TelkoNet, Inc. Interview for Eric David & Sons, September 25, 2003

As an explosion of complex communication products fight for shelf space, tempting and teasing most all of our senses, something innocent innately begs and longs for some simplicity in it all. Is the effortlessness of 'plug it and let there be light' all but a distance memory?

How wondrous it would be to find that elusive product that would marry the height of technology with the ease and non-complexity of the plug-in appliance.

Ask and ye shall find…enter the HomePlug technology solution, a new standard that uses a building's existing circuits and wiring to distribute a broadband Internet signal to electrical outlets. The need for mobility and no new wires mantras are well served in this capacity. And the ramifications for larger scale structure Internet linkage - whether it be via the combination and piggybacking of DSL, Cable, T1 or wireless connections - are truly profound.

Today's consumers are hungry for products providing such communications efficiencies and unlimited scalability, and the investment markets eagerly await their staging.

Telkonet, Inc. (OTCBB: TLKO), a leader in powerline communications, provides Internet access products and connectivity over existing electrical wiring as a viable and cost-effective alternative to the challenges of hardwiring and wireless local area networks (LANs).

Their products are designed for use in commercial and residential applications, including multi-dwelling units and the hospitality and government markets, and, in many situations, the Telkonet system can be implemented more quickly and less expensively than adding either a dedicated wired or installing a wireless system.

An Interview with Ron Pickett, Telkonet's President, conducted by Eric David & Sons, Inc. September 25, 2003, follows:

Eric David and Sons (EDS): Please give us an encapsulated picture of what powerline communications is, elaborating on its genesis in Voice Over Internet Protocol technology forward.

Ron Pickett (RP): The most basic thing that powerline communications provides for is the creation of a situation where you don't need any new wires for Internet services through a building. The real value is in its simplicity.

With the installation of the Telkonet devices, a high-speed Internet signal is delivered to a building's electrical outlets. As the broadband signal is fed into the electric lines, the device plugged into an electric outlet becomes a terminal, receiving that signal. At the other end of the terminal is an Ethernet cord that you plug your computer into. You're then online and sharing the Internet signal. It's a VOIP, meaning it's good for voice, good for data, and a total digital system that works on 220 voltage as well as that of 110 (US Voltage), so it's viable in the European theatre as well.

The process was first conceived for the 220-volt system because it was 3-phase; it was then further converted back to the 110 3-phase. That's important to note, as it's 3-phase electric that's used in commercial settings. Residential homes are single phase.

3-phase electricity presented a real challenge which the Company obviously overcame figuring out how to the capture the signal and split it three different directions on three different phases, then having the gateway communicate to all of the different terminals on those different phases. Case in point: in one room you may have a single phase 110 on one wall and a different 110 phase, or a neutral phase, in the same room. With a network in that room, the computers have to go back to the gateway terminal to communicate, from terminal to gateway to terminal. As the two computers don't talk to each other directly, but rather through the gateway, handing that on the different phases, as you can imagine, became a technological challenge. Telkonet won that battle. I'll be quite pleased to see that patent come through.

EDS: Does your configuration lend itself to a faster material delivery time than that of just broadband alone?

RP: It does, although it certainly is also dependent on the size of the pipe. DSL lines delivery is about half a MB; cable isn't quite that much.

Our chipset is currently a 13MB chipset with 7MB constant, so we can handle just about all the data you can plough through a T3 line (North America) or an E3 (Europe). We are presently looking for, as well as researching and developing, a 50MB chipset. With that advancement, we would be able to provide all the Internet connectivity you would ever want; we could start networking and actively working with files and video. One of our major commercial markets is hotels. Telkonet could do for the hotel what we're doing on the Internet with their entire in-house video system. This is just the beginning, the tip of the iceberg, with powerline technology.

My prediction is that in the near term, this technology will have the ability to replace the need for a CAT 5 system. Everything you're able to do on a CAT (cabling system [wires, junctions, and connectors] referenced in terms of the large data rates that they can sustain), you'll be able to do over our connection. And that's all related to the chipset right now.

EDS: Your 'hard-wired' nature suggests a great sense of end user security.

RP: Today's security issue is, undoubtedly, huge. As you know, wireless is starting to get some a good user foothold. And there are a lot of good places and circumstances in which wireless is appropriate, but you don't have the inherent security that you need.

Take into consideration this example: when you open a laptop in a wireless environment, you're essentially opening all of your information up to anyone who knows how to peep in do just that. As a business traveler, I wouldn't want my laptop operating in a wireless-supported hotel room, knowing that the guy next door to me has the ability to take a look all of the vitals stored away on my hard drive. All of your personal information suddenly becomes exposed: credit cards, pin codes et al.

In a commercial or business setting, wireless, in my opinion, is a great device for broadcast only, as opposed to two-way transmission. If you're in a meeting room and someone wants to broadcast something out to you, great. But you don't want to be transmitting material back to him.

As Telkonet's devices are compatible with wireless, we can cap off that issue, not to mention offer a secure solution all our own. You can introduce a Telkonet system into a wireless environment and have your electric lines and outlets become a secure connection, because it's hub and spoke. And, yet, the same system can power the signal to the wireless hubs. Instead of stringing wires to the wireless hub, facilitating the hub to broadcast a signal, why not just string your wire from the hub over the nearest light fixture where you'd be grabbing it from us. Now you have your outlets secure and still have the broadcast capability.

We are compatible with all systems re expansion potential. Our goal is to complement these broadband systems, not overtake them.

EDS: You manufacture the product as well. How do you eliminate noise on the powerline and keep it from interfering with clear data transmission?

RP: Three years ago, the industry gurus - Intel, Cisco, Motorola - got together and said, "one day, we think that the powerline will be used for the Internet signal. We could use the powerline to carry that signal to our high-end electronic devices, such as plasma screens, air conditioner controls (analogous to the smart-house concept). Instead of running a CAT 5 to every device, which would be ridiculous, and realistically speaking, can't be done, the industry will someday find a way for the electrical lines to carry these very signals to every house and, in turn, to all the devices. We then could put microprocessors and chipsets in all of them enabling us, among other techno and futuristic things, to go through the Internet and do online diagnostic testing when there's a problem."

From that thought process, a group called HomePlug Alliance (www.homeplug.com) was established. They all voluntarily contributed the frequencies on all of their devices as well as set aside a frequency on the powerline not colliding with anything they had in the market or anything that would comprise them in the future.

When we heard about that, we joined the group a few years ago and our engineers have since dedicated themselves wholly to what that organization brings to market. A company called Intellon makes a chipset that's HomePlug compliant (HomePlug 1.0.1). We took the Intellon chipset design and built our system compatible with that from day one. We bet the ranch that Intellon would get that chipset in silicon and become compliant. And they did; it came to market July 2002.

It was at that time, we put it into our boxes and started doing the field tests. We buy these chipsets. Our devices are compatible with other HomePlug offerings, but without our technology, these other devices cannot talk to us. We piggyback on all of their compliance and indeed their non-interference and elimination of noise.

EDS: Any electrical wiring considered substandard for your installation?

RP: No, not at all. There are two different types of wiring in what we refer to as 'commercial residential', (ie apartments) installations, each of them having different conduction qualities. That being the case, one of the challenges we had, when we went from the hotel device, which was commercial, to the apartment device, which was residential, was the FCC classification. Essentially, it was a Class A vs. a Class B issue, as well as that of different levels of emission. Not that the wire wasn't an excellent conduit for us, it was the type of noise radiation emitting from it that was a concern.

We had to redesign a second-generation product and come up with something that was compatible for both Class A & B situations.

To that end, we announced a few weeks ago that we had passed that testing, receiving FCC Class B compliancy, allowing us to sell product for residential applications, (http://biz.yahoo.com/bw/030904/45307_2.html). That's a very significant event for us.

EDS: Your foray into the Hospitality Market has been a strong one, starting with hotel installations in North Carolina and Georgia to your Partnership Agreement with Choice Hotels International. What's the marketing process with Choice and how many of the partnering hotels in the chain, to date, have purchased the gateway and modems?

RP: Choice Hotels International has upwards of 3,800 franchised hotels in the 48 contiguous states. By becoming a Choice approved vendor, it means that anyone carrying the Choice flag (Clarion, Comfort Inn/Suites, Quality Inn, etc) doesn't require further approval from Choice headquarters if they wish to use Telkonet products.

And that's noteworthy for a number of reasons, the most immediate and fervent being that Comfort Inn/Suites and Clarion (approx 700 of the 3,800 hotels) have now been mandated to have high-speed Internet installed in their establishments by June 2004. And, if they don't meet this mandate, they lose their flag. Choice Hotels has given them three facilitating equipment vendor options: 1) a hard-wired system, 2) a TV device, and 3) Telkonet. And if they wish to buy Telkonet's product, that's great, as they're approved to do so, meaning no extra corporate or research efforts required on the vendor. That's certainly incentive for them.

We've since started a marketing campaign, just after Labor Day, communicating with all of them via many mediums: fax blasts, the Choice corporate magazines, the Choice monthly literature. That's all part of the privileged vendor status. Our early traction goal is to obtain at least one hotel contract in every of the 48 states by the end of this month. Although we are not ready to publish how many contracts we have at present, I can say that we're well on target. Contracts are coming in every day. We'll be looking to officially announce that status probably by the middle of October.

We also have some VARS - Value Added Resellers - that have recently signed up with us that have signed on with specific sales quotas that they're guaranteeing.

We're still doing market tests with the 100 hotels to find appropriate price points, any resistance, what else they may want in the system, etc. Before we turn it on to the rest of the potential customer base, we want to make sure that we have matched everything that the market wants regarding both price and offering.

Another advantageous note…the Choice hotel franchisees own an additional 10,000 (other chain) hotels. Running the numbers, approximately 1/3 of the 44,000 hotels in the United States are represented by the group that we're contacting through this Choice Hotel preferred status. That's quite a target network for us to be reaching via one program.

EDS: Are you chatting up any other hotel chains, either here or abroad?

RP: We definitely intend to broach other chains. In fact, we have met with one already.

We feel, internally, that position traction with Choice is essential right now. If we get a minimum of one hotel in each state, we'll have reference points and satisfied customer testimonials. From that point onwards, it certainly won't take long for the industry word to travel allowing us to walk into another chain with a book full of operating history and positive feedback. Better to work from the bottom up in this case.

We have such a 'tiger by the tail'. It's difficult not to shout it to the rooftops, but it's the right way to go about it.

EDS: Congratulations on your recent FCC approval for multi-dwelling units. Have you identified distribution/marketing partners in this space other than Noment Networks and, more recently announced, Rover Communications?

RP: As a matter of fact, we have just signed with others this week. There's a whole network of system integrators and VARS in the multi-dwelling space all over the country that we intend to approach. Our hands are so full at present! We hired five Sales and Marketing people this summer and find that we still need more. It's a happy problem to have.

EDS: Regarding Sales and Marketing to Government Facilities, have you identified or approached any targets?

RP: We have two very substantial Government systems integrators that have approved Telkonet.

The Government space will be ideally and much better served with a larger chipset. Most Government installations harbor copious amounts of data and foster a lot traffic and our present 13MB capacity presents a little in the way of limitation there. That said, I really don't feel that it'll be too long before we move into that forum full throttle, meaning the larger capacity chipset will soon be part of our inventory.

The Government associated areas that can be zeroed in on right now are the Military and the school systems. Within a school system, computer labs can be installed in one day with our equipment and extension cords. They can put in as many computers as they want from that point; it's very scalable.

With the mobility of the children and the (portable) classroom, it's really a natural consideration. We don't have any one in particular signed to that as of yet, although, we have met with one school system and an integrator, that wanted to do a pilot with us earlier this year. We, unfortunately, didn't have enough equipment for it at that time, but, now that we're producing equipment, we'll be looking to proceeding with that in the near future.

A more immediate target would be branches of our Military. There are thousands of buildings on bases that are literally infested with asbestos and lead paint - older buildings - and they can't use wireless because of potential compromised security. So the situation is that we have Generals and Admirals that cannot get on the Internet either because they just don't have the infrastructure to adequately do so, or, because of poor construction materials, they just cannot put it in.

We have demonstrated our product for one branch of the service so far. We have a package of test equipment that has been delivered for a pilot project. We're in the process of waiting for their official procurement program to come to fruition.

We know that we have a solution for them - as, we believe, they know that we have a solution for them - it's just the process of going through the Government beaurocracy. It's very encouraging for us to know that there's a resolution that can help our Government offices and Military installations, at a price point that's effective.

EDS: Any plans to move into the single home residential market, like those Companies we read about in the trades, or is it technologically or economically feasible for you to do so?

RP: No, and not because our equipment doesn't work in that situation, it's that we just do not want to gear the Company to be structured to handle that market. It's primarily the shipping, customer service and the whole retail end of it that we're not really well suited for, nor do we care to be.

That said, I will say that we did complete a project with a real estate developer, one of the largest in the country, involving some analysis on some of their higher end houses and found that this system was, in fact, more economical to the builder and buyer than hard wiring the Internet during the construction phase. That peaked our interest somewhat. Running wires along bare walls is relatively inexpensive, but, taking labor and material into consideration, it was ultimately more expensive that the Telkonet system.

At some point, we may consider introducing the system to a builder so he can do the installation for the homebuyers. And possibly sell it in a proprietary 'home store' situation as well….you know, you buy a house and pick our your flooring, fixtures and cabinetry; well maybe you'll be soon able to pick out your Internet connection as well.

To that extend, we may entertain that direction, but very likely in those terms only. And, only then, via responsible professionals doing it properly, from the ground up.

EDS: How does your technology's viability stack up against the proliferation of Wi-Fi products? Can your utility-esque set-up keep up with the growth of hotspots with the likes of Intel and Nextel pushing the territory ever farther?

RP: I think Wi-Fi is going capture what's right for Wi-Fi. There are certain situations that Wi-Fi is adequate and good for. I think it'll be most successful in the single-family residential arena (as it's easy to install there) as well as places likes Starbucks and others marketp[laces of public interest where they might have screens broadcasting information. It makes a lot of sense there. It's competitive, but you could use Telkonet for the same thing.

As mentioned earlier, we might even offer some cost savings to that industry. There's a group from California that is currently doing a study for us evaluating the economics of a Telkonet system saving on the installation of a Wi-Fi system. When you put in a commercial Wi-Fi system, it's an engineered system, meaning that it's not a simple 'come in and hook me up' deal. There are inherent weaknesses in range and penetration ability. Despite their products having a range of about 150 feet indoors, it depends on the number of walls and the environment through which that signal has to travel. Wi-Fi products are also known to have interference glitches with cordless phones and microwaves.

An installer has to come into a building, go through the architectural drawings to find out where the concrete and steel is - as the wireless signal cannot penetrate that - and then they have to figure where to put the broadcast hubs followed by having to run wires from the initial hook up to those hubs. They may have to further move those hubs around as they encounter hidden interference nodes. It's a little more involved and complicated that most people understand.

Seeing that most commercial buildings have light fixtures in the ceilings, wouldn't it be a lot easier just to run a wire from your hub to the light fixture, and send the signal from the basement electrical panel installation to the light fixture via the electric line? You'd be supplied secured connections at the electric outlets if you wanted to supplement wireless with what we offer. The verdict is really still out on whether it's more economical or not, but it certainly gives a new dimension to Wi-Fi.

We've always thought of that potential in reverse. We've been thinking that Telkonet would extend into Wi-Fi, but it's quite apparent that that works in reverse as well. It definitely has some possibilities but needs some more time for us to further prove it out.

EDS: You recently received notification from the US Patent Office that your PlugPlusInternet and PlugPlus' initial acceptance stages were complete. Are you planning on initiating the same product patents in other countries?

RP: Absolutely! We have many other patents in the pipeline as well.

The truth is that that was a patent we weren't really that confident on, as it was so general in nature. When we first jumped into this arena five years ago, there wasn't anybody thinking about this concept; we were there even before the HomePlug Power Alliance. And the inventors were working on it four years prior to that; they were real pioneers.

This particular patent is for telephony over the electric lines.

When I started to work with the original inventors, the prototype was meant to carry telephone service over European 220-volt lines. Their target was to provide telephones to people in emerging countries, where there's electric but no telephone service to speak of. Most people don't realize that in a country like Poland 1/3 of the population doesn't have a telephone. Regions of South America and Eastern Europe are also included in that group. It's amazing that there are so many without what we consider to be a basic service.

It was a huge challenge as it generally costs in the neighborhood of US $600 to take a telephone line to each of those community doors. There are millions of people putting deposits up and waiting years before there's enough deposits in the area for a Telco to afford to come in and install the 'final or last mile'. That was the original purpose and solution offered by this product.

After they introduced it to me, I asked if they could provide Internet over the phone lines and they came back with a resounding yes, despite having not really given it any real thought previously. That was the genesis of my original investment with them.

The patent that was just issued was the one that was applied for first, that being for telephony over 110-volt lines. And that's one that we want to move into Europe as soon as we can, as our products still service that: voice and data on both 110 and 220-volt lines.

This is just the beginning. Not only do we truly have a rural economy telecom solution, we also offer a great potential re the propagation of a variety of services, both nationally and worldwide.

EDS: True, your VOIP technology would be a low-cost installation boom for emerging nation markets. What's been the early response regarding your initial venture into the Eastern Bloc nations?

RP: The reception has been really positive. We've had several meetings, among them, two with high-level officials. The final word is 'let's bring it over here and test it'. And, as soon as we have plenty of product ready and solid industry traction here, we're heading over to launch some pilot projects.

EDS: How would you compare your business positioning to industry compadre and Power Line Communications Associate member Ambient Corporation, who just received a nationwide license from the FCC and are conducting active trials throughout the US (with Con Ed)?

RP: Ambient is somewhat of an industry compadre, but not a direct competitor of ours.

The challenge facing them as well as Maryland-based company and contemporary, Current Technology, is that they are working on sending the Internet signal over the grid, ie: the wires running up and down the street, not necessarily inside the house or building itself. They want to become another ISP. They want to cross the digital divide and take the electric lines to where the Internet is not available, as well as compete where it is available; and that is directly with the telecoms and their DSL's, or the cable providers.

Indeed, they perform other functions. Part of their management tools include provision for the circumstance of notification - as it's direct point-to-point communication - and pinpointing of an electrical outage. There are all kinds of bonuses and advantages in it for the electrical company. That's why Con Ed is putting money behind them and banking on their success.

Ultimately, if they can become another utility, and extend that utility to the Internet, ie bring it the house, users could buy the home products at Best Buy that are maybe compatible, but the jury is still out.

We've actually had some meetings with them. No technology secrets were shared, but they represent a good open door. We look at them this way…if they're successful in their undertaking, and we hope they are as it'll be more Internet portals to more buildings, then that's more opportunity to establish our product inside the buildings.

Again, like wireless, they're really facilitators to us as opposed to competitors.

EDS: Any thought of Telkonet possibly allying directly with a utility company?

RP: Not in this country, but we have had some discussions in some foreign countries about that very thing.

It would seem to me that if you partnered with a Con Ed or Pepco in this country, it could very well preclude you from doing business with any other utility provider. Hypothetically, let's say that Verizon wanted to use our system for inside the house. Initially, the feeling would be that it would be great, but I wouldn't want to do in such a way that I would be limited in not being allowed to sell to Southern Bell. If Verizon owned me, do you think they would want me selling to a competitor?

That's one of the reasons we didn't go knocking on their doors when we were looking for funding. It ultimately wouldn't have been in our best expansion or long-term interest.

EDS: Do you plan on becoming a member of the Power Line Communications Association like some of your contemporaries, or is your membership in HomePlug(R) Powerline Alliance - http://www.homeplug.com/index_basic.html - equivalent?

RP: 'Over the grid' companies like BG&E, Ambient and Current Technologies are members. That's their interest, not ours. HomePlug's mandate is based on the stuff inside the walls and the house. You can incorporate homeplug to work in concert with any broadband line.

They want to be the ISP but they're counting on buying someone else's tools for inside the house. They're very open about saying that they'll be using the Linksys and Netgear product. That certainly works in the house, but not in the office or other commercial settings. That's why we're talking with them right now; they've actually approached us querying about what our product will do. To the best of our knowledge, they don't have any commercial products, and they're counting on devices being available in the marketplace for them.

The reason they're being very broad in their method descriptions is because whatever they have out there on the line has to be stepped down to be compatible inside the building. Right now, they're not homeplug compatible, and will have to resort to employing something like a modem to transform what they have on the wires to make it so compatible. So a Linksys product would work, but only in the home setting.

When they get to commercial they will encounter all of the same challenges that Telkonet faced with 3 phase and security issues, as the home doesn't have security; it's an open system. And to the best of our knowledge, they're not doing anything in that realm.

Frankly, if they weren't using the homeplug chipset, in some product development, they would be missing a whole industry... and we know the speed and capacity is not nearly sufficient for their solution.

EDS: Why do you think industry giants like Nortel and Siemens have abandoned and pretty much 'poo-poo'd' the idea of this transmission market? Do you see them getting back into the market as it matures, possibly buying up smaller entities?

RP: Nortel's industry shine has really tarnished. They lost a couple $100M trying to set this up in Europe a number of years back. Their biggest obstacle was jumping around the transformers and, when powering it up enough to get around the transformers, interfering with people's TV sets and other electrical items. They got out because they said it simply couldn't be done.

For years after, anyone who was regaled with their experience went along and agreed that it couldn't be done.

When we started this venture five years ago - that's when I started to invest in it, and it was three ago when I started to chat it up to my friends - I couldn't launch an investment query without finding myself being three conversations away from someone saying that it just couldn't be done; they tried and failed. We would simply respond that that was them, and Ambient and Current, not us. They tried to take it through the power grid, but they never tried it inside the building. They were working outside in the grid fields, trying to take it to the whole community via one pipe. I still don't know if they'll be able to do it. Truth be told, they have huge challenges ahead of them that are totally unrelated to what we do inside of the building.

The Wall Street Journal and Wired Magazine may be extending loads of coverage time to Ambient and their endeavor, but they don't know about us yet. When we do surface on their stage, and do so with representation in every state, with presence in the Military, hotel chains, schools, multi-dwelling residential complexes and with a product that has proven itself, I frankly believe that'll be a big news day.

WSJ had articles three days straight this past week referencing wireless. Cisco just spent $500M buying the aforementioned Linksys system to move into the residential wireless market with great fanfare, but we're commercial-oriented and, right now, the only player in town. Maybe we'll be a Xerox or a Frigadaire…something a little more revolutionary and first kid on the block. That as opposed to being one in the crowd.

EDS: Let's jump to a few fundamental questions. You were appointed President back in December 2002. Up to that point you were the company's principal investor. What's your holding at present and total Management holding in the Company?

RP: I was the original angel investor in the Company. Three years back, some friends started coming in to invest with me. Every time there was investment, I wrote a check alongside them. The last investment I made into the Company was last December for $200K. For that, I have a convertible debenture that I can exchange for shares as well as 200K warrants that I can exercise. If you assume that I have all of that in equity, I have approximately 2.8M Telkonet shares, representing about 8% of the Company.

If you aggregate the officers and directors, we have approximately 25% of the Company via shares owed and those that may be exercised.

EDS: Any more financing plans after your $5M senior note raise in June 2003?

RP: We believe the funding from the senior note is adequate to get us to cash flow break-even. Just a few months ago, some of the original investors, who did all convertible debt, converted to equity and we had a registration that we filed for them (144 to non-restrictive). We also gave everyone notice that they could convert their warrants.

As a result, we've received, as of September 17th, another $3.5 M capital infusion from warrant exercise. Some of the senior note holders have also recently requested that they exercise some of their warrants in exchange for restricted shares. That exercise has reduced our total senior note debt to approximately $3M. Based on these events, we'll file an 8K, which will be the basis for our eligibility to gravitate to a more senior exchange.

EDS: I noticed there was a S1 registration filing a couple of days ago. What is your present number of shares outstanding and what is the fully diluted position?

RP: There are 29M shares outstanding and, with 6M warrants issued, our fully diluted position would 35M shares.

That doesn't count, though, the 7M in employee stock options, which are all 3 - 5 yr vesting (certainly not all of them are vested, though).

EDS: What is your primary revenue model?

RP: We have one primary revenue model and that's in the hospitality industry, that being a rental program. We install the entire facility and then provide them with a number of terminals, installed via our installation and service partner CompuCom (a $2B/year systems integrator, 51% owed by SafeGuard Scientific).

Here's how it works: the hotel doesn't put up any money for the equipment, just their first month's rent. We give them a starter kit with, perhaps, 4 terminals. When they're comfortable with the service, they usually find that with a 100-room hotel, you'll need 10% of those every night for Internet provision, so they'll ask for 6 more, bringing the total to 10 units. We charge them $25/month for every terminal. It's scalable for them and easy to manage. They have no upfront cost, and they only order what they need. That's the primary market and what we're focusing on.

We've built up enough inventory to equip the first 400 - 500 hotels under that model. 500 hotels at $650 /month, we'd be cash flow break-even right now, as the inventory is all paid for. That's obviously a real traction target for us.

For the rental apartment complexes, we'll have a different revenue model. Some we'll manage ourselves, some we'll do so through our VARS and system integrators who want to buy the equipment from us and do their own deal with the complex owner. Some of those owners will want to rent the terminals from us, which we will encourage. So we'll be selling the installation equipment, but renting the terminals.

The Military department that we're talking to has indicated a willingness to consider renting rather than owning the equipment. That's new for the Military, but they've been renting computers for the past few years now and we fall into that category.

We're telling the marketplace that our terminal is something that you don't want to nor need to own. It's analogous to an AOL Time Warner cable box. Why would anyone want to own that? If it's broken, we'll replace it; if there's new technology afoot, we'll ship you a new one.

When you install a hard-wired system, on the contrary, you always buy it. Part of our challenge is the educational process. This isn't a chunk of hardware, it's a piece of software. And you don't want to own software, you just license it.

When we move to a market where the terminals are to be purchased outright, we'll likely be instituting a service fee along with that. But the rental format is still the main target forum now.

EDS: Any institutional involvement in your Company stock?

RP: We have 5 - 6 institutional owners at present. We have a couple of hedge funds involved and we brought a few institutional groups into the last $5M financing round.

We don't have any 13D filers (institutions buying off the open market) right now. That said, I wouldn't be at all surprised if some of the smaller funds that we've been meeting with are starting to nibble away at some shares, judging from their continued positive response.

But once we start announcing sales and people can start putting some matrix to what our market is and what our margins could be and what our overall sales revenues have the very real potential to be, I believe those institutions that find themselves investing in higher-risk companies will discover they may have an appetite for Telkonet.

We do, however, have two European institutions involved from private rounds.

EDS: Have any industry contemporaries broached you about investing in your efforts?

RP: Not at this time, nor have we actively pursued it. We're still pretty much unknown, although that's changing pretty rapidly.

Advancing to a more reputable exchange and trading forum plus some media exposure will see the winds of change blow in the 4th quarter; now through till Christmas. Tech is also getting a bit of a break and more favorable outlook lately.

We're in the right place at the right time.

EDS: ETA for positive cash flow?

RP: I would be thrilled if we could hit level cashflow late Q2/early Q3 of next year, and I'm confident that's attainable. I think by that time, the Company will be moving product overseas and spending some capital investing in another market there as well.

Our activity level here could certainly put us in that sort of position - cost of doing business vs. cost of its return - as well.

The P&L side is a little more complicated. With our rental program, we buy the equipment, put it our client's hotels, and depreciate it over a 3-year period. We get a deposit and our first month's rent, but that's not applied till the month is complete. I can't accurately pinpoint how that's going to translate down to the P&L statement, but cash is still king and our cash side is, and will continue to be, great. We have $7.5M cash in the bank. We've raised $16M. How many companies out there have spent only $8.5M and gotten this far?

EDS: What's your crystal ball view of the next 3 - 5 years in your industry, and what milestones is Telkonet looking to set?

RP: The next 3 - 5 years will see an absolute acceptance of powerline technology, that of inside the building. Same technology over the grid? I can't really say.

More importantly, we'll see it flourish both here and abroad. I think we'll experience huge penetration in Eastern and Western Europe, South America and the Pacific Rim because they truly do crave the infrastructure that we replace. They don't have the requisite copper. And if they had the installer, they have no way of getting those wires through some of those antiquated buildings. Remember the limitation presented by wireless: it doesn't transmit through concrete and steel and a good number of those buildings in Europe, as such, just aren't candidates for wireless. On another note, the telecoms are actually one of the biggest thwarts to Internet development, outside of the lack of infrastructure, because of the exorbitant time charges they institute for telephone calls.

My crystal ball says that there's somebody out there that is as close to a solution for 2-way Internet with sizable pipe capacity as we are to the powerline communications solution. And just about the time we get that traction, 2 way/satellite Internet will get traction and when you marry that 2-way satellite and Telkonet, you can drop a signal on a building anywhere in the world and light it up literally in one day. You'll transform the way that the Internet is delivered, totally from the source of the pipe to the end user.

It's there, someplace. It's not at all far fetched.

Talk about the implications of our slogan, 'no new wires'. Think of the possibilities of sticking a little VSat on a roof, taking the coax from the back of it, screwing it into the coax terminal on our box, which exists today because we constructed it compatible to the first 2-way satellite system Hughes created two years ago, have an electrician tie it into the electric panels in the basement and light up the entire building. The only addition is the provision of our terminals. Combine that with a little larger chipset, and we'll never communicate the same way again.

I commented to a group meeting with us last week, find a client that is on the brink of this and bring them to us. Don't bring us a Hughes or Echo Star. Find us someone new and growing in the industry who knows what they're doing, someone who wants to conquer the speed problem of 2-way. And tell us how much capital it takes to bring it all to fruition. We'll raise it to solve the problem.

Our very distinguished and renowned Chairman, Warren (Pete) Musser, invented the network card. Creating networking was a disruptive technology. He said it best when he stated that Telkonet, too, is a disruptive technology. It'll change the way you do things and its application is global. Our markets are virtually untapped. And there aren't enough 0's on anybody's calculator to project this thing out.

It's all just around the corner….and we're chairing the race. That's the vision.

Jennifer Gardiner, an Investor Relations veteran and a freelance business writer, is presently consulting with Eric, David and Sons, Inc. Working primarily with micro and small cap Companies, she has assembled and actively maintains international relationships in her roles as Marketing/Communications Strategist, and Investor/Public Relations Managerial consultant.

Please view the EDS disclosure/disclaimer on TLKO here.

2003 © Eric, David & Sons, Inc. All Rights Reserved.

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