**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549




**FORM
      10-KSB**




**x** **ANNUAL
      REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE**


**ACT
      OF 1934**




**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2006**




**o** **TRANSITION
      REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE**


**ACT
      OF 1934**




**FOR
      THE TRANSITION PERIOD FROM ______________
      TO________________**




**Commission
      file number 0-21864**




**TELEGEN
      CORPORATION**


(Exact
      name of small business issuer as specified in its charter)





**California**
            **84-0672714****(State
                or other jurisdiction of incorporation or
                organization)**
            **(I.R.S.
                Employer Identification
                No.)**




**1840
      GATEWAY DRIVE, SUITE 200, SAN MATEO, CALIFORNIA 94404**


(Address
      of principal executive offices)




(650)
      292-9658


(Registrant’s
      telephone number)




Securities
      registered under Section 12(b) of the Exchange Act: NONE.




Securities
      registered under Section 12(g) of the Exchange Act: COMMON STOCK NO PAR
      VALUE.




Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange. o




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the issuer was required to file such reports), and (2) has been subject
      to
      such filing requirements for the past 90 days. Yes x No o




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B not contained in this form, and no disclosure will be contained,
      to the best of the issuer’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. o




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o No x




For
      the
      fiscal year ended December 31, 2006, the issuer’s revenues were $0. As of
      February 21, 2007, the aggregate market value of issuer’s voting stock held by
      non-affiliates was $9,717,604 based on the average of the bid and ask prices
      of
      such stock on that date of $0.30, as reported on the Pink Sheets.




On
      February 21, 2007 there were 47,830,683 shares of Registrant’s common stock, no
      par value, issued and outstanding.





**Documents
      Incorporated By Reference** :    None





Transitional
      Small Business Disclosure Format: Yes o No x










TABLE
      OF
      CONTENTS




PagePART
                I
            
            NumberItem
                1.
            Our
                Business
            1Item
                2.
            Properties
            4Item
                3.
            Legal
                Proceedings
            4Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            4PART
                IIItem
                5.
            Market
                for Common Equity, Related Stockholder Matters and Small Business
                Issuer
                Purchases of Equity Securities
            5Item
                6.
            Management’s
                Discussion and Analysis or Plan of Operation
            6Item
                7.
            Financial
                Statements
            13Item
                8.
            Changes
                in and Disagreements with the Accountants on Accounting and Financial
                Disclosure
            14Item
                8A.
            Controls
                and Procedures
            14Item
                8B.
            Other
                Information
            14PART
                IIIItem
                9.
            Directors,
                Executive Officers, Promoters, Control Persons and Corporate Governance;
                Compliance With Section 16(a) of the Exchange Act
            15Item
                10.
            Executive
                Compensation
            18Item
                11.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            20Item
                12.
            Certain
                Relationships and Related Transactions and Director
                Independence
            21Item
                13.
            Exhibits
            22Item
                14.
            Principal
                Accountant Fees and Services
            23Signatures
            
            24










**EXPLANATORY
      NOTE**





Unless
      otherwise indicated or the context otherwise requires, all references in this
      Annual Report on Form 10-KSB to “we,” “us,” “our,” and the “Company” are to
      Telegen Corporation and our four subsidiaries, Telegen Display Corporation,
      Telegen Communications Corporation, Telegen Display Laboratories, Inc. and
      Telisar Corporation.







**CAUTIONARY
      NOTE REGARDING FORWARD LOOKING STATEMENTS**




We
      are
      including the following cautionary statement in this Annual Report on Form
      10-KSB to make applicable and take advantage of the safe harbor provisions
      of
      the Private Securities Litigation Reform Act of 1995 for any forward-looking
      statements. All statements other than statements of historical fact, including
      statements concerning plans, objectives, goals, strategies, future events or
      performance and underlying assumptions, future results of operations or
      financial position, made in this Annual Report on Form 10-KSB are forward
      looking. In particular, the words “believe,” “expect,” “intend,” “anticipate,”
“estimate,” “may,” “will,” variations of such words, and similar expressions
      identify forward-looking statements, but are not the exclusive means of
      identifying such statements and their absence does not mean that the statement
      is not forward-looking.




The
      forward-looking statements contained herein involve risks and uncertainties
      which could cause actual results or outcomes to differ materially from those
      expressed in the forward-looking statements. Our expectations, beliefs and
      projections are expressed in good faith and are believed by management to have
      a
      reasonable basis, including without limitation, management’s examination of
      historical operating trends, data contained in our records and other data
      available from third parties, but there can be no assurance that management’s
      expectation, beliefs or projections will result or be achieved or accomplished.
      In addition to other factors and matters discussed elsewhere herein, the
      following are important factors that, in our view, could cause actual results
      to
      differ materially from those discussed in the forward-looking statements: our
      losses from period to period; our current dependence on a limited number of
      key
      suppliers and investors; our ability to successfully market and sell our
      products in view of changing trends, acceptance of products and other factors
      affecting market conditions; technological advances by our competitors; capital
      needs to fund operations and development programs; delays in the manufacture
      of
      new and existing products by us or third party contractors; the loss of any
      key
      employee; the outcome of any litigation; changes in governmental regulations;
      and availability of capital on terms satisfactory to us. We do not undertake
      any
      obligation to update or revise any forward-looking statements to reflect any
      future events or circumstances.




For
      a
      discussion of some of the factors that may affect our business, results and
      prospects, see “ITEM 1.- OUR BUSINESS” and “Risk Factors.” Readers are
      urged to carefully review and consider the various disclosures made by us in
      this Report and in our other reports filed with the Securities and Exchange
      Commission, and those described from time to time in our press releases and
      other communications, which attempt to advise interested parties of the risks
      and factors that may affect our business, prospects and results of
      operations.








**PART
      I**





**ITEM
      1. OUR BUSINESS**




**Overview**




Telegen
      Corporation is a research and development company focused on developing
      proprietary light-emitting technology. We believe that if we are successful
      in
      developing our technology, it could have varied commercial applications.
      However, the commercial viability of our light-emitting technology is largely
      dependent on research and development results and specific markets as determined
      as a result of the same. We currently have no commercial products and no
      revenues, and we have no established timeline to bring a commercial product
      to
      market or generate revenue.




We
      are a
      California corporation, originally incorporated on August 30, 1996. Our shares
      of common stock are presently quoted on the Pink Sheets under the symbol “TEGN”.
      We have four inactive subsidiaries. The inactive subsidiaries are Telegen
      Display Corporation (“TDC”), a California corporation and our wholly-owned
      subsidiary, Telegen Communications Corporation (“TCC”), a California corporation
      and our wholly-owned subsidiary, Telegen Display Laboratories, Inc., (“TDL”) a
      California corporation and our wholly-owned subsidiary, and Telisar Corporation,
      a California corporation and our majority-owned subsidiary. Our corporate
      offices are located at 1830 Gateway Drive (Suite 200) San Mateo, CA 94404 and
      our telephone number is 650-292-9658. See “- Our History” below for further
      discussion of our prior history.




Peterson
      Sullivan, PLLC, our independent registered public accounting firm, in their
      opinion on our financial statements for the year ended December 31, 2006, raised
      substantial doubt about our ability to continue as a going concern. Moreover,
      Singer, Lewak, Greenbaum & Goldstein LLP, our previous independent
      registered public accounting firm in their opinion on our financial statements
      for the year ended December 31, 2005, have also raised substantial doubt about
      our ability to continue as a going concern. For further information regarding
      this, see Note 3 to our Consolidated Financial Statements included in this
      Annual Report.




**Our
      Proprietary Technology and Our Research and Development
      Efforts**




Previously,
      we were a high technology company with products in development in the flat
      panel
      display industry and embedding of digital data in an RF signal through our
      majority-owned subsidiary, Telisar Corporation. In 2004, we hired a technology
      consultant, Signum Technologies and its affiliated company, Vanguard
      Technologies, to perform a review of the viability of completing our technology
      and to identify any viable markets. Ultimately, we determined that this Telisar
      technology was potentially viable, but it was beyond our existing resources
      for
      the development effort required to achieve technological feasibility. Research
      also showed the market size for digital imbedding of data on an RF signal to
      be
      limited and shrinking with the technology most likely becoming obsolete in
      the
      near term. Accordingly, we decided to cease funding of this technology; however,
      we allocated funds to complete the process for U.S. Patent 7,071,994 B2, which
      was issued on July 4, 2006. All other patent development efforts were abandoned
      due to lack of funds and market viability. We also engaged our former Vice
      President of Engineering, Stalimir Popovich, to review the viability of the
      flat
      panel display technology. After meeting with former technology research
      consultants and reviewing the state of the global flat panel market, management
      decided that although the technology was potentially viable, it was beyond
      our
      existing resources for the development effort required to achieve technological
      feasibility and market penetration would be difficult given current market
      conditions.




While
      researching the flat panel market, we determined that market potential might
      exist in the lighting industry utilizing some of our prior proprietary
      technology and recent technology developments from our research and development
      activities. We believe that the continuation of development efforts on this
      new
      technology is the best use of our current resources and we have focused our
      efforts and resources on developing proprietary lighting technology. Beginning
      in 2004 through today, we have engaged several research consultants under work
      for hire contracts to assist in our development efforts of our new lighting
      technology.




1




We
      are
      currently performing methods research and manufacturing proof of concept
      prototypes. We are also developing the necessary documentation, and we have
      applied for patent protection on our proprietary technology. There can be no
      assurances that any such patent application will be approved or any patents
      granted. Although we believe that our light-emitting technology is
      technologically feasible, there can be no assurances that feasibility will
      be
      achieved or if achieved that a market for the technology will be sufficient
      to
      enable us to generate revenues or achieve profitable operations.




We
      believe that the primary market for our light-emitting technology is the general
      illumination market, where incandescent, halogen, fluorescent and LED light
      emitters are utilized. Other potential markets are electronic signs, billboards,
      traffic signals, as well as specialized military and industrial
      applications.




Our
      emphasis on lighting technology research will command management’s primary
      attention for the foreseeable future. It will also comprise the primary use
      of
      our limited financial resources. Our near-term success will depend largely
      on
      our ability to continue to develop our light emitting technology, achieve proof
      of concept and protect the technology developed through patents and trade
      secrets, and obtain funding to finance our operations until we are able to
      generate meaningful revenue. In addition, our success will depend on our ability
      to develop products that meet industry standards and that are accepted in the
      marketplace at a level sufficient for us to achieve profitable operations.
      If we
      are unable, for technological, competitive, financial or other reasons, to
      successfully develop our technology and commercial products in a timely manner
      or respond to changes in the industry or if products or product enhancements
      that Telegen develops do not achieve market acceptance, our business and results
      of operations will be materially adversely affected.




**The
      Lighting Industry Market**




We
      believe the primary market for our light-emitting technology is the General
      Illumination Market, where incandescent, halogen, fluorescent and LED light
      emitters are utilized. According to Strategies Unlimited of Mountain View
      California, the General Illumination Market is an estimated $12 to $15 billion
      market segment, and we believe our technology could be utilized in major areas
      of this market segment. This market segment is highly competitive and
      traditionally dominated by several large competitors such as General Electric
      Company, Phillips Electronics NV, Osram Sylvania, the North American operation
      of OSRAM GmbH, Germany, Siemens AG, Ushio Inc. These entities possess far more
      substantial financial, human and other resources than we do. In the past decade,
      other smaller rapidly growing companies have entered this market due to the
      outsourcing of manufacturing on a non-exclusive basis by these large
      corporations and other market factors. Distribution in this market segment
      is
      primarily through numerous distributors (typically regional) or directly from
      manufacturers to larger retailers.





Significant
      lighting market drivers are size, cost, brightness, color rendering (CRI),
      mercury free and energy efficiency. We are directing our research efforts with
      awareness of these market drivers and believe our light emitting technology
      will
      have advantages in this market space.





The
      largest segment in the General Illumination Market is the common household
      and
      commercial light bulb style applications with the R-30 style light bulb, our
      most likely initial product, one of the largest sub-market segments. There
      are
      over 16 million bulbs of this type purchased in the state of California annually
      according to sources at the California Lighting and Technology
      Center.





Other
      potential markets are electronic signs, billboards, traffic signals, as well
      as
      industrial, horticultural and specialized military applications.




**Our
      Intellectual Property, Patents and Proprietary Rights**




We
      have
      filed two U.S. patent applications on our proprietary lighting technology,
      and
      we expect to file a third patent application in the first quarter of 2007 and
      for additional patent protection as appropriate. We believe that our technology
      has unique aspects that are patentable; however, there can be no assurances
      that
      any patent will be issued or if issued that it will be defensible.




In
      addition, we currently have one issued U.S. patent on our prior flat panel
      display technology. In the first quarter of 2005, we suspended all further
      development efforts relating to this prior technology. We continue to review
      this patent from time to time for potentially viable markets and commercial
      applications.




2




We
      protect our intellectual property rights by through a combination of trademark,
      copyright, trade secret laws and other methods of restricting disclosure, and
      requiring our independent consultants, strategic vendors and suppliers to sign
      non-disclosure agreements as well as an assignment of inventions agreement
      when
      appropriate.




**Regulatory
      Issues**




Any
      commercial products that we attempt to develop based on our proprietary
      light-emitting technology may require certifications from Underwriters
      Laboratories or other certifying agencies and may be subject to other regulatory
      approvals. The approvals and certifications required will be determined based
      upon the market that we enter with our proprietary lighting
      technology.





**Marketing
      and Sales**




Currently
      we have no sales and marketing efforts as we are primarily a research and
      development company; however, we have engaged consultants to analyze and
      evaluate the marketability of our light-emitting technology as envisioned.
      Based
      on the information obtained and industry interviews performed by consultants,
      we
      believe that the technology could prove to have a viable market, but can give
      no
      assurances that any such market will develop.





In
      the
      state of California, certain utilities are required by law to invest 0.15%
      of
      their gross revenue to introduce energy saving devices to the market. They
      do so
      by providing incentives to all market channel levels. One form of incentives
      is
      by providing cash rebates to manufacturers, stores and consumer. As part of
      our
      market and sales due diligence, in November 2006, we attended the California
      Lighting Technology Forum attended by all major California utilities and the
      director of the California Energy Commission, and in 2005 and 2006 we attended
      LightFair, the largest lighting related trade show in the U.S.





We
      believe that initial sales would most likely occur though independent regional
      distributors and direct purchases by utility companies. However, we currently
      do
      not have any distribution relationships, and these may never
      develop.




**Our
      History**




Previously,
      we were a high technology company with products in development in the flat
      panel
      display industry and embedding of digital data in an RF signal through our
      majority-owned subsidiary, Telisar Corporation. We did not achieve profitable
      operations and on October 28, 1998, we commenced a reorganization case under
      Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court. From
      January 1, 2000 through June 28, 2000, we managed our affairs as a
“debtor-in-possession”, subject to supervision of the Bankruptcy Court,
      including the requirements that we file certain reports and seek court approval
      for certain actions, primarily any actions outside the ordinary course of
      business. We filed a Plan of Reorganization on April 22, 2000 and the Bankruptcy
      Court confirmed the Plan of Reorganization on June 28, 2000. We were
      recapitalized after emerging from bankruptcy, and continued pursuing flat panel
      development and embedding of digital data in an RF signal through Telisar.
      We
      never achieved profitable operations in either venture before exhausting
      funding. We ceased operational activities and became dormant during fiscal
      2002.
      The final decree closing this bankruptcy case was issued on September 10,
      2005.




**Board
      and Management Changes Since 2004**




On
      September 29, 2003, a committee of Stockholders initiated a Solicitation of
      Consents to Elect Directors to fill vacant seats on our board of directors.
      On
      February 28, 2004, we received sufficient consents to elect Ron Davis, Richard
      Herring, Victor Meiusi, Richard Sellers and Duncan Troy to the board; however,
      only Richard Herring, Richard Sellers and Duncan Troy accepted the board
      nominations, with Duncan Troy appointed as Chairman of the Board. Previously
      elected board members Jessica Stevens and Bonnie Crystal remain as board
      members; however neither Ms. Stevens nor Ms. Crystal has attended any board
      meetings subsequent to February 28, 2004.




In
      May
      2004, our board of directors installed a new management team, with Richard
      Herring as President and Chief Executive Officer and Richard Sellers as Chief
      Operating Officer.




In
      June
      2005, the board of directors appointed Mark Weber to the board. In October
      2006,
      the board of directors appointed Charles E. Hunt to the board, bringing the
      total number of directors on the board to seven, and appointed Matt DeVries
      as
      our new Chief Financial Officer.




3




**Settlements
      with Creditors**




During
      2005 we contacted certain creditors to settle and obtain releases for an
      aggregate of $535,174 of our historic liabilities with eight vendors for
      aggregate consideration of cash of $83,468 and the issuance of 380,198 shares
      of
      common stock valued at $15,208, recorded as a “Gain on debt settlements” of
      $436,498 in the accompanying consolidated statement of operations for the year
      ended December 31, 2005.




**Private
      Placements of Common Stock**




Beginning
      on December 28, 2006 and ending on January 4, 2007 we sold an aggregate of
      3,400,000 shares of common stock to a group of five accredited investors
      pursuant to Regulation D under the Securities Act of 1933, as amended, at a
      purchase price of $0.125 per share for gross proceeds of $425,000 to be used
      for
      working capital. Mark Weber, one of our directors, participated in the private
      placement, purchasing 400,000 shares for $50,000 and Richard Sellers, an officer
      and director converted $100,000 that he had advanced to us on November 16,
      2006
      into 800,000 shares of common stock. The purchases by Mr. Weber and Mr. Sellers
      were made on identical terms to all other investors.





During
      2005 and ending on October 31, 2005, we sold an aggregate of 6,000,000 shares
      of
      common stock to a group of 19 accredited investors pursuant to Regulation D
      under the Securities Act of 1933, as amended, at a purchase price of $0.10
      per
      share for gross proceeds of $600,000 to be used for working capital. Mark Weber,
      one of our directors, participated in the private placement, purchasing 90,000
      shares for $9,000 and Richard Sellers, an officer and director, purchased
      1,000,000 shares for $100,000. The purchases by Mr. Weber and Mr. Sellers were
      made on identical terms to all other investors.





During
      2004 and ending on May 30, 2004, we sold an aggregate of 9,563,898 shares of
      common stock to a group of five accredited non-U.S. investors pursuant to
      Regulation S under the Securities Act of 1933, as amended, at a purchase price
      of $0.045 per share, for gross proceeds of $430,375 to be used for working
      capital.




**Employees**




As
      of
      December 31, 2006 we had two part-time employees, Richard Herring our Chief
      Executive Officer and Richard Sellers our Chief Operating Officer, working
      on
      managing technology development and day to day operations. Mr. Herring and
      Mr.
      Sellers have not been paid any cash salaries. In 2006, we granted shares of
      restricted common stock for the services of these officers. Mr. Sellers received
      400,000 restricted shares and Mr. Herring 200,000 restricted shares,
      respectively. The ability and timing of hiring full time employees directly
      relates to our technology development timelines and obtaining adequate
      funding.




**Consultants**




All
      operations and technological development to date have been made through
      independent consultants and strategic vendors on a work for hire contract basis.
      Consultants will continue to be the human resource for us until such a time
      that
      our technology warrants hiring full time employees and sufficient funding is
      obtained to expand the operations.





**ITEM
      2. PROPERTIES**




We
      own no
      real property and have no long-term lease obligations. Our corporate
      headquarters are leased on a month-to-month basis.





**ITEM
      3. LEGAL PROCEEDINGS**




We
      have
      no pending legal proceedings.





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




No
      matters were submitted to a vote of our security holders during the fourth
      quarter of the fiscal year ended December 31, 2006.




4




**PART
      II**





**ITEM
      5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
      ISSUER PURCHASES OF EQUITY SECURITIES**




Our
      shares of common stock are presently quoted on the Pink Sheets under the symbol
      TEGN. Listed below are the high and low sale prices for the shares of our common
      stock during the years ended December 31, 2006 and 2005. These quotations
      reflect inter-dealer prices, without mark-up, mark-down or commission and may
      not represent actual transactions.





High
            
            LowFiscal
                2005First
                Quarter (ended March 31, 2005)
            
            $
            0.050
            
            $
            0.030Second
                Quarter (ended June 30, 2005)
            
            
            0.070
            
            
            0.035Third
                Quarter (ended September 30, 2005)
            
            
            0.270
            
            
            0.070Fourth
                Quarter (ended December 31, 2005)
            
            
            0.550
            
            
            0.080Fiscal
                2006First
                Quarter (ended March 31, 2006)
            
            
            0.380
            
            
            0.160Second
                Quarter (ended June 30, 2006)
            
            
            0.300
            
            
            0.120Third
                Quarter (ended September 30, 2006)
            
            
            0.250
            
            
            0.120Fourth
                Quarter (ended December 31, 2006)
            
            
            0.300
            
            
            0.120




On
      December 5, 2006 the board of directors terminated the 2000 Stock Option Plan,
      2000 Director Stock Option Plan, 2000 Employee Stock Purchase Plan and 2000
      Officer Stock Purchase Plan. There were no grants of options or purchase rights
      outstanding under any of these plans and there has been no activity for the
      years ended December 31, 2006 and 2005.




As
      of
      December 31, 2006 there were 47,430,683 shares issued and outstanding and
      approximately 635 holders of record of our common stock. We believe that a
      significant number of beneficial owners of our common stock hold shares in
      street name. No dividends have ever been paid to holders of our common stock,
      and we do not anticipate paying dividends in the future.




**Sales
      of Unregistered Securities**




The
      following provides information regarding sales of equity securities by us during
      the fiscal year ended December 31, 2006, which were not registered under the
      Securities Act.





·
            On
                October 17, 2006 we issued an aggregate of 900,000 shares of common
                stock
                to our corporate officers for services they performed for us. Richard
                Herring, our Chief Executive Officer received 200,000 shares, Richard
                Sellers, our Chief Operating Officer received 400,000 shares and
                Matthew
                DeVries, our Chief Financial Officer received 300,000 shares. The
                price of
                the shares was $0.20 as determined by the closing market price as
                of the
                date of issuance. The shares were offered and sold pursuant to the
                exemption from registration under Section 4(2) of the Securities
                Act.





·
            On
                October 17, 2006 we issued an aggregate of 300,000 shares of common
                stock
                to Charles Hunt upon his appointment to our Board of Directors.The
                price of the shares was $0.20 as determined by the closing market
                price as
                of the date of issuance.The
                shares were offered and sold pursuant to the exemption from registration
                under Section 4(2) of the Securities
                Act.





·
            On
                October 17, 2006 we issued an aggregate of 50,000 shares of common
                stock
                to a vendor for services rendered. The price of the shares was $0.20
                as
                determined by the closing market price as of the date of issuance.
                The
                shares were offered and sold pursuant to the exemption from registration
                under Section 4(2) of the Securities
                Act.





·
            From
                December 28, 2006 to January 4, 2007 we sold an aggregate of 3,400,000
                shares of common stock to a group of 5 accredited investors at a
                purchase
                price of $0.125 per share for gross proceeds of $425,000 to be used
                for
                working capital. Mark Weber, one of our directors, participated in
                the
                private placement, purchasing 400,000 shares and Richard Sellers,
                an
                officer and director, purchased 800,000 shares through the conversion
                of
                his November 16, 2006 cash advance. The purchases by Mr. Weber and
                Mr.
                Sellers were made on identical terms to all other investors in the
                private
                placement. No commissions were paid in the private placement. The
                shares
                were offered and sold pursuant to the exemption from registration
                under
                Regulation D of the Securities Act.





5




**ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION**




The
      following discussion and analysis should be read in conjunction with the
      Consolidated Financial Statements and notes thereto appearing elsewhere in
      this
      Report. Except for historical information, the following discussion contains
      forward-looking statements within the meaning of the Private Securities
      Litigation Reform Act of 1995. See “Forward Looking Statements” and “Risk
      Factors.”




At
      December 31, 2006 our Independent Registered Public Accounting Firms, Peterson
      Sullivan, PLLC has raised substantial doubt about our ability to continue as
      a
      going concern. See “Note 3” to our Consolidated Financial
      Statements.





**Overview**




Telegen
      Corporation is a research and development company focused on developing
      proprietary light-emitting technology. We believe that if we are successful
      in
      developing our technology, it could have varied commercial applications. The
      commercial viability of our light-emitting technology is largely dependent
      on
      research and development results and specific markets determined as a result
      of
      the same. We currently have no commercial products and no revenues and we have
      no established timeline to develop a commercial product or to generate
      revenue.




**Plan
      of Operations**




We
      have
      had no revenues in either fiscal 2006 or 2005, and we have made significant
      expenditures for research and development. In order to become competitive in
      a
      changing business environment, we must continue to make significant expenditures
      in these areas. Therefore, our operating results will depend in large part
      on
      the results of our research and development and our ability to generate revenue
      from those efforts.




For
      fiscal 2007, we anticipate that we will continue our research and development
      efforts for our proprietary lighting technology project and the attendant cost
      of operations at similar levels as 2006. As of December 31, 2006, we do not
      have
      sufficient resources to fund our operations through 2007 without raising
      additional debt or equity financing. We expect that during the second quarter
      of
      2007 we will require additional funds for our research and development
      activities for the continued research of our proprietary lighting technology.
      No
      additional projects are planned, but there can be no assurances that changes
      to
      this plan will not occur. We expect that our capital expenditures related to
      the
      development of the technology during fiscal 2007 will not exceed $10,000. It
      is
      not anticipated that, given the current level of funding that any significant
      changes will occur with the number of employees. Any employees added will be
      determined primarily by our ability to successfully develop the technology
      and
      our available funding to hire employees.





**Results
      of Operations for the Fiscal Years ended December 31, 2006 and
      2005**




**Research
      and Development Expenses**




For
      the
      twelve months ended December 31, 2006 and 2005 we were involved in a single
      project to develop and commercialize our proprietary lighting technology.
      Research and development expenses increased $69,288 to $316,422 for the year
      ended December 31, 2006 compared to $247,134 for the year ended December 31,
      2005. For the years ended December 31, 2006 and 2005, research and development
      expenses were comprised primarily of technical consulting expenses, legal
      expenses for the development and protection of intellectual property and travel.
      A non-cash charge for compensation expense of $60,000 for the issuance of
      300,000 shares of common stock to Charles Hunt, a member of our board of
      directors and one of our technical consultants is included in the year ended
      December 31, 2006. The increase in the twelve months ended December 31, 2006
      is
      due primarily to this increased compensation expense, as well as increased
      technical consulting expenses related to the ramp up of the development of
      our
      lighting technology. We do not have an established timeline for the completion
      of this project, as the results are not certain and as such, cannot estimate
      the
      costs that are required to develop a commercially viable product. If we are
      unable to develop a product that is commercially viable with the resources
      available to us, we will need to discontinue our current development efforts
      and
      either seek alternative projects or possibly curtail or cease our
      operations.




6




**General
      and Administrative Expenses**




General
      and administrative expenses for the years ended December 31, 2006 and 2005
      are
      comprised primarily of compensation expenses related to stock issuances,
      professional and legal fees, consulting expenses, insurance, travel, general
      corporate related overheads and office expenses. General and administrative
      expenses increased by $5,659 to $408,105 for the year ended December 31, 2006
      compared to $402,446 for the year ended December 31, 2005. The increase is
      due
      primarily to increases in professional fees related to public company filings
      incurred in 2006 partially offset by decreases in corporate related travel
      expenses. In fiscal 2006, non-cash compensation expense for stock issued to
      certain directors, officers and consultants was $190,000 compared to $171,138
      for fiscal 2005.




**Other
      Income**




Other
      income and expense for fiscal 2006 is comprised of interest income of $3,857,
      an
      increase of $1,868 when compared to $1,989 for fiscal 2005. The increase in
      interest income is due to higher average cash balances for fiscal 2006 when
      compared to fiscal 2005. Other income for fiscal 2005 also includes a gain
      on
      debt settlements of $436,498 relating to the settlement of $535,174 of its
      historic liabilities with nine vendors for aggregate consideration of cash
      of
      $83,468 and 380,198 shares of common stock valued at $15,208, resulting in
      a
      gain on debt settlements of $436,498.





**Liquidity
      and Capital Resources**




Our
      cash
      and cash equivalents of $289,795 as of December 31, 2006 are not sufficient
      to
      support our operations through fiscal 2007 and it will be necessary for us
      to
      seek additional financing.




Historically,
      we have funded our operations primarily through private placements of shares
      of
      unregistered common stock with accredited individual and institutional investors
      and advances from our officers and directors.




Richard
      Sellers, our Chief Operating Officer and a director, provided funding during
      fiscal 2006 for operations. On November 16, 2006, Mr. Sellers advanced cash
      in
      an aggregate amount of $100,000, which he subsequently converted into 800,000
      shares of common stock on December 28, 2006 at a price of $0.125 per share.




From
      December 28, 2006 to January 4, 2007 we sold an aggregate of 3,400,000 shares
      of
      common stock to a group of 5 accredited investors at a purchase price of $0.125
      per share for gross proceeds of $425,000 to be used for working capital. The
      gross proceeds include the $100,000 advanced by Mr. Sellers.




We
      will
      need to raise working capital to sustain our operations through one or more
      debt
      or equity financings. Our efforts to raise sufficient capital may not be
      successful, and even if we are able to obtain additional financing, the terms
      of
      any such financing may be unfavorable to us and may be highly dilutive to
      existing stockholders. Our officers or directors may make further cash advances
      to us to fund operations from time to time; however, no officer or director
      is
      obligated to make any such advances. There can be no assurances that further
      cash advances or debt or equity financings, when and if made, will be sufficient
      to sustain our required levels of operations. In addition, if necessary, we
      may
      explore strategic alternatives, which may include a merger, asset sale, joint
      venture or another comparable transaction. If we are unable to obtain sufficient
      cash to continue to fund operations or if we are unable to locate a strategic
      partner, we may be forced to seek protection from creditors under the bankruptcy
      laws or cease operations. Any inability to obtain additional cash as needed
      would have a material adverse effect on our financial position, results of
      operations and our ability to continue in existence. Our auditors added an
      explanatory paragraph to their opinion on our fiscal 2006 financial statements
      stating that there was substantial doubt about our ability to continue as a
      going concern.





**Off-Balance
      Sheet Arrangements**





We
      have
      no off-balance sheet arrangements.





7




**Critical
      Accounting Policies**




The
      discussion and analysis of our financial condition and results of operations
      are
      based upon our financial statements, which have been prepared in accordance
      with
      accounting principles generally accepted in the United States. The preparation
      of these financial statements requires the use of estimates that affect the
      reported amounts of assets, liabilities and expenses. We evaluate our estimates
      on an ongoing basis and base our estimates on historical experience and on
      actual information and assumptions that we believe to be reasonable under the
      circumstances at that time. Actual results may differ from these estimates
      under
      different assumptions or conditions. We believe that the following critical
      accounting policies affect our more significant estimates used in the
      preparation of our financial statements.




**Income
      Taxes**





We
      recognize the amount of income taxes payable or refundable for the current
      year
      and recognize deferred tax assets and liabilities for the future tax
      consequences attributable to differences between the financial statement amounts
      of certain assets and liabilities and their respective tax bases. Deferred
      tax
      assets and deferred tax liabilities are measured using enacted tax rates
      expected to apply to taxable income in the years those temporary differences
      are
      expected to be recovered or settled. A valuation allowance is required when
      it
      is less likely than not that we will be able to realize all or a portion of
      our
      deferred tax assets.




**Recently
      Issued Accounting Pronouncements**




In
      February 2006, the FASB issued SFAS No. 155 “Accounting for Certain Hybrid
      Financial Instruments”, which is an amendment of SFAS Nos. 133 and 140. This
      statement (a) permits fair value remeasurement for any hybrid financial
      instrument that contains an embedded derivative that otherwise would require
      bifurcation, (b) clarifies which interest-only strip and principal-only strip
      are not subject to the requirements of SFAS No. 133, (c) establishes a
      requirement to evaluate interests in securitized financial assets to identify
      interests that are freestanding derivatives or that are hybrid financial
      instruments that contain an embedded derivative requiring bifurcation, (d)
      clarifies that concentrations of credit risk in the form of subordination are
      not embedded derivatives, (e) amends SFAS No. 140 to eliminate the prohibition
      on a qualifying special-purpose entity from holding a derivative financial
      instrument that pertains to a beneficial interest other than another derivative
      financial instrument. This statement is effective for financial statements
      for
      fiscal years beginning after September 15, 2006. Earlier adoption of this
      statement is permitted as of the beginning of an entity’s fiscal year, provided
      the entity has not yet issued any financial statements for that fiscal year.
      The
      adoption of this standard is not expected to have a material impact on our
      financial statements.




In
      March
      2006, the FASB issued SFAS No. 156 “Accounting for Servicing of Financial
      Assets”, which amends SFAS No. 140. This statement establishes, among other
      things, the accounting for all separately recognized servicing assets and
      servicing liabilities. This statement amends SFAS No. 140 to require that all
      separately recognized servicing assets and servicing liabilities be initially
      measured at fair value, if practicable. This statement permits, but does not
      require, the subsequent measurement of separately recognized servicing assets
      and servicing liabilities at fair value. An entity that uses derivative
      instruments to mitigate the risks inherent in servicing assets and servicing
      liabilities is required to account for those derivative instruments at fair
      value. Under this statement, an entity can elect subsequent fair value
      measurement to account for its separately recognized servicing assets and
      servicing liabilities. By electing that option, an entity may simplify its
      accounting because this statement permits income statement recognition of the
      potential offsetting changes in fair value of those servicing assets and
      servicing liabilities and derivative instruments in the same accounting period.
      This statement is effective for financial statements for fiscal years beginning
      after September 15, 2006. Earlier adoption of this statement is permitted as
      of
      the beginning of an entity’s fiscal year, provided the entity has not yet issued
      any financial statements for that fiscal year. Management believes that adoption
      of this standard will not have a material impact on our financial
      statements.




In
      June
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainties in
      Income Taxes”, ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in
      income taxes and prescribes a recognition threshold and measurement attribute
      for the financial statement recognition and measurement of a tax position taken
      or expected to be taken in a tax return. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. Management believes that adoption of this
      standard will not have a material impact on our financial
      statements.




8




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” to
      eliminate the diversity in practice that exists due to the different definitions
      of fair value and the limited guidance for applying those definitions in GAAP
      that are dispersed among the many accounting pronouncements that require fair
      value measurements. SFAS No. 157 retains the exchange price notion in earlier
      definitions of fair value, but clarifies that the exchange price is the price
      in
      an orderly transaction between market participants to sell an asset or liability
      in the principal or most advantageous market for the asset or liability.
      Moreover, the SFAS states that the transaction is hypothetical at the
      measurement date, considered from the perspective of the market participant
      who
      holds the asset or liability. Consequently, fair value is defined as the price
      that would be received to sell an asset or paid to transfer a liability in
      an
      orderly transaction between market participants at the measurement date (an
      exit
      price), as opposed to the price that would be paid to acquire the asset or
      received to assume the liability at the measurement date (an entry
      price).




SFAS
      No.
      157 also stipulates that, as a market-based measurement, fair value measurement
      should be determined based on the assumptions that market participants would
      use
      in pricing the asset or liability, and establishes a fair value hierarchy that
      distinguishes between (a) market participant assumptions developed based on
      market data obtained from sources independent of the reporting entity
      (observable inputs) and (b) the reporting entity’s own assumptions about market
      participant assumptions developed based on the best information available in
      the
      circumstances (unobservable inputs). Finally, SFAS No. 157 expands disclosures
      about the use of fair value to measure assets and liabilities in interim and
      annual periods subsequent to initial recognition. Entities are encouraged to
      combine the fair value information disclosed under SFAS No. 157 with the fair
      value information disclosed under other accounting pronouncements, including
      SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” where
      practicable. The guidance in this Statement applies for derivatives and other
      financial instruments measured at fair value under SFAS No.133, “Accounting for
      Derivative Instruments and Hedging Activities,” at initial recognition and in
      all subsequent periods.




SFAS
      No. 157 is effective for financial statements issued for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal years, although
      earlier application is encouraged. Additionally, prospective application of
      the
      provisions of SFAS No. 157 is required as of the beginning of the fiscal year
      in
      which it is initially applied, except when certain circumstances require
      retrospective application. We are currently evaluating the impact of this
      statement on our results of operations or financial position.




In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans (an amendment of FASB Statements
      No. 87, 88, 106, and 132R)”, which will require employers to fully recognize the
      obligations associated with single-employer defined benefit pension, retiree
      healthcare and other postretirement plans in their financial statements. Under
      past accounting standards, the funded status of an employer’s postretirement
      benefit plan (i.e., the difference between the plan assets and obligations)
      was
      not always completely reported in the balance sheet. Past standards only
      required an employer to disclose the complete funded status of its plans in
      the
      notes to the financial statements. SFAS No. 158 applies to plan sponsors that
      are public and private companies and nongovernmental not-for-profit
      organizations. The requirement to recognize the funded status of a benefit
      plan
      and the disclosure requirements are effective as of the end of the fiscal year
      ending after December 15, 2006, for entities with publicly traded equity
      securities, and at the end of the fiscal year ending after June 15, 2007, for
      all other entities. The requirement to measure plan assets and benefit
      obligations as of the date of the employer’s fiscal year-end statement of
      financial position is effective for fiscal years ending after December 15,
      2008.
      We do not expect that the adoption of SFAS No. 158 will have a significant
      impact on our consolidated results of operations or financial
      position.




**RISK
      FACTORS**





In
      addition to the other information in this Report on Form 10-KSB, the following
      risk factors should be considered carefully in evaluating our business and
      an
      investment in our stock.





**We
      are a research and development company. We have a limited operating history,
      we
      have generated no revenues since 1998, and it is difficult to evaluate our
      business and prospects.**





We
      have
      been engaged in the development of our new lighting technology since May 2004,
      and have incurred significant operating losses in every fiscal year since our
      inception in 1996 as we previously pursued flat panel technologies in a highly
      competitive marketplace. We expect to continue to incur operating losses as
      we
      continue research and development expenditures on our lighting technology,
      pursue product development, patent protection and enforcement, marketing and
      sales, and establishment and expansion of manufacturing and distribution
      capabilities.





9


**We
      have a number of technology issues to resolve before we will be able to
      manufacture a commercially viable product.**





Although
      we have completed initial engineering of our lighting technology and products,
      further development work and field testing will be necessary before the
      technology can be deployed. If we are unable to solve current and future
      technology issues, we will not be able to manufacture a commercially viable
      product. In addition, if we encounter unanticipated difficulty in solving
      technology issues, our research and development costs could substantially exceed
      budgeted amounts, and it may take longer to produce a commercially viable
      product.





Our
      future operating results may depend upon our ability to manufacture our products
      at a competitive cost. To do so, we may have to develop manufacturing processes
      and the manufacturing capability that will allow us to produce high volumes
      of
      products at commercially viable yields. Because we have no experience with
      manufacturing our products, we may not be able to establish manufacturing
      capacity at a reasonable cost, maintain the quality of our products as
      production increases, or develop the administrative and operational
      infrastructure necessary to support expanded operations. If we fail to achieve
      volume production of its products with competitive yields at acceptable costs,
      our business, financial condition, and results of operations may be materially
      and adversely affected.





**We
      must successfully develop, introduce, manufacture market, and sell products
      and
      manage our operating expenses.**





We
      have
      no revenues and we have significant operating losses. To be a viable business,
      we must successfully develop commercial applications for our technology,
      introduce, manufacture market, and sell products and manage our operating
      expenses. There can be no assurance that we will meet and realize any of these
      objectives, generate revenue or ever achieve profitability. Our failure to
      meet
      and realize any of these objectives or achieve profitability may have a material
      adverse effect on our business, financial condition, and results of operations.
      Our products are in development and are subject to the risks inherent in the
      development of technology products, including unforeseen delays, expenses,
      patent challenges and complications frequently encountered in the development
      and commercialization of technology products, the dependence on and attempts
      to
      apply new and rapidly changing technology, and the competitive environment
      of
      the industry. Many of these events are beyond our control, such as unanticipated
      development requirements, delays in submitting documentation for and being
      granted patents and manufacturing problems.





**We
      have incurred historical losses and as a result, may not be able to generate
      profits, support our operations, or establish a return on invested
      capital.**





We
      incurred losses in fiscal 2006 of $723,870 and have an accumulated deficit
      of
      $45,422,233 as of December 31, 2006. In addition, we expect to increase
      infrastructure and operating expenses to fund our anticipated growth. We cannot
      predict when or whether we will ever generate a profit or otherwise establish
      a
      return on invested capital. There can be no assurances that any of our business
      strategies will be successful or that significant revenues or profitability
      will
      ever be achieved or, if they are achieved, that they can be consistently
      sustained or increased on a quarterly or annual basis.





**We
      have a limited amount of cash and will require additional capital to continue
      our operations.**





We
      have a
      limited amount of available cash and will require additional capital to continue
      to implement our business plan. In the event that our operations do not generate
      sufficient cash flow, or we cannot obtain additional funds if and when needed,
      we may be forced to curtail or cease our activities, which would likely result
      in the loss to investors of all or a substantial portion of their investment.
      Our actual working capital needs will depend upon many factors, including but
      not limited to, the progress and success of our research and development, the
      extent and timing of commercial acceptance of our products, our operating
      results, and the status of competitive products. We will require additional
      funding in order to achieve our operating objectives. We may seek to obtain
      additional funds through additional equity or debt financings, as well as
      through strategic financial partners. If we raise additional funds through
      the
      issuance of equity, equity-related or debt securities, these securities may
      have
      rights, preferences or privileges senior to those of the rights of the common
      stock. The sale of additional equity or convertible debt securities could result
      in additional dilution to our stockholders. In addition, the issuance of debt
      securities could increase our risk or perceived risk. There can be no assurance
      that any additional financing will be available to us on acceptable terms,
      if at
      all. If adequate funds are not available as required, our results of operations
      will be materially adversely affected. See also “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations Liquidity and Capital
      Resources.”


10




**We
      may fail to continue as a going concern, in which event you may lose your entire
      investment in our shares.**





Our
      audited financial statements have been prepared on the assumption that we will
      continue as a going concern. Our independent registered public accounting firm
      has stated in their report on our 2006 financial statements that our recurring
      losses from operations and our difficulties in generating cash flow to meet
      our obligations and sustain our current level of operations raise substantial
      doubt about our ability to continue as a going concern.





**We
      depend on our intellectual property, and if we are unable to protect our
      intellectual property, we may be unable to compete and our business may
      fail.**





Our
      success and ability to develop our technology and create new products and
      eventually compete depends to a significant degree on our ability to protect
      our
      proprietary technology. We rely on a combination of patents, trade secret and
      other intellectual property law, nondisclosure agreements and other protective
      measures to preserve our rights pertaining to our technology. Such protection,
      however, may not preclude competitors from developing products similar to ours.
      In addition, the laws of certain foreign countries do not protect our
      intellectual property rights to the same extent as do the laws of the United
      States.





We
      do not
      have sufficient available resources to defend a lawsuit challenging our
      intellectual property rights or to prosecute others who may be infringing our
      rights. We compete in industries where competitors pursue patent prosecution
      worldwide and patent litigation is customary. At any given time, there may
      be
      one or more patent applications filed or patents that are the subject of
      litigation, which, if granted or upheld, could impair our ability to conduct
      our
      business without first obtaining licenses or granting cross-licenses, which
      may
      not be available on commercially reasonable terms, if at all. We do not perform
      worldwide patent searches as a matter of custom and, at any given time, there
      could be patent applications pending or patents issued that may have a material
      adverse effect on our business, financial condition, and results of operations.




Other
      parties may assert intellectual property infringement claims against us, and
      our
      products may infringe upon the intellectual property rights of third parties.
      Intellectual property litigation is expensive and time consuming and could
      divert management’s attention from our business and could result in the loss of
      significant rights. If there is a successful claim of infringement, we may
      be
      required to develop non-infringing technology or enter into royalty or license
      agreements which may not be available on acceptable terms, if at all. In
      addition, we could be required to cease selling any of our products that
      infringe upon the intellectual property rights of others. Successful claims
      of
      intellectual property infringement against us may have a material adverse effect
      on our business, financial condition, and results of operations. Even successful
      defense and prosecution of patent suits is costly and time
      consuming.





We
      rely
      in part on unpatented proprietary technology, and others may independently
      develop the same or similar technology or otherwise obtain access to our
      unpatented technology. To protect our trade secrets and other proprietary
      information, we require employees, consultants, advisors and strategic partners
      to enter into confidentiality agreements. These agreements may not provide
      meaningful protection for our trade secrets, know-how or other proprietary
      information in the event of any unauthorized use, misappropriation or disclosure
      of those trade secrets, know-how or other proprietary information. In
      particular, we may not be able to protect our proprietary information as we
      conduct discussions with potential strategic partners. If we are unable to
      protect the proprietary nature of our technologies, it may have a material
      adverse effect on our business, financial condition, and results of
      operations.





**We
      rely heavily on a few employees and consultants, the loss of which could have
      a
      material**  **adverse
      effect on its business, operating results and financial
      condition.**





Our
      future success will depend in significant part upon the continued services
      of
      our two employees and certain key consultants, and our ability to attract,
      assimilate and retain highly qualified technical, managerial and sales and
      marketing personnel when needed. Competition for quality personnel is intense,
      and there can be no assurance that we can retain our existing key personnel
      or
      that we will be able to attract, assimilate and retain such employees in the
      future when needed. The loss of key personnel or the inability to hire,
      assimilate or retain qualified personnel in the future could have a material
      adverse effect upon our business.


11





**We
      may be materially disadvantaged if we fail to keep pace with technological
      changes.**





The
      industry in which we hope to compete is characterized by rapid technological
      change and evolving industry standards and is highly competitive with respect
      to
      timely product innovation. The introduction of products embodying new technology
      and the emergence of new industry standards can render existing products and
      technologies obsolete and unmarketable. Our success will depend in part on
      our
      ability to successfully develop commercial applications for our technology,
      anticipate and respond to changes in technology and industry standards, and
      obtain market acceptance on any products we introduce. We may not be successful
      in the development of our technology, and we encounter technical or other
      serious difficulties in our development or commercialization that would
      materially adversely affect our results of operations.





**We
      face intense competition.**





The
      industry in which we hope to compete is very competitive and we expect this
      competition to increase continually. There are a number of well-funded U.S.
      and
      foreign companies that have established products and are developing new products
      that compete with the products we are developing. There can be no assurance
      that
      we will be able to compete effectively against our competitors, most of whom
      have substantially greater financial resources and operating experience than
      us.
      Many of our current and future competitors may have advantages over us,
      including:





·
              well
                  established products that dominate the
                  market;





·
              longer
                  operating histories;





·
              established
                  customer bases;





·
              substantially
                  greater financial resources;





·
              well
                  established and significantly greater technical, research and development,
                  manufacturing, sales and marketing resources, capabilities, and
                  experience; and





·
              greater
                  name recognition.





Our
      current and potential competitors have established, and may continue to
      establish in the future, cooperative relationships among themselves or with
      third-parties that would increase their ability to compete with us. In addition,
      competitors may be able to adapt more quickly than we can to new or emerging
      technologies and changes in customer needs, or to devote more resources to
      promoting and selling their products. If we fail to adapt to market demands
      and
      to compete successfully with existing and new competitors, our results of
      operations could be materially adversely affected.




The
      market for lighting technology is changing rapidly and there can be no assurance
      that we will be able to compete, especially in light of our limited resources.
      There can be no assurance that any products that we develop and technologies
      can
      compete successfully on a cost, quality or market acceptance basis with these
      other products and technologies.





**Any
      commercial products we develop will be subject to extensive regulation, which
      will be costly.**





If
      our
      research and development efforts are successful, any commercial products that
      we
      develop will be subject to extensive regulation. Compliance with these laws
      and
      regulations will be costly and will incur significant management time. Failure
      to comply with applicable laws and regulations could have a material adverse
      effect on our business.





**Our
      future operating results are difficult to predict.**





Due
      to
      our limited operating history and the significant development and manufacturing
      objectives that it must achieve to be successful, our quarterly operating
      results will be difficult to predict and may vary significantly from quarter
      to
      quarter. In addition, the amount and duration of losses will be extended if
      we
      are unable to develop and manufacture our products in a timely manner. Factors
      that could inhibit our product and manufacturing development and future
      operating results include:





·
              failure
                  to solve existing or future technology-related issues in a timely
                  manner;


·
              failure
                  to obtain sufficient financing when
                  needed;


·
              failure
                  to secure key manufacturing or other strategic partnerships;
                  and


·
              competitive
                  factors, including the introduction of new products, product enhancements
                  and the introduction of new or improved technologies by our competitors,
                  the entry of new competitors into the lighting markets and pricing
                  pressures.







12




**Risks
      Relating to our Common Stock**





**We
      do not intend to pay dividends** , **so any return on investment must come from appreciation**





We
      have
      never declared or paid any cash dividends on our capital stock and do not intend
      to pay dividends in the foreseeable future. We intend to invest all future
      earnings, if any, to fund our growth. Therefore, any investment return in our
      common stock must come from increases in the fair market value and trading
      price
      of our common stock.





**Our
      common stock is thinly traded.**





The
      trading volume of our common stock is thin. Therefore, there may not be a large
      number of potential purchasers ready to buy shares whenever a shareholder
      desires to sell. The public stock markets generally, and our shares
      specifically, are volatile and unpredictable. There can be no assurance that
      a
      shareholder will be able to dispose of his or her shares at the time he or
      she
      desires to do so or at the desired selling price. ****





**We
      have the right to issue up to 10,000,000 shares of “blank check” preferred
      stock, which may adversely affect the voting power of the holders of other
      of
      our securities and may deter hostile takeovers or delay changes in management
      control.**





Our
      Articles of Incorporation allow us to issue up to 10,000,000 shares of preferred
      stock without further stockholder approval and upon such terms and conditions,
      and having such rights, preferences, privileges, and restrictions as the board
      of directors may determine. The rights of the holders of common stock will
      be
      subject to, and may be adversely affected by, the rights of holders of any
      preferred stock that may be issued in the future. In addition, the issuance
      of
      preferred stock could have the effect of making it more difficult for a third
      party to acquire control of, or of discouraging bids for control of our company.
      This could limit the price that certain investors might be willing to pay in
      the
      future for shares of common stock. We have no current plans to issue any shares
      of preferred stock.





**Our
      common stock is considered a “penny stock.”**





Our
      common stock is subject to certain rules and regulations relating to “penny
      stock.” A “penny stock” is generally defined as any equity security that has a
      price less than $5.00 per share and that is not quoted on the NASDAQ Stock
      Market or a national securities exchange. Being a penny stock generally means
      that any broker who wants to trade in our shares (other than with established
      clients and certain institutional investors) must comply with certain “sales
      practice requirements,” including delivery to the prospective purchaser of the
      penny stock a risk disclosure document describing the penny stock market and
      the
      risks associated therewith. These penny stock rules make it more difficult
      for
      broker-dealers to recommend our common stock, and as a result, our stock holders
      may have difficulty in selling their shares in the secondary trading market.
      This lack of liquidity may also make it more difficult for us to raise capital
      in the future through the sale of equity securities.





**We
      may be subject to sanctions from the SEC or NASD due to our failure to timely
      file periodic reports with the SEC.**





From
      2003
      through December 2006, we were not in compliance with our reporting obligations
      under the Securities Exchange Act of 1934. In particular, we have failed to
      file
      any required annual, quarterly and other periodic reports since January 2003.
      We
      may be subject to sanctions from the SEC or from the NASD as a result of our
      deficient filings. Any such action may have an adverse effect on us or on the
      trading of our common stock. In December 2006, we filed with the SEC our annual
      report on Form 10-KSB for the year ended December 31, 2005 and our quarterly
      reports on Form 10-QSB for each of the quarterly periods during fiscal
      2006.





**ITEM
      7. FINANCIAL STATEMENTS**





The
      information required by this Item is set forth in our Consolidated Financial
      Statements and Notes thereto beginning at page F-1 of this Annual Report on
      Form
      10-KSB.


13


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




Our
      former independent registered public accounting firm, Singer Lewak Greenbaum
      & Goldstein, LLP (“SLGG”) was dismissed effective December 7, 2006. The
      decision to dismiss SLGG was approved by our Board of Directors which presently
      serves as the Audit Committee. SLGG’s audit report on our consolidated financial
      statements for fiscal years ended December 31, 2005 and 2004 did not contain
      any
      adverse opinion or disclaimer of opinion and were not qualified or modified
      as
      to uncertainty, audit scope or accounting principles; however, it contained
      an
      explanatory paragraph regarding our ability to continue as a going concern.





During
      our two most recent fiscal years and the subsequent interim period through
      the
      date of SLGG’s dismissal on December 7, 2006 there were no disagreements with
      SLGG on any matter of accounting principles or practices, financial statement
      disclosure, or auditing scope or procedures, which disagreements, if not
      resolved to the satisfaction of SLGG, would have caused SLGG to make reference
      to the subject matter of such disagreements in connection with its opinions.
      In
      addition, no reportable events, as defined in Item 304(a)(1)(iv) of Regulation
      S-B, occurred during our fiscal years ended December 31, 2005 and 2004 and
      the
      subsequent interim period through the date of SLGG’s dismissal.





Effective
      December 7, 2006, we engaged Peterson Sullivan PLLC as our new independent
      registered public accounting firm to audit our financial statements for the
      fiscal year ending December 31, 2006. The Board of Directors, which presently
      serves as the Audit Committee, approved the engagement of Peterson Sullivan
      after conducting a review of candidate accounting firms and made the decision
      to
      engage Peterson Sullivan to review the interim periods ended March 31, 2006,
      June 30, 2006 and September 30, 2006 as well as to audit our financial
      statements for the year ending December 31, 2006. During the two most recent
      fiscal years and the interim period through the date of engagement of Peterson
      Sullivan, we have not consulted with Peterson Sullivan regarding any matter
      or
      event.





**ITEM
      8A. CONTROLS AND PROCEDURES**




As
      required by Rule 13a-15 under the Exchange Act, as of the end of the fiscal
      year
      covered by this report, we have carried out an evaluation of the effectiveness
      of the design and operation of our disclosure controls and procedures. This
      evaluation was carried out under the supervision and with the participation
      of
      our management, including our chief executive officer and chief financial
      officer. Based upon that evaluation, our chief executive officer and chief
      financial officer concluded that our disclosure controls and procedures are
      effective at December 31, 2006. There have been no changes in our internal
      controls over financial reporting in connection with this evaluation that
      occurred during the fourth quarter of fiscal 2006 that has materially affected,
      or is reasonably likely to materially affect, our internal control over
      financial reporting.




Disclosure
      controls and procedures are controls and other procedures that are designed
      to
      ensure that information required to be disclosed in our reports filed or
      submitted under the Exchange Act is (1) recorded, processed, summarized and
      reported, within the time periods specified in the Securities and Exchange
      Commission’s rules and forms and (2) accumulated and communicated to
      management, including our chief executive officer and chief financial officer,
      as appropriate, to allow timely decisions regarding required
      disclosure.




**ITEM
      8B. OTHER INFORMATION**




None




14


**PART
      III**




**ITEM
      9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
      GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
      ACT**





**Directors
      and Executive Officers**





The
      following table sets forth the names, positions and ages of our executive
      officers and directors as of December 31, 2006.





**Name**
            
            **Age**
            
            **Title**Duncan
                Troy
            
            47
            
            Chairman
                of the BoardRichard
                N. Herring
            
            68
            
            Chief
                Executive Officer and DirectorRichard
                G. Sellers
            
            46
            
            Chief
                Operating Officer and DirectorMark
                Weber
            
            50
            
            DirectorCharles
                Hunt
            
            
            
            DirectorMatthew
                DeVries
            
            44
            
            Chief
                Financial OfficerJessica
                L. Stevens
            
            50
            
            DirectorBonnie
                A. Crystal
            
            54
            
            Director





Our
      directors serve until the next annual meeting of stockholders or until their
      successors are elected and qualified. Our officers serve at the discretion
      of
      the board of directors. There are no arrangements or understandings among any
      of
      our directors or officers. There are no family relations among any of our
      directors or officers.




As
      of
      December 31, 2006, two members of our Board of Directors, Mark Weber and Duncan
      Troy were “independent” within the meaning of the listing standards of The
      NASDAQ Stock Market.




The
      principal occupations and brief summary of the background of each of our
      directors and executive officers during the past five years is as
      follows:





DUNCAN
      TROY was elected to our board effective February 28, 2004, and has served as
      our
      Chairman of the Board since May 2004. Mr. Troy was a former Telegen Advisory
      Board member and a current director of the following U.K. based companies,
      Private Equity III Limited (from September 1996 to date), an investment vehicle;
      The Vintage Wine Company Limited (from June 1982 to date), a wine broker;
      Lifescan Limited (from January 2003 to date), which offers a range of screening
      devices using CT technology for the early detection of disease, SMSLOTTOME
      LIMITED (from March 2004). Licensed in the UK by the Betting, Gaming and
      Lotteries Act, SMSLOTTOME LIMITED works globally with National Lotteries, Sports
      Bodies, Media and Gaming Companies to provide fixed odds and lottery numbers
      games by cell phone by providing the technology, hardware, software, website,
      technical support, maintenance and multilingual content management systems.
      Private Equity VIII Limited (from November 2003) an investment vehicle. During
      the past four years he has been actively involved with raising capital for
      development companies and is a citizen and resident of the United
      Kingdom.





RICHARD
      N. HERRING was elected to our board effective February 28, 2004, and has served
      as our Chief Executive Officer since May 2004. Mr. Herring was a former Telegen
      Advisory Board member and has served as the Executive Director of Engineers
      Without Borders - USA (“EWB-USA”) from 2002 through 2005.  EWB-USA is a
      non-profit corporation which attempts to help disadvantaged communities improve
      their quality of life through implementation of environmentally and economically
      sustainable engineering projects.  From January 2001 to July 2002 he served
      as the CEO of 4C Corporation, a non-profit entity focused on church development.
       From April 1998 to August 1999 Mr. Herring served as the CEO of Spectral
      Solutions, Inc., a company focused on cellular telephone enhancement products;
      Spectral Solutions, Inc. was acquired by ISCO INT’L and Mr. Herring served as
      the COO of ISCO INT’L from August 1999 to December 2000.  From January 1995
      to December 1997 Mr. Herring served as the CEO of Earth Watch, Inc., a company
      focused on remote sensing technology. Prior
      to
      this, Mr. Herring worked at Ball Aerospace for 27 years in increasing levels
      of
      management including President of the Space Systems Division and being COO
      of
      five divisions of the group before spinning Digital Globe out as an independent
      company.




RICHARD
      G. SELLERS was elected to our board effective February 28, 2004, and has served
      as our Chief Operating Officer and Secretary since May 2004.  Mr. Sellers
      is an investor and advisor to start-up and turnaround companies combining his
      engineering, marketing and operations experience to build positive cash flow
      and
      shareholder equity.  He worked as a consultant for Telegen to assist with
      their emergence from bankruptcy from March through October 2000 (His sole
      compensation was stock options, which have since expired unexercised).
 From 1989 to 2000 he was founder and CEO of ARC Group International, Inc.,
      a company specializing in international logistics.  In the 1980’s he worked
      as a test engineer for Martin Marietta (now Lockheed Martin Corporation) and
      thereafter was a founding member of Quadtek, Inc., which pioneered innovative
      high temperature video systems in industrial environments. Mr. Sellers currently
      is the CEO and founder of a private real estate development company in Seattle,
      Washington.  Mr. Sellers is an investor, board member or advisory board
      member for several privately held companies in various market
      segments.


15





MARK
      WEBER was appointed to our board effective June 15, 2005.  Mr. Weber has
      been a marketing consultant, strategic planner and senior business advisor
      to
      financial services companies, technology companies and emerging growth companies
      since 1988. Mr. Weber has been involved in raising private capital and launching
      start up, emerging growth technology companies and new banks the past 20 years.
      He has been the President of Weber Marketing Group since its launch in 1988.
      WMG
      is the 12 th largest
      marketing agency in Washington State and a national provider of marketing
      consulting and branding services to financial services and technology companies
      across the U.S. Mr. Weber was a founder and board member of Pacifica Bank from
      1998 to 2005, helping raise $15 million to launch the bank. Pacifica Bank was
      a
      SEC registered business bank sold in 2005 to United Bank California (UCBH).
      Mr.
      Weber also served as Chairman of the Compensation Committee at Pacifica from
      2002 to 2005. Mr. Weber has served as an advisory board member of several
      technology and emerging growth companies between 1990 and 2001. He has been
      on
      the Board of Trustees of the Noemi Fund, a part of Agros International since
      2003.




DR.
      CHARLES HUNT was appointed to our board of directors on October 17, 2006. Dr.
      Hunt holds a B.S.E.E. and M.S.E.E. from the University of Utah and a Ph.D.
      from
      Cornell University. He has been at the University of California at Davis since
      1986, where he is presently a Professor with multiple appointments and a
      visiting Professor of Electronics in the Faculty of Physics of the University
      of
      Barcelona. Professor Hunt is a Senior Member of the Institute of Electrical
      and
      Electronics Engineers, and is Author or Co-Author of over one hundred and twenty
      refereed publications, eight books, and holds twelve patents. From 1997-2004
      he
      served as Editor of the journal, *Solid-State
      Electronics* .





MATTHEW
      DEVRIES was appointed by the Board of Directors as our Chief Financial Officer
      on October 17, 2006. Mr. DeVries has been a financial consultant since 2001,
      providing small business issuers and privately held corporations financial
      assistance and has coordinated audits and supervised the preparation and filing
      of public disclosure documents for corporations in his consulting practice.
      In
      2000 and 2001, Mr. DeVries was a senior financial executive for a publicly
      traded Active Voice Corporation until its acquisition by Cisco Systems, Inc.
      Mr.
      DeVries served two different terms in 2001- 2002 and 2004 to 2006 as Executive
      Board Member and Treasurer of the Parent Cooperative Education Program, a
      non-profit corporation based in Edmonds, Washington.





JESSICA
      L. STEVENS has been a director since October 1996, although she has not attended
      any meetings of the board since February 28, 2004. Stevens has been an inventor
      and engineer for over two decades. In May 1990, she co-founded Telegen
      Communications Corporation, then known as Telegen Corporation and our
      predecessor corporation, with Bonnie A. Crystal and served as President, Chief
      Executive Officer and Chair of the Board until October 1996, when she was
      appointed to the same offices with us following our merger with Solar Energy
      Research Corporation. In August 1997, she stepped down as Chair of the Board
      and
      CEO and was appointed Chief Technology Officer, a position she held until
      October 31, 1997, when she left our employment but remained a director. In
      October 1998, she was reappointed President, Chief Executive Officer and Chair
      of the Board. Until August 2004 she was also the Chair of the Board, President
      and Chief Executive Officer of our subsidiaries, Telegen Communications
      Corporation, Telegen Display Corporation and Telisar Corporation. Since February
      2004, we have had limited contact with Ms. Stevens and we do not know her
      current employment or activities.




BONNIE
      A.
      CRYSTAL has been a director since October 1996, although she has not attended
      any meetings of the board since February 28, 2004. Ms. Crystal has been a
      telecommunications, display and wireless engineer, consultant and inventor
      for
      over two decades. In May 1990, she co-founded Telegen Communications
      Corporation, then known as Telegen Corporation and our predecessor corporation,
      with Jessica L. Stevens and served as Executive Vice President, Secretary and
      a
      director until October 1996, when she was appointed to the same offices with
      us
      following our merger with Solar Energy Research Corporation. On October 31,
      1997, she left our employment but remained a director. In October 1998, she
      was
      reappointed Executive Vice President and Secretary in addition to the position
      of Chief Technology Officer. From 1989 to 1991, she was Senior Staff Engineer
      for R&D for Toshiba America MRI, Inc. Since February 2004, we have had
      limited contact with Ms. Crystal and we do not know her current employment
      or
      activities.


16





**Audit
      Committee Financial Expert**




Our
      entire Board of Directors currently functions as the Audit Committee .
      Due to
      our lack of operations, we do not have an “audit committee financial expert”
serving on the Board, but we intend to locate such expert when
      possible.





**Policy
      on Stockholder Nomination of Directors**





There
      have been no material changes to the procedures by which stockholders may
      recommend nominees to our Board of Directors, from those set forth in our annual
      report on Form 10-KSB for the year ended December 31, 2005.





**Section
      16(a) Beneficial Ownership Reporting Compliance**




Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires our officers
      and directors and persons who own more than 10% of a registered class of our
      equity securities to file reports of ownership on Form 3 and changes in
      ownership on Form 4 or 5 with the Securities and Exchange Commission (the
“SEC”). Such officers, directors, and 10% stockholders are also required by SEC
      rules to furnish us with copies of all Section 16(a) reports they
      file.




Other
      than Matthew DeVries timely filing a Form 3 upon his appointment as our Chief
      Executive Officer, we believe that none of our officers, directors, or 10%
      stockholders complied with their Section 16(a) filing obligations during the
      fiscal year ended December 31, 2006. In particular, we are aware of the
      following deficiencies:





·
            Richard
                Herring, our Chief Executive Officer and a director, failed to file
                a Form
                4 to report a stock grant to him in 2006;


·
            Richard
                Sellers, our Chief Operating Officer and a director, failed to file
                a Form
                4 to report a stock grant to him in 2006, four transactions in which
                he
                gifted shares in 2006, and his purchase of shares in our private
                placement
                in December 2006;


·
            Matthew
                DeVries, our Chief Financial Officer, failed to file a Form 4 to
                report a
                stock grant to him in 2006;


·
            Duncan
                Troy, our Chairman of the Board, failed to file Forms 4 to report
                nine
                sales of common stock during 2006;


·
            Charles
                Hunt, one of our directors, failed to file a Form 3 upon his appointment
                to the Board and failed to file a Form 4 for a share issuance in
                2006;


·
            We
                do not have any information regarding any stock transactions by Board
                members Jessica Stevens and Bonnie
                Crystal.




**Code
      of Ethics**




Due
      to
      our lack of employees and limited operations, we have not yet adopted a Code
      of
      Ethics applicable to our principal executive officer, principal financial and
      accounting officer or persons performing similar functions.


17





**ITEM
      10. EXECUTIVE COMPENSATION**





The
      following table provides information about the compensation paid to, earned
      or
      received during the last two fiscal years ended December 31, 2006 and 2005
      by
      our principal executive officer (the “Named Executive Officer”). None of our
      executive officers received total compensation in excess of $100,000 during
      fiscal 2006 or 2005.





SUMMARY
      COMPENSATION TABLE




Name
                  and
                Principal
                Position
              
              Year
              
              Salary
                ($)
              
              Bonus
                ($)
              
              Stock
                Awards
                ($)
              
              Option
                Awards
                  ($)
              
              Non-Equity
                Incentive
                  Plan Compensation
                ($)
              
              Nonqualified
                  Deferred Compensation Earnings
                ($)
              
              All
                  Other
                Compensation
                ($)
              
              Total
                ($)Richard
                  HerringChief
                  Executive
              
              
              2006
              
              
              -
              
              
              -
              
              $
              40,000
              (1)
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              $
              40,000Officer,
                  Principal
              
              
              2005
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Executive
                  Officer




(1)
            On
                October 17, 2006, we issued 200,000 shares of our common stock to
                Mr.
                Herring for his service as our Chief Executive Officer. The value
                was
                determined using the closing market price of $0.20 on the date of
                grant.





**Narrative
      Disclosure to Summary Compensation Table**





We
      do not
      have an employment agreement in place with our Named Executive Officer, and
      we
      do not pay him salary, bonus or other cash compensation. During fiscal 2006,
      we
      awarded him 200,000 restricted shares of common stock, valued at the closing
      market price of $0.20 per share on the date of grant.





In
      addition, we do not have agreements with our Named Executive Officer providing
      for payments, whether from resignation, retirement or other termination of
      employment, resulting from a change of control.





**Outstanding
      Equity Awards at Fiscal Year-End**





**Option
                Awards**
            
            **Stock
                Awards****Name**
            
            **Number
                of Securities Underlying Unexercised Options**
              **(#)**
              **Exercisable**
            
            **Number
                of Securities Underlying Unexercised Options**
              **(#)**
              **Unexercisable**
            
            **Equity
                Incentive Plan Awards: Number of Securities Underlying Unexercised
                Unearned Options**
              **(#)**
            
            **Option
                Exercise Price**
              **($)**
            
            **Option
                Expiration Date**
            
            **Number
                of Shares or Units of Stock That Have Not Vested**
              **(#)**
            
            **Market
                Value of Shares or Units of Stock That Have Not
                Vested**
              **($)**
            
            **Equity
                Incentive Plan Awards: Number of Unearned Shares, Units or Other
                Rights
                That Have Not Vested**
              **(#)**
            
            **Equity
                Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                Units or
                Other Rights That Have Not Vested**
              **($)****Richard**
              **Herring**
            
            
            **–**
            
            
            **–**
            
            
            **–**
            
            
            **–**
            
            
            **–**
            
            
            **–**
            
            
            **–**
            
            
            **–**
            
            
            **–**




18





**Compensation
      of Directors**





The
      following table summarizes data concerning the compensation of our directors
      for
      the fiscal year ended December 31, 2006.





DIRECTOR
      COMPENSATION





Name
            
            Fees
                Earned or Paid in Cash
              ($)
            
            Stock
                Awards
              ($)
            
            Option
              Awards
              ($)
            
            Non-Equity
                Incentive Plan Compensation ($)
            
            Nonqualified
                Deferred Compensation Earnings
              ($)
            
            All
                Other Compensation
              ($)
            
            Total
              ($)Duncan
                Troy
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Richard
                Herring
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Richard
                Sellers
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Mark
                Weber
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Charles
                Hunt
            
            
            -
            
            $
            60,000
            (1)
            
            -
            
            
            -
            
            
            -
            
            $
            79,260
            (2)
            $
            139,260Jessica
                Stevens
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Bonnie
                Crystal
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -




(1)
                  On
                      October 17, 2006, we issued 300,000 shares of our common stock
                      to Mr. Hunt
                      for service on our board of directors. The value was determined
                      using the
                      closing market price of $0.20 on the date of
                      grant.
 
 (2)
                  Comprised
                      of hourly based fees charged to us for services
                      rendered.


19


**ITEM
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT**




The
      table
      below sets forth certain information regarding the beneficial ownership of
      our
      common stock as of February 21, 2007, based on information available to us
      by
      the following persons or groups:





·
            each
                person who is known by us to own more than 5% of the outstanding
                common
                stock;





·
            each
                of our directors;





·
            the
                Named Executive Officer; and





·
            all
                of our executive officers and directors, as a
                group.




Name
                and Address
            
            Number
                of Shares
              Beneficially
                Owned (1)
            
            PercentRichard
                Sellers
            
            
            5,660,212
            
            
            11.8
            %Michael
                Moors (2)
              Eaton
                Cottage
              Eaton
                Congleton UK
              CW12
                2NA
            
            
            5,258,364
            
            
            11.0Polymer
                Holdings, Ltd.
              Broomhill
                Road
              Stonehaven,
                UK AB39 2NH
            
            
            3,538,889
            
            
            7.4Jessica
                L. Stevens
              204
                E. 2ndAve # 256
              San
                Mateo, CA 94401
            
            
            2,477,111
            
            
            5.2Duncan
                Troy (3)
            
            
            2,422,663
            
            
            5.1Eric
                Broadley
              Little
                Farm
              Causway
                Road
              Huntington,
                Cambridgeshire UK
              PE17
                3AS
            
            
            2,289,917
            
            
            4.8SG
                Trust (Asia), Ltd.
              80
                Robinson Road 28thFloor
              Singapore
                068898
            
            
            2,221,489
            
            
            4.6Bonnie
                Crystal
              204
                E. 2ndAve #256
              San
                Mateo, CA 94401
            
            
            1,845,818
            
            
            3.9Richard
                Herring
            
            
            1,315,000
            
            
            2.7Mark
                Weber (4)
            
            
            1,147,866
            
            
            2.4Charles
                Hunt
            
            
            300,000
            
            
            **All
                Directors and Executive Officers as a Group (8 persons)
                (5)
            
            
            15,468,670
            
            
            32.3
            %





**  Less
      than
      one percent







(1)  Beneficial
      ownership is determined in accordance with the rules of the SEC and generally
      includes voting or investment power with respect to the shares. A person is
      also
      deemed to be a beneficial owner of any securities of which the person has the
      right to acquire beneficial ownership within 60 days. Unless otherwise indicated
      in the footnotes to this table and subject to community property laws where
      applicable, we believe that the each of the stockholders named in this table
      has
      sole voting and investment power with respect to the shares shown as
      beneficially owned by him. To our knowledge, there are no voting arrangements
      among our stockholders.





(2)  Includes
      4,325,030 shares owned by Mr. Moors and 933,334 shares held by Private Equity
      III Ltd., an investment entity of which Duncan Troy is the holder of 12.5%
      and
      Michael Moors 18.75% of the issued share capital and both are Directors. Mr.
      Moors disclaims beneficial ownership of the shares in Private Equity III Ltd.
      except to the extent of his pecuniary interest.


20


(3)  Includes
      1,489,329 shares owned by Mr. Troy and 933,334 shares held by Private Equity
      III
      Ltd., an investment entity of which Duncan Troy is the holder of 12.5% and
      Michael Moors 18.75% of the issued share capital and both are Directors. Mr.
      Troy disclaims beneficial ownership of the shares in Private Equity III Ltd.
      except to the extent of his pecuniary interest.





(4)  Includes
      990,000 shares held by Mr. Weber and 157,866 shares held by Weber Marketing
      Group, Inc., a marketing agency wholly owned by Mr. Weber.





(5)  Consists
      of Duncan Troy, Richard Herring, Richard Sellers, Mark Weber, Charles Hunt,
      Matthew DeVries, Jessica Stevens and Bonnie Crystal.





**Securities
      Authorized for Issuance Under Equity Compensations
      Plans**





On
      December 5, 2006 the Board of Directors terminated the 2000 Stock Option Plan
      and the 2000 Director Option Plan. We
      do not
      presently have in place any equity compensation plan or plans under which shares
      of our common stock may be issued.





**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE**




**Related
      Party Transactions**




On
      October 17, 2006 the board of directors granted Richard Sellers 400,000 shares
      of common stock valued at $80,000 using the closing price as of that date of
      $0.20 for service as our Chief Operating Officer. In addition, the board of
      directors granted 200,000 shares valued at $40,000 using the closing price
      as of
      that date of $0.20 to Richard Herring for services as our Chief Executive
      Officer. We recorded the value of the shares as general and administrative
      expense in the accompanying statement of operations for the year ended December
      31, 2006.




On
      October 17, 2006 the board of directors appointed Charles Hunt to our board
      of
      directors. A total of 300,000 shares of common stock valued at $60,000 using
      the
      closing price as of that date of $0.20 were granted upon Mr. Hunt’s acceptance
      of the Board nomination. We recorded the value of the shares as research and
      development expense in the accompanying statement of operations for the year
      ended December 31, 2006. In addition, we paid Mr. Hunt fees of $79,260 for
      research and development services rendered.




On
      October 17, 2006 the board of directors appointed Matthew DeVries as our Chief
      Financial Officer. A total of 300,000 shares of our common stock valued at
      $60,000 using the closing price as of that date of $0.20 were granted upon
      Mr.
      DeVries’ satisfaction of certain performance and time based vesting criteria
      which occurred on December 22, 2006. We recorded the value of the shares as
      general and administrative expense in the accompanying statement of operations
      for the year ended December 31, 2006. In addition, we paid Mr. DeVries fees
      of
      $28,348 for services rendered.





On
      November 16, 2006, Richard Sellers, our COO and a Director, advanced us $100,000
      which, on December 28, 2006 he converted into common stock at a price of $0.125.
      Mr. Sellers converted his stock as part of his participation in the private
      placement of common stock at the price the shares were offered to third
      parties.





On
      January 4, 2007, Mark Weber, a member of our Board or Directors, purchased
      400,000 shares of our common stock at a price of $0.125 per share for a total
      purchase price of $50,000. The price was the same as that paid by third parties
      in the private placement.





Except
      as
      otherwise disclosed herein, none of our directors, executive officers, principal
      stockholders, or any associate or affiliate thereof had any material interest,
      direct or indirect, in any transaction during the fiscal year ended December
      31,
      2006.


21


**ITEM
      13. EXHIBITS** **AND REPORTS ON FORM 8-K**




**Exhibit
                  No.**
              
              
              
              **Description**3.1
              
              (1)
              
              Amended
                  and Restated Articles of Incorporation of Telegen Corporation dated
                  June
                  30, 20003.2A
              
              (2)
              
              Bylaws
                  of Telegen Corporation3.2B
              
              (3)
              
              Certificate
                  of Amendment of Bylaws effective August 6, 199721.1
              
              (4)
              
              List
                  of Subsidiaries31.1
              
              **
              
              Rule
                  13a-14(a)/15d-14(a) Certification of Richard Herring31.2
              
              **
              
              Rule
                  13a-14(a)/15d-14(a) Certification of Matthew DeVries32.1
              
              **
              
              Certification
                  of Richard Herring, CEO, pursuant to 18 U.S.C. Section 1350, as
                  adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  200232.2
              
              **
              
              Certification
                  of Matthew DeVries, CFO, pursuant to 18 U.S.C. Section 1350, as
                  adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002


**   Filed
        herewith
  (1)
              Previously
                  filed as an exhibit to, and incorporated herein by reference from,
                  our
                  Form 8-K filed on December 20,
                  2000.
  (2)
              Previously
                  filed as an exhibit to, and incorporated herein by reference from,
                  our
                  Quarterly Report on Form 10-QSB as filed with the Commission on
                  November
                  12, 1996.
  (3)
              Previously
                  filed as an exhibit to, and incorporated herein by reference from,
                  our
                  Annual Report on Form 10-K filed on April 15,
                  1998.
  (4)
              Previously
                  filed as an exhibit to, and incorporated herein by reference from,
                  our
                  Annual Report on Form 10-K filed on April 1,
                  2002.


22


**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**





**Fees
      Paid to Peterson Sullivan, PLLC for Fiscal 2006 and 2005**





The
      following is a summary of the aggregate fees billed to us by Peterson Sullivan
      PLLC for the fiscal years ended December 31, 2006 and 2005:




Fiscal
                2006
            
            Fiscal
                2005Audit
                Fees
            
            $
            9,383
            
            $
            —Audit
                Related Fees
            
            
            —
            
            
            —Tax
                Fees (1)
            
            
            —
            
            
            —All
                Other Fees
            
            
            —
            
            
            —TOTAL
                Fees
            
            $
            9,383
            
            $
            —





**Fees
      Paid to Singer Lewak Greenbaum & Goldstein LLP for Fiscal 2006 and
      2005**





The
      following is a summary of the aggregate fees billed to us by Singer, Lewak,
      Greenbaum & Goldstein LLP for the fiscal years ended December 31, 2006 and
      2005:




Fiscal
                2006
            
            Fiscal
                2005Audit
                Fees
            
            $
            51,664
            
            $
            20,280Audit
                Related Fees
            
            
            —
            
            
            —Tax
                Fees (1)
            
            
            —
            
            
            15,459All
                Other Fees
            
            
            —
            
            
            —TOTAL
                Fees
            
            $
            51,664
            
            $
            35,739







(1)Tax
      fees
      for fiscal 2005 consisted of fees relating to the preparation of state and
      federal tax returns.





**Policy
      for Approval of Audit and Permitted Non-Audit Services**





Our
      Board
      of Directors, which serves as our audit committee, reviews the scope and extent
      of all audit and non-audit services to be provided by the independent auditors,
      including any engagement letters, and reviews and pre-approves all fees to
      be
      charged for such services. The Board of Directors may establish additional
      or
      other procedures for the approval of audit and non audit services that our
      independent auditors perform. In pre-approving services to be provided by the
      independent auditors, the Board of Directors considers whether such services
      are
      consistent with applicable rules regarding auditor independence.





The
      Board
      approved the tax services provided by Singer, Lewak, Greenbaum & Goldstein
      LLP during fiscal 2005.




23


**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Exchange Act of 1934, the Registrant
      caused this report to be signed on its behalf by the undersigned, thereunto
      duly
      authorized.




**TELEGEN
                CORPORATION**Date: February
                23, 2007
            By:
            /s/ Richard
                HerringRichard
                Herring
              Chief
                Executive Officer and Principal Executive
                Officer




In
      accordance with the Securities Exchange Act of 1934, this Report on Form 10-KSB
      has been signed below by the following persons on behalf of the Registrant
      in
      the capacities and on the dates indicated.





***Signature***
            
            ***Capacities***
            
            ***Date***/s/
                Duncan Troy
            
            Chairman
                of the Board
            
            February
                23, 2007Duncan
                Troy/s/
                Richard N. Herring
            
            Chief
                Executive Officer and Director
            
            February
                23, 2007Richard
                N. Herring
            
            (*Principal
                Executive Officer*)/s/
                Richard G. Sellers
            
            Chief
                Operating Officer and Director
            
            February
                23, 2007Richard
                G. Sellers/s/
                Matthew DeVries
            
            Chief
                Financial Officer
            
            February
                23, 2007Matthew
                DeVries
            
            (*Principal
                Financial Officer and*
              *Principal
                Accounting Officer*)/s/
                Mark Weber
            
            Director
            
            February
                23, 2007Mark
                Weber/s/
                Charles Hunt
            
            Director
            
            February
                23, 2007Charles
                HuntDirectorJessica
                L. StevensDirectorBonnie
                Crystal




24




**TELEGEN
      CORPORATION AND SUBSIDIARIES**


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**




Report
                of Independent Registered Public Accounting Firm
            
            F-1Report
                of Predecessor Independent Registered Public Accounting
                Firm
            
            F-2Consolidated
                Balance Sheets as of December 31, 2006 and December 31,
                2005
            
            F-3Consolidated
                Statements of Operations for the Years Ended December 31, 2006 and
                December 31, 2005
            
            F-4Consolidated
                Statements of Stockholders’ Equity (Deficit) for the Years Ended December
                31, 2006 and December 31, 2005
            
            F-5Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2006 and
                December 31, 2005
            
            F-6Notes
                to the Consolidated Financial Statements
            
            F-7
                to F-15











**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors


Telegen
      Corporation


San
      Mateo, California





We
      have
      audited the accompanying consolidated balance sheet of Telegen Corporation
      and
      Subsidiaries as of December 31, 2006, and the related consolidated
      statements of operations, stockholders' equity (deficit), and cash flows for
      the
      year then ended. These consolidated financial statements are the responsibility
      of the Company's management. Our responsibility is to express an opinion on
      these consolidated financial statements based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company has determined that
      it
      is not required to have, nor were we engaged to perform, an audit of its
      internal control over financial reporting. Our audit included consideration
      of
      internal control over financial reporting as a basis for designing audit
      procedures that are appropriate in the circumstances, but not for the purpose
      of
      expressing an opinion on the effectiveness of the Company's internal control
      over financial reporting. Accordingly, we express no such opinion. 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 that
      our
      audit provides a reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Telegen Corporation and
      Subsidiaries as of December 31, 2006, and the results of their operations
      and their cash flows for the year then ended, in conformity with accounting
      principles generally accepted in the United States.





The
      accompanying consolidated financial statements have been prepared assuming
      the
      Company will continue as a going concern. As discussed in Note 3 to the
      consolidated financial statements, the Company incurred a net loss of $723,870,
      and it had negative cash flows from operations of $487,891 in 2006. In addition,
      the Company had an accumulated deficit of $45,422,233 at December 31, 2006.
      These factors raise substantial doubt about the Company's ability to continue
      as
      a going concern. Management's plans regarding those matters are also described
      in Note 3. The consolidated financial statements do not include any
      adjustments that might result from the outcome of this uncertainty.





/s/
      PETERSON SULLIVAN PLLC




February 2,
      2007


Seattle,
      Washington


F-1




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors


Telegen
      Corporation


San
      Mateo, California





We
      have
      audited the accompanying consolidated balance sheet of Telegen Corporation
      and
      subsidiaries (collectively, the “Company”) as of December 31, 2005, and the
      related consolidated statements of operations, stockholders’ equity (deficit)
      and cash flows for the year then ended. These financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. 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 that our audit provides a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Telegen Corporation and
      subsidiaries as of December 31, 2005, and the results of their operations and
      their cash flows for the year then ended in conformity with U.S. generally
      accepted accounting principles.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note 3 to the
      consolidated financial statements, the Company incurred a net loss of $214,293,
      and it had negative cash flows from operations of $442,093. In addition, the
      Company had an accumulated deficit of $44,698,363 at December 31, 2005. These
      factors, among others, raise substantial doubt about the Company’s ability to
      continue as a going concern. Management’s plans in regard to these matters are
      also described in Note 3. The consolidated financial statements do not include
      any adjustments that might result from the outcome of this
      uncertainty.







/s/
      SINGER LEWAK GREENBAUM & GOLDSTEIN LLP





Los
      Angeles, California


October
      21, 2006


F-2





**TELEGEN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


December
      31, 2006 and 2005




**ASSETS**
            
            **2006**
            
            **2005**Current
                assetsCash
                and cash equivalents
            
            $
            289,795
            
            $
            408,782Prepaid
                expenses
            
            
            5,169
            
            
            —Total
                current assets
            
            
            294,964
            
            
            408,782Non-current
                assetsEquipment,
                net of accumulated depreciation of $915
            
            
            5,181
            
            
            —Total
                assets
            
            $
            300,145
            
            $
            408,782**LIABILITIES
                AND STOCKHOLDERS’ (DEFICIT) EQUITY**Current
                liabilitiesBankruptcy
                liability
            
            $
            153,019
            
            $
            153,019Accounts
                payable
            
            
            191,384
            
            
            201,151Total
                current liabilities
            
            
            344,403
            
            
            354,170Commitments
                and contingenciesStockholders’
                equity (deficit)Preferred
                stock, $1 par value10,000,000
                shares authorizedno
                shares issued and outstanding
            
            
            —
            
            
            —Common
                stock, no par value100,000,000
                shares authorized47,430,683
                and 43,180,683 sharesissued
                and outstanding, respectively
            
            
            45,377,975
            
            
            44,752,975Accumulated
                deficit
            
            
            (45,422,233
            )
            
            (44,698,363
            )Total
                stockholders’ (deficit) equity
            
            
            (44,258
            )
            
            54,612Total
                liabilities and stockholders’ (deficit) equity
            
            $
            300,145
            
            $
            408,782





The
      accompanying notes are an integral part of these consolidated financial
      statements.


F-3




**TELEGEN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**For
      the years ended December 31, 2006 and 2005**





**Years
                Ended December 31,****2006**
            
            **2005**Operating
                expenses:Research
                and development
            
            $
            316,422
            
            $
            247,134General
                and administrative
            
            
            408,105
            
            
            402,446Total
                operating expenses
            
            
            724,527
            
            
            649,580Loss
                from operations
            
            
            (724,527
            )
            
            (649,580
            )Other
                incomeInterest
                income
            
            
            3,857
            
            
            1,989Gain
                on debt settlements
            
            
            —
            
            
            436,498Total
                other income
            
            
            3,857
            
            
            438,487Loss
                before provision for income taxes
            
            
            (720,670
            )
            
            (211,093
            )Provision
                for income taxes
            
            
            (3,200
            )
            
            (3,200
            )Net
                loss
            
            $
            (723,870
            )
            $
            (214,293
            )Basic
                and diluted loss per share
            
            $
            (0.02
            )
            $
            (0.01
            )Weighted-average
                common shares outstanding
            
            
            43,461,642
            
            
            36,925,322




The
      accompanying notes are an integral part of these consolidated financial
      statements.


F-4





**TELEGEN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)**


**For
      the Years Ended December 31, 2006 and 2005**




**Common
                Stock****Shares**
            
            
            **Amount**
            
            
            **Subscription**
              **Receivable**
            
            
            **Accumulated
                Deficit**
            
            
            **Total**Balance,
                December 31, 2004
            
            
            34,347,987
            
            $
            43,836,230
            
            $
            (123,250
            )
            $
            (44,484,070
            )
            $
            (771,090
            )Issuance
                of common stock forCash
            
            
            6,000,000
            
            
            600,000
            
            
            
            
            
            
            
            
            600,000Services
            
            
            1,556,448
            
            
            189,120
            
            
            
            
            
            
            
            
            189,120Conversion
                of related party loan
            
            
            1,276,248
            
            
            127,625
            
            
            
            
            
            
            
            
            127,625Collection
                of subscription receivable
            
            
            
            
            
            
            
            
            123,250
            
            
            
            
            
            123,250Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            (214,293
            )
            
            (214,293
            )Balance,
                December 31, 2005
            
            
            43,180,683
            
            
            44,752,975
            
            
            —
            
            
            (44,698,363
            )
            
            54,612Issuance
                of common stock forCash
            
            
            2,200,000
            
            
            275,000
            
            
            
            
            
            
            
            
            275,000Services
            
            
            1,250,000
            
            
            250,000
            
            
            
            
            
            
            
            
            250,000Conversion
                of related party loan
            
            
            800,000
            
            
            100,000
            
            
            
            
            
            
            
            
            100,000Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            (723,870
            )
            
            (723,870
            )Balance,
                December 31, 2006
            
            
            47,430,683
            
            $
            45,377,975
            
            $
            —
            
            $
            (45,422,233
            )
            $
            (44,258
            )




The
      accompanying notes are an integral part of these consolidated financial
      statements.


F-5





**TELEGEN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**For
      the Years Ended December 31, 2006 and 2005**





**Years
                Ended December 31,****2006**
            
            **2005**Cash
                flows from operating activities:Net
                loss
            
            $
            (723,870
            )
            $
            (214,293
            )Adjustments
                to reconcile net loss to net cash from operating
                activitiesDepreciation
            
            
            915
            
            
            —Issuance
                of common stock for services rendered
            
            
            250,000
            
            
            189,120Gain
                on debt settlements
            
            
            —
            
            
            (436,498
            )Changes
                in assets and liabilities:Prepaid
                expenses
            
            
            (5,169
            )
            
            13,125Accounts
                payable
            
            
            (9,767
            )
            
            (61,832
            )Due
                from officer
            
            
            —
            
            
            68,285Net
                cash flows from operating activities
            
            
            (487,891
            )
            
            (442,093
            )Cash
                flows from investing activities:Purchases
                of equipment
            
            
            (6,096
            )
            
            —Net
                cash flows from investing activities
            
            
            (6,096
            )
            
            —Cash
                flows from financing activities:Net
                proceeds from sale of common stock
            
            
            275,000
            
            
            600,000Proceeds
                from related party loans
            
            
            100,000
            
            
            127,625Collection
                of subscription receivable
            
            
            —
            
            
            123,250Net
                cash flows from financing activities
            
            
            375,000
            
            
            850,875Net
                change in cash and cash equivalents
            
            
            (118,987
            )
            
            408,782Cash
                and cash equivalents, beginning of year
            
            
            408,782
            
            
            —Cash
                and cash equivalents, end of year
            
            $
            289,795
            
            $
            408,782Supplemental
                disclosures of cash flow informationInterest
                paid
            
            $
            —
            
            $
            —Income
                taxes paid
            
            $
            —
            
            $
            6,508Supplemental
                  disclosure of non-cash investing and financing activities
                Stock
                  issued upon conversion of related party loans
            
            $
            100,000
            
            $
            127,625




The
      accompanying notes are an integral part of these consolidated financial
      statements.


F-6






**TELEGEN
      CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      1 - BUSINESS AND ORGANIZATION**




**General**





Telegen
      Corporation (“Telegen”) and its subsidiaries (collectively, the “Company”) is a
      research and development company currently engaged in the development of
      lighting technology.




Telegen
      has four inactive subsidiaries. The inactive subsidiaries are Telegen Display
      Corporation (“TDC”), a California corporation and wholly-owned subsidiary of the
      Company, Telegen Communications Corporation (“TCC”), a California corporation
      and wholly-owned subsidiary of the Company, Telegen Display Laboratories, Inc.,
      (“TDL”) a California corporation and wholly-owned subsidiary of the Company and
      Telisar Corporation (“Telisar”), a California corporation and majority-owned
      subsidiary of the Company. No minority interest is presented for the minority
      stockholders of Telisar due to accumulated losses for Telisar on a stand alone
      basis.




On
      October 28, 1998 (the “Filing Date”), the Company, including TCC and TDC, filed
      a voluntary petition (the “Chapter 11 Case”) under Chapter 11 of the United
      States Bankruptcy Code (Case No. 98-34876-DM-11) in the United States Bankruptcy
      Court for the District of California (the “Bankruptcy Court”). On June 28, 2000,
      the Company’s Second Amended Plan of Reorganization (the “Plan of
      Reorganization”) was confirmed and became effective on June 30, 2000. The final
      decree closing this bankruptcy case was issued on September 10,
      2005.




At
      December 31, 2006 and 2005, the bankruptcy liability was comprised of accounts
      payable to unsecured creditors.




**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




**Principles
      of Consolidation**





The
      consolidated financial statements include the accounts of Telegen and all of
      its
      wholly-owned and controlled subsidiaries. All significant intercompany
      transactions and balances have been eliminated in consolidation.




**Use
      of Estimates**




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities, disclosure of contingent assets and liabilities and the reported
      amounts of revenues and expenses during the reporting period. Actual results
      could differ from those estimates.





**Cash
      and Cash Equivalents**




For
      purposes of the statements of cash flows, the Company considers all investments
      purchased with original maturities of three months or less to be cash
      equivalents. At December 31, 2006 and 2005 the Company had cash of $189,795
      and
      $308,782, respectively, in excess of federally insured limits.





**Property
      and Equipment**





Property
      and equipment is comprised of equipment used in the testing of the Company’s
      lighting technology and is stated at cost. The Company provides for depreciation
      and amortization using the straight-line method over the estimated useful life
      of three to seven years. Expenditures for maintenance and repairs are charged
      to
      operations as incurred while renewals and betterments are capitalized. Gains
      or
      losses on the sale of property and equipment are reflected in the statements
      of
      operations.




F-7




**Income
      Taxes**





The
      Company recognizes the amount of income taxes payable or refundable for the
      current year and recognizes deferred tax assets and liabilities for the future
      tax consequences attributable to differences between the financial statement
      amounts of certain assets and liabilities and their respective tax bases.
      Deferred tax assets and deferred tax liabilities are measured using enacted
      tax
      rates expected to apply to taxable income in the years those temporary
      differences are expected to be recovered or settled. A valuation allowance
      is
      required when it is less likely than not that the Company will be able to
      realize all or a portion of its deferred tax assets.





**Long
      Lived Assets**




Long-lived
      assets are reviewed for impairment when events or changes in circumstances
      indicate that the carrying amount may not be recoverable. Recoverability of
      assets to be held and used is measured by comparison of the carrying amount
      of
      an asset to future net cash flows expected to be generated by the asset. If
      such
      assets are considered to be impaired, the impairment to be recognized is
      measured by the amount that the carrying amount of the assets exceeds the fair
      value of the assets. Assets to be disposed of are reported at the lower of
      the
      carrying amount or fair value less costs to sell.





**Fair
      Value of Financial Instruments**




The
      Company measures its financial assets and liabilities in accordance with
      generally accepted accounting principles. For certain of the Company’s financial
      instruments, including cash and cash equivalents, accounts payable and accrued
      expenses, the carrying amounts approximate fair value due to their short
      maturities.




**Revenue
      Recognition**




Revenues
      are recognized when (a) persuasive evidence of an arrangement exists, (b)
      delivery has occurred and no significant obligations remain, (c) the fee is
      fixed or determinable and (d) collection is determined to be probable. The
      Company has not recognized any revenues in the accompanying financial
      statements.




**Research
      and Development Costs**




For
      financial reporting purposes, all costs of research and development activities
      performed internally or on a contract basis are expensed as incurred. For the
      years ended December 31, 2006 and 2005, research and development expenses were
      comprised primarily of technical consulting expenses, legal expenses for the
      development and protection of intellectual property and travel. Research and
      development for the year ended December 31, 2006 also included a non-cash charge
      of $60,000 for the issuance of 300,000 shares of common stock to Charles Hunt,
      a
      member of our Board of Directors (See Note 4).





**Stock
      Based Compensation**




Effective
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      (“SFAS”) No. 123R "Share Based Payment" (“SFAS No. 123R”). This statement is a
      revision of SFAS No. 123 (“SFAS No. 123”), and supersedes APB Opinion No. 25,
      and its related implementation guidance. SFAS No. 123R addresses all forms
      of
      share based payment ("SBP") awards including shares issued under employee stock
      purchase plans, stock options, restricted stock and stock appreciation rights.
      Under SFAS No. 123R, SBP awards will result in a charge to operations that
      will
      be measured at fair value on the awards’ grant date, based on the estimated
      number of awards expected to vest over the service period. Compensation cost
      for
      awards that vest will not be reversed if the awards expire without being
      exercised. The Company estimates the fair value of each stock option grant
      by
      using the Black-Scholes option pricing model.




As
      of
      December 31, 2006, the Company has no unvested options and did not grant any
      options to employees during the year ended December 31, 2006. The adoption
      of
      SFAS No. 123R did not effect the Company's financial position, results of
      operations or cash flows for the year ended December 31, 2006, but may have
      a
      material impact if options are granted in the future.




Prior
      to
      the Company's adoption to SFAS No. 123R, SFAS No. 123 required that the Company
      provide pro-forma information regarding net earnings and net earnings per share
      as if the Company's stock based awards had been determined in accordance with
      the fair value method described therein. The Company had previously adopted
      the
      disclosure portion of SFAS No. 148, "Accounting for Stock-Based Compensation
      -
      Transition and Disclosure," requiring quarterly SFAS No. 123 pro-forma
      disclosure. The pro-forma charge for compensation cost related to stock-based
      awards granted was recognized over the service period. For stock options, the
      service period represented the period of time between the date of grant and
      the
      date each option became exercisable without consideration of acceleration
      provisions such as retirement or change of control.




F-8




The
      Company is using the modified prospective method in its adoption of SFAS No.
      123R. The impact of this method will require the Company to record a charge
      for
      the fair value of stock options granted on a prospective basis over the vesting
      period in the consolidated financial statements. The Company had no outstanding
      employee stock options at December 31, 2006 and 2005 and the Company did not
      grant any options during the years ended December 31, 2006 and
      2005.




**Comprehensive
      Income**




The
      Company utilizes SFAS No. 130, “Reporting Comprehensive Income.” This statement
      establishes standards for reporting comprehensive income and its components
      in a
      financial statement. Comprehensive income as defined includes all changes in
      equity (net assets) during a period from non-owner sources. Examples of items
      to
      be included in comprehensive income, which are excluded from net income, include
      foreign currency translation adjustments and unrealized gains and losses on
      available-for-sale securities. Comprehensive income is not presented in the
      Company’s financial statements since the Company did not have any of the items
      of comprehensive income in any period presented.





**Earnings
      (Loss) Per Share**




The
      Company calculates loss per share in accordance with SFAS No. 128, “Earnings per
      Share.” Basic loss per share is computed by dividing loss available to common
      stockholders by the weighted-average number of shares of common stock
      outstanding. Diluted loss per share is computed similar to basic loss per share
      except that the denominator is increased to include the number of additional
      shares of common stock that would have been outstanding if the potential common
      shares had been issued and if the additional common shares were dilutive.





The
      following potentially dilutive common shares are excluded from the computation
      of diluted net loss per share for all periods presented because the effect
      is
      anti-dilutive:





For
                the Year Ended December 31,2006
            
            2005Warrants
                issued as compensation
            
            
            —
            
            
            300,000Total
                potentially dilutive securities
            
            
            —
            
            
            300,000




**Recently
      Issued Accounting Pronouncements**




In
      February 2006, the FASB issued SFAS No. 155 “Accounting for Certain Hybrid
      Financial Instruments”, which is an amendment of SFAS Nos. 133 and 140. This
      statement (a) permits fair value remeasurement for any hybrid financial
      instrument that contains an embedded derivative that otherwise would require
      bifurcation, (b) clarifies which interest-only strip and principal-only strip
      are not subject to the requirements of SFAS No. 133, (c) establishes a
      requirement to evaluate interests in securitized financial assets to identify
      interests that are freestanding derivatives or that are hybrid financial
      instruments that contain an embedded derivative requiring bifurcation, (d)
      clarifies that concentrations of credit risk in the form of subordination are
      not embedded derivatives, (e) amends SFAS No. 140 to eliminate the prohibition
      on a qualifying special-purpose entity from holding a derivative financial
      instrument that pertains to a beneficial interest other than another derivative
      financial instrument. This statement is effective for financial statements
      for
      fiscal years beginning after September 15, 2006. Earlier adoption of this
      statement is permitted as of the beginning of an entity’s fiscal year, provided
      the entity has not yet issued any financial statements for that fiscal year.
      The
      adoption of this standard is not expected to have a material impact on the
      Company’s financial statements.




F-9




In
      March
      2006, the FASB issued SFAS No. 156 “Accounting for Servicing of Financial
      Assets”, which amends SFAS No. 140. This statement establishes, among other
      things, the accounting for all separately recognized servicing assets and
      servicing liabilities. This statement amends SFAS No. 140 to require that all
      separately recognized servicing assets and servicing liabilities be initially
      measured at fair value, if practicable. This statement permits, but does not
      require, the subsequent measurement of separately recognized servicing assets
      and servicing liabilities at fair value. An entity that uses derivative
      instruments to mitigate the risks inherent in servicing assets and servicing
      liabilities is required to account for those derivative instruments at fair
      value. Under this statement, an entity can elect subsequent fair value
      measurement to account for its separately recognized servicing assets and
      servicing liabilities. By electing that option, an entity may simplify its
      accounting because this statement permits income statement recognition of the
      potential offsetting changes in fair value of those servicing assets and
      servicing liabilities and derivative instruments in the same accounting period.
      This statement is effective for financial statements for fiscal years beginning
      after September 15, 2006. Earlier adoption of this statement is permitted as
      of
      the beginning of an entity’s fiscal year, provided the entity has not yet issued
      any financial statements for that fiscal year. Management believes that adoption
      of this standard will not have a material impact on the Company’s financial
      statements.




In
      June
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainties in
      Income Taxes”, ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in
      income taxes and prescribes a recognition threshold and measurement attribute
      for the financial statement recognition and measurement of a tax position taken
      or expected to be taken in a tax return. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. Management believes that adoption of this
      standard will not have a material impact on the Company's financial
      statements.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” to
      eliminate the diversity in practice that exists due to the different definitions
      of fair value and the limited guidance for applying those definitions in GAAP
      that are dispersed among the many accounting pronouncements that require fair
      value measurements. SFAS No. 157 retains the exchange price notion in earlier
      definitions of fair value, but clarifies that the exchange price is the price
      in
      an orderly transaction between market participants to sell an asset or liability
      in the principal or most advantageous market for the asset or liability.
      Moreover, the SFAS states that the transaction is hypothetical at the
      measurement date, considered from the perspective of the market participant
      who
      holds the asset or liability. Consequently, fair value is defined as the price
      that would be received to sell an asset or paid to transfer a liability in
      an
      orderly transaction between market participants at the measurement date (an
      exit
      price), as opposed to the price that would be paid to acquire the asset or
      received to assume the liability at the measurement date (an entry
      price).




SFAS
      No.
      157 also stipulates that, as a market-based measurement, fair value measurement
      should be determined based on the assumptions that market participants would
      use
      in pricing the asset or liability, and establishes a fair value hierarchy that
      distinguishes between (a) market participant assumptions developed based on
      market data obtained from sources independent of the reporting entity
      (observable inputs) and (b) the reporting entity’s own assumptions about market
      participant assumptions developed based on the best information available in
      the
      circumstances (unobservable inputs). Finally, SFAS No. 157 expands disclosures
      about the use of fair value to measure assets and liabilities in interim and
      annual periods subsequent to initial recognition. Entities are encouraged to
      combine the fair value information disclosed under SFAS No. 157 with the fair
      value information disclosed under other accounting pronouncements, including
      SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” where
      practicable. The guidance in this Statement applies for derivatives and other
      financial instruments measured at fair value under SFAS No.133, “Accounting for
      Derivative Instruments and Hedging Activities,” at initial recognition and in
      all subsequent periods.




SFAS
      No. 157 is effective for financial statements issued for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal years, although
      earlier application is encouraged. Additionally, prospective application of
      the
      provisions of SFAS No. 157 is required as of the beginning of the fiscal year
      in
      which it is initially applied, except when certain circumstances require
      retrospective application. The Company is currently evaluating the impact of
      this statement on its results of operations or financial position of the
      Company.




In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans (an amendment of FASB Statements
      No. 87, 88, 106, and 132R)”, which will require employers to fully recognize the
      obligations associated with single-employer defined benefit pension, retiree
      healthcare and other postretirement plans in their financial statements. Under
      past accounting standards, the funded status of an employer’s postretirement
      benefit plan (i.e., the difference between the plan assets and obligations)
      was
      not always completely reported in the balance sheet. Past standards only
      required an employer to disclose the complete funded status of its plans in
      the
      notes to the financial statements. SFAS No. 158 applies to plan sponsors that
      are public and private companies and nongovernmental not-for-profit
      organizations. The requirement to recognize the funded status of a benefit
      plan
      and the disclosure requirements are effective as of the end of the fiscal year
      ending after December 15, 2006, for entities with publicly traded equity
      securities, and at the end of the fiscal year ending after June 15, 2007, for
      all other entities. The requirement to measure plan assets and benefit
      obligations as of the date of the employer’s fiscal year-end statement of
      financial position is effective for fiscal years ending after December 15,
      2008.
      The Company does not expect that the adoption of SFAS No. 158 will have a
      significant impact on the consolidated results of operations or financial
      position of the Company.




F-10




**NOTE
      3 - GOING CONCERN MATTERS**




The
      accompanying financial statements have been prepared in conformity with
      accounting principles generally accepted in the United States which contemplate
      continuation of the Company as a going concern. During the year ended December
      31, 2006, the Company incurred a net loss of $723,870 and it had negative cash
      flows from operations of $487,891. In addition, the Company had an accumulated
      deficit of $45,422,233 at December 31, 2006. These factors raise substantial
      doubt about the Company’s ability to continue as a going concern.




Recovery
      of the Company’s assets is dependent upon future events, the outcome of which is
      indeterminable. The Company’s attainment of profitable operations is dependent
      upon the Company obtaining adequate debt and equity financing and achieving
      a
      level of sales adequate to support the Company’s cost structure. In addition,
      realization of a major portion of the assets in the accompanying balance sheet
      is dependent upon the Company’s ability to meet its financing requirements and
      the success of its plans to sell its products. The financial statements do
      not
      include any adjustments relating to the recoverability and classification of
      recorded asset amounts or amounts and classification of liabilities that might
      be necessary should the Company be unable to continue in existence.




Management
      plans to raise additional equity or debt financing and continue to develop
      its
      products. If management is unsuccessful in raising additional capital, it will
      be forced to curtail or even cease its operations.







**NOTE
      4 - RELATED PARTY TRANSACTIONS**




On
      October 17, 2006 the board of directors granted Richard Sellers 400,000 shares
      of common stock valued at $80,000 using the closing price as of that date of
      $0.20 for service as the Company’s Chief Operating Officer. In addition, the
      Board granted 200,000 shares valued at $40,000 using the closing price as of
      that date of $0.20 to Richard Herring for services as Chief Executive
      Officer.The
      Company recorded the value of the shares as general and administrative expense
      in the accompanying statement of operations for the year ended December 31,
      2006.




On
      October 17, 2006 the board of directors appointed Charles Hunt to the Company’s
      board of directors. A total of 300,000 shares of Company common stock valued
      at
      $60,000 using the closing price as of that date of $0.20 were granted upon
      Mr.
      Hunt’s acceptance of the Board nomination. The Company recorded the value of the
      shares as research and development expense in the accompanying statement of
      operations for the year ended December 31, 2006.




On
      October 17, 2006 the Company appointed Matthew DeVries as its Chief Financial
      Officer. A total of 300,000 shares of Company common stock valued at $60,000
      using the closing price as of that date of $0.20 were granted upon Mr. DeVries’
satisfaction of certain performance and time based vesting criteria which
      occurred on December 22, 2006. The Company recorded the value of the shares
      as
      general and administrative expense in the accompanying statement of operations
      for the year ended December 31, 2006.





On
      November 16, 2006, Richard Sellers, the Company’s COO and a Director, advanced
      the Company $100,000 which, on December 28, 2006 was converted into common
      stock
      at a price of $0.125. Mr. Sellers converted his loan as part of his
      participation in the offering of common stock at the price the shares were
      offered to third parties.





On
      January 4, 2007, Mark Weber, a member of the Company’s Board of Directors,
      purchased 400,000 shares of common stock at a price of $0.125 per share for
      gross proceeds to the Company of $50,000. The price was the same as that paid
      by
      third parties in the offering.





During
      2005, Richard Sellers, the Company’s COO and a Director, made loans from time to
      time to the Company to fund operations. An aggregate of $127,625 was loaned
      to
      the Company throughout 2005 and, on September 30, 2005 said amount was converted
      into 1,276,248 shares of Company common stock. The conversion price of $0.10
      was
      determined using the price of the private placement as discussed in Note 6.
      Mr.
      Sellers also returned the $68,285 held by him as custodian and presented as
      Advance to Officer in the consolidated balance sheet at December 31,
      2004.




F-11





In
      2005,
      Mark Weber, one of our directors, participated in the private placement of
      6,000,000 shares of common stock as discussed in Note 6, purchasing 90,000
      shares for $9,000 and Richard Sellers, an officer and director, purchased
      1,000,000 shares for $100,000.





On
      June
      15, 2005 the Company issued 500,000 shares valued at $75,000 using the closing
      market price as of that date of $0.15 to Mark Weber as compensation for service
      as a Board member.




**NOTE
      5 - COMMITMENTS AND CONTINGENCIES**





The
      Company leases space for its corporate headquarters on a month to month basis.
      Total rent expense was $1,037 and $1,096 for the twelve months ended December
      31, 2006 and 2005, respectively.




**NOTE
      6 - STOCKHOLDERS’ EQUITY**





**Common
      Stock Issuances**





During
      the year ended December 31, 2006, the Company completed the
      following:





·
            On
                October 17, 2006 the board of directors granted a total of 900,000
                shares
                of common stock valued at $180,000 using the closing price as of
                that date
                of $0.20 for service to its Chief Executive, Chief Operating and
                Chief
                Financial Officers for services as described in Note 4.





·
            On
                October 17, 2006 the board of directors granted 300,000 shares of
                common
                stock valued at $60,000 using the closing price as of that date of
                $0.20
                for services to Charles Hunt as described in Note
                4.





·
            On
                October 17, 2006 the board of directors granted 50,000 shares of
                common
                stock valued at $10,000 using the closing price as of that date of
                $0.20
                to a vendor for services. The value of the shares has been recorded
                as
                general and administrative expense in the accompanying consolidated
                statement of operations for the year ended December 31,
                2006.





·
            On
                December 28 and 29, 2006, the board of directors granted 3,000,000
                shares
                to four investors at a price of $0.125 for gross proceeds of $375,000,
                including $100,000 of advances converted by Richard Sellers, our
                Chief
                Operating Officer and a director.








During
      the year ended December 31, 2005, the Company completed the
      following:




·
            The
                Company issued an aggregate of 676,250 shares of its common stock
                at
                prices ranging from $0.03 to $0.46 as determined by reference to
                the
                closing price on the date of issuance to seven consultants for services
                rendered during the current and prior years. The aggregate value
                of the
                common stock was $98,913 of which $96,138 was recorded as additional
                general and administrative expense in the accompanying statement
                of
                operations for the year ended December 31,
                2005.




·
            On
                June 15, 2005 the Company issued 500,000 shares valued at $75,000
                to Mark
                Weber, a director of the Company, for service as a Board member.
                The price
                was determined using the closing price as of the date of
                issuance.




·
            From
                August 31, 2005 to October 31, 2005, the Company completed an offering
                of
                an aggregate of 6,000,000 shares at an offering price of $0.10 per
                share
                for net proceeds of $600,000 to a group of nineteen investors. Mark
                Weber,
                one of our directors, participated in the private placement, purchasing
                90,000 shares for $9,000 and Richard Sellers, an officer and director,
                purchased 1,000,000 shares for
                $100,000.




F-12




·
            The
                Company issued an aggregate of 380,198 shares of its common stock
                to four
                creditors with an aggregate value of $15,208 in settlement of certain
                liabilities of the Company. The value of the shares was determined
                by
                reference to the closing price on the respective dates of
                issuance.




·
            On
                September 30, 2005 the Company issued 1,276,248 shares to Richard
                G.
                Sellers, a director and officer of the Company, upon the conversion
                of
                debt of $127,625. The price was determined using the offering price
                of
                $0.10 as per the private placement discussed
                above.




**2000
      Employee Stock Purchase Plan**




On
      June
      30, 2000, the Company readopted its 1996 Stock Purchase Plan and renamed it
      the
      2000 Employee Stock Purchase Plan. There was no activity in this plan during
      2006 and 2005 and on December 5, 2006 the Board of Directors terminated the
      plan.




**2000
      Officer Stock Purchase Plan**




On
      June
      30, 2000, the Company adopted the 2000 Officer Stock Purchase Plan. There was
      no
      activity in this plan during 2006 and 2005 and on December 5, 2006 the Board
      of
      Directors terminated the plan.




**Warrant
      Activity**




The
      Company issued a warrant to purchase 150,000 shares of Company common stock
      to a
      vendor pursuant to a consulting agreement dated August 1, 2005. The warrant
      had
      a term of 1.25 years, an exercise price of $0.10 per share vesting in three
      tranches upon the achievement of certain performance milestones. On February
      28,
      2006 the Company terminated the contract by its terms prior to the completion
      of
      the performance milestones and the warrants expired unvested.





The
      Company also issued a warrant to purchase 150,000 shares of Company common
      stock
      to a vendor pursuant to a consulting agreement dated December 1, 2005. The
      warrant had a term of 1.25 years, an exercise price of $0.10 per share vesting
      in three tranches upon the achievement of certain performance milestones. On
      April 30, 2006 the Company terminated the contract by its terms prior to the
      completion of the performance milestones and the warrants expired
      unvested.




The
      following table details the warrant activity for the years ended December 31,
      2006 and 2005:





Weighted
            
            WeightedWarrants
            
            Average
            
            AverageOutstanding
            
            Exercise
                Price
            
            LifeOutstanding,
                December 31, 2004
            
            
            2,270,000
            
            $
            1.67
            
            
            0.5Granted
            
            
            300,000
            
            $
            0.10
            
            
            1.3Expired
                /canceled
            
            
            (2,270,000
            )
            $
            1.67Outstanding,
                December 31, 2005
            
            
            300,000
            
            $
            0.10
            
            
            1.0Expired
                /canceled
            
            
            (300,000
            )
            $
            0.10Outstanding,
                December 31, 2006
            
            
            —
            
            
            —Exercisable,
                December 31, 2006
            
            
            —
            
            
            —
            
            
            —




F-13




**Stock
      Option Plans**




2000
      Stock Option Plan




The
      Company adopted the 1996 Stock Option Plan in October 1996 to provide additional
      incentives to the employees and consultants of the Company.




On
      June
      30, 2000, the Company readopted its 1996 Stock Option Plan and renamed it the
      2000 Stock Option Plan, which expires in 2010. There was no activity in this
      plan during 2006 and 2005 and on December 5, 2006 the Board of Directors
      terminated the plan.





2000
      Director Option Plan




On
      June
      30, 2000, the Company adopted the 2000 Director Option Plan to attract and
      retain outside directors. There was no activity in this plan during 2006 and
      2005 and on December 5, 2006 the Board of Directors terminated the
      plan.




Telisar
      2001 Stock Option Incentive Plan




The
      Board
      of Directors of Telisar adopted the Telisar 2001 Stock Option Incentive Plan
      (the “Telisar Plan”) on April 11, 2001 to provide additional incentive to the
      employees and consultants of Telisar. Options granted are incentive stock
      options as defined in Section 422 of the Internal Revenue Code of 1986, as
      amended. The specific terms of each option grant are approved by the Telisar
      Board and reflected in a written stock option agreement between Telisar and
      each
      grantee. Generally, the options are for a term of no more than five years at
      an
      exercise price not less than the fair market value of Telisar’s common stock as
      determined by Telisar’s Board of Directors at the time of option grant. Common
      stock may also be granted or sold under the Telisar Plan independent of any
      option grant. Telisar has reserved 2,500,000 shares of its common stock for
      issuance under the Telisar Plan. There was no activity in this plan during
      2006
      and 2005.




**NOTE
      7 - GAIN ON DEBT SETTLEMENTS**




During
      2005, the Company settled and obtained releases for an aggregate of $535,174
      of
      its historic liabilities with nine vendors for aggregate consideration of cash
      of $83,468 and 380,198 shares of common stock valued at $15,208, resulting
      in a
      gain on debt settlement of $436,498.




**NOTE
      8 - INCOME TAXES**




The
      following table presents the current and deferred income tax provision for
      federal and state income taxes for the years ended December 31, 2006 and 2005,
      respectively:





2006
            
            2005CurrentFederal
            
            $
            —
            
            $
            —State
            
            
            3,200
            
            
            3,2003,200
            
            
            3,200DeferredFederal
            
            
            —
            
            
            —State
            
            
            —
            
            
            ——
            
            
            —Provision
                for income taxes
            
            $
            3,200
            
            $
            3,200




F-14




The
      provision for income taxes differs from the amount that would result from
      applying the federal statutory rate for the years ended December 31, 2006 and
      2005 as follows:





2006
            
            2005Statutory
                regular federal income tax rate
            
            
            34.0
            %
            
            34.0
            %State
                taxes
            
            
            5.8
            
            
            5.8Change
                in valuation allowance
            
            
            (39.8
            )
            
            (39.8
            )Total
            
            
            —
            %
            
            —
            %





The
      tax
      effects of temporary differences which give rise to deferred taxes at December
      31, 2006 and 2005 respectively consist of:


2006
            
            2005Deferred
                tax assetsFederal
                net operating loss carryforward
            
            $
            15,277,866
            
            $
            15,033,518Total
                gross deferred tax assets
            
            
            15,277,866
            
            
            15,033,518Less
                valuation allowance
            
            
            (15,277,866
            )
            
            (15,033,518
            )Net
                deferred tax assets
            
            $
            —
            
            $
            —




During
      the years ended December 31, 2006 and 2005, the valuation allowance recorded
      on
      the deferred tax assets increased by $244,348 and $65,244, respectively. As
      of
      December 31, 2006, the Company had net operating loss carryforwards for federal
      and state income tax reporting purposes of $44,934,899 which if unused, will
      expire in the following years:




**Year**
            
            **Amount**2018
            
            $
            27,080,2692019
            
            
            1,745,8672020
            
            
            6,137,7252021
            
            
            5,251,1752022
            
            
            1,751,3222023
            
            
            1,729,9302024
            
            
            328,0482025
            
            
            191,8932026
            
            
            718,670$
            44,934,899





The
      utilization of net operating loss carryforwards may be limited due to the
      ownership change under the provisions of Internal Revenue Code Section 382
      and
      similar state provisions.





**NOTE
      9 - SUBSEQUENT EVENTS**




On
      January 4, 2007 the Company issued 400,000 shares at a price of $0.125 in
      exchange for cash of $50,000 to Mark Weber, a director of the Company. The
      price
      paid was the same as the price paid by third party investors.




F-15