of events that have been included in the financial statement or
tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between financial statements and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. Temporary differences between taxable
income reported for financial reporting purposes and income tax purposes are
insignificant.

For income tax reporting purposes, the Company's aggregate unused net operating
losses approximate $963,693, which expire through 2020, subject to limitations
of Section 382 of the Internal Revenue Code, as amended. The deferred tax asset
related to the carryforward is approximately $327,489. The Company has provided
a valuation reserve against the full amount of the net operating loss benefit,
since in the opinion of management based upon the earning history of the
Company, it is more likely than not that the benefits will be realized.

Components of deferred tax assets as of December 31, 2000 are as follows:

Non Current:
         Net operating loss carryforward      $ 327,489
         Valuation allowance                   (327,489)
                                              ----------
         Net deferred tax asset               $       -
                                              ==========

NOTE F - COMMITMENTS AND CONTINGENCIES

Lease Commitments
-----------------

The Company leases office space on a year to year basis in Annapolis, Maryland
for its corporate offices. Commitments for minimum rentals under non cancelable
leases at the end of 2000 are as follows:

                       2001           $ 55,500
                       2002             55,500
                       2003             42,000
                                      ---------
                                      $153,000
                                      =========

Employment and Consulting Agreements
------------------------------------

The Company has an employment agreement with the Company's Chief Executive
Officer and Chief Operating Officer. In addition to salary and benefit
provisions, the agreement includes defined commitments should the employee
terminate the employment with or without cause.

The Company has consulting agreements with outside contractors to provide
marketing and financial advisory services. The Agreements are generally for a
term of 12 months from inception and renewable automatically from year to year
unless either the Company or Consultant terminates such engagement by written
notice.

                                      F-13
<PAGE>

                                 TELKONET, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                   CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 1999

NOTE G - LOSSES PER COMMON SHARE

The following table presents the computations of basic and dilutive loss per
share:

                                                                   2000
                                                               -----------
          Net loss available to common shareholders            $  (929,720)
                                                               ============
          Basic and fully diluted loss per share               $     (0.04)
                                                               ============
          Weighted average common shares outstanding            20,891,349
                                                               ============

NOTE H - SUBSEQUENT EVENTS

Subsequent to the date of the financial statements, the Company borrowed
$150,000 from a financial institution. The loan is due in March 2002 with
interest at 11% per annum, and guaranteed by the Company's principal
shareholders and officers.

NOTE I - GOING CONCERN MATTERS

The accompanying statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As shown in the financial statements from
November 3, 1999 (date of inception of Company), the Company incurred loses from
operations of $963,693. This factor among others may indicate that the Company
will be unable to continue as a going concern for a reasonable period of time.

The Company's existence is dependent upon management's ability to develop
profitable operations and resolve it's liquidity problems. Management
anticipates the Company will attain profitable status and improve it liquidity
through the continued developing of its products, establishing a profitable
market for the Company's products and additional equity investment in the
Company. The accompanying financial statements do not include any adjustments
that might result should the Company be unable to continue as a going concern.

In order to improve the Company's liquidity, the Company is actively pursing
additional equity financing through discussions with investment bankers and
private investors. There can be no assurance the Company will be successful in
its effort to secure additional equity financing.

If operations and cash flows continue to improve through these efforts,
management believes that the Company can continue to operate. However, no
assurance can be given that management's actions will result in profitable
operations or the resolution of its liquidity problems.

                                      F-14
<PAGE>



                                    EXHIBITS

<PAGE>

                                  EXHIBIT INDEX


NUMBER                        DESCRIPTION OF EXHIBIT                    PAGE
------                        ----------------------                    ----

(11)                     Computation of Losses per Common
                         and Common Share Equivalents                   E-1