**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, 2005**




**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 000-21864**




**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 o No
x




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, 2005, the issuer’s revenues were $0. As of
      November 30, 2006, the aggregate market value of issuer’s voting stock held by
      non-affiliates was $7,686,082 based on the average of the bid and ask prices
      of
      such stock on that date of $0.25, as reported on the Pink Sheets.




On
      November 30, 2006 there were 44,430,683 shares of Registrant’s common stock, no
      par value, issued and outstanding.




Transitional
      Small Business Disclosure Format: Yes oNo x





TABLE
      OF
      CONTENTS





PagePART
                I
            
            NumberItem
                1.
            Our Business
            2Item
                2.
            Properties
            5Item
                3.
            Legal Proceedings
            5Item
                4.
            Submission of Matters to a Vote of Security
              Holders
            6PART
                IIItem
                5.
            Market for Common Equity, Related Stockholder
              Matters and Small Business Issuer Purchases of Equity Securities
            6Item
                6.
            Management’s Discussion and Analysis or Plan
              of Operation
            8Item
                7.
            Financial Statements
            17Item
                8.
            Changes in and Disagreements with the
              Accountants on Accounting and Financial Disclosure
            18Item
                8A.
            Controls and Procedures
            18Item
                8B.
            Other Information
            18PART
                IIIItem
                9.
            Directors, Executive Officers, Promoters
              and
              Control Persons; Compliance With Section 16(a) of the Exchange
              Act
            18Item
                10.
            Executive Compensation
            22Item
                11.
            Security Ownership of Certain Beneficial
              Owners and Management
            23Item
                12.
            Certain Relationships and Related
              Transactions
            24Item
                13.
            Exhibits
            25Item
                14.
            Principal Accountant Fees and
              Services
            26Signatures
            
            27








**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.







**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 disclaim any
      obligation to update any forward-looking statements to reflect events or
      circumstances after the date hereof.




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.





-1-


**PART
      I**




**ITEM
      1. OUR BUSINESS**




**Overview**




Telegen
      Corporation is a research and development company focused on development of
      our
      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 solely dependent on
      research and development results achieved and specific market determined by
      the
      same. We currently have no revenues and no commercial products, and we have
      no
      established timeline to do so.




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.




Singer,
      Lewak, Greenbaum & Goldstein LLP, our independent registered public
      accounting firm, has raised substantial doubt about our ability to continue
      as a
      going concern. 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 current, we engaged several research consultants under work
      for
      hire contracts to assist in our development efforts of our new lighting
      technology.




We
      are
      currently performing methods research and manufacturing proof of concept
      prototypes. We are also developing the necessary documentation, and we intend
      to
      apply for patent protection on our proprietary technology. There can be no
      assurances that any such patents will be obtained. 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 achieve profitable
      operations.




-2-


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 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**




The
      world
      lighting market for which we are developing our light emitting technology is
      highly competitive and 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. and others. These
      entities possess far more substantial financial, human and other resources
      than
      we do.




According
      to Strategies Unlimited of Mountain View, California, the high brightness light
      emitting diode (“LED”) lighting market segments is
      expected to grow from $2.7 billion in 2003 to $6 billion in 2008. About 50
      percent of the market consists of cell phones and other mobile devices. About
      18
      percent is automotive, while outdoor signs account for 23 percent of the market.
      Illumination, for now, is a scant 5 percent of the market. General
      illumination, an estimated $12 to $15 billion market segment according to
      Strategies Unlimited, is the largest and most likely market segment for our
      light emitting technology. 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. The
      specific market segment will be determined by the final development results
      achieved.




**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 for additional patent protection as appropriate. There can
      be
      no assurances that the patents will be granted.




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.




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.




-3-




**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 look into 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, if successfully developed, could prove to have
      a
      viable market, but can give no assurances that any such market will develop.
      The
      ultimate market entry position will be influenced by many factors, including
      competitive positioning, financing, strategic partnerships, manufacturability
      and market size.




**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.




Subsequent
      to the end of fiscal 2005, 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.




**Settlements
      with Creditors**




During
      2004 and 2005 we contacted certain creditors to settle outstanding liabilities.
      During 2004, we settled and obtained releases for an aggregate of $249,303
      of
      our historic liabilities with three vendors for aggregate consideration of
      cash
      of $71,380 resulting in a gain on debt settlement of $177,923. During 2005,
      we
      settled and obtained 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, resulting
      in a gain on debt settlement of $436,498.




-4-




**Private
      Placements of Common Stock**




During
      2004 and completing 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 under Regulation
      S
      at a purchase price of $0.045 per share for gross proceeds of $430,375 to be
      used for working capital.




During
      2005 and completing on October 31, 2005, we sold an aggregate of 6,000,000
      shares of common stock to a group of 19 accredited investors under Regulation
      D
      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 and Richard Sellers, an officer
      and
      director, purchased 1,000,000 shares. The purchases by Mr. Weber and Mr. Sellers
      were made on identical terms to all other investors in the private placement.




**Employees**




As
      of
      December 31, 2005 we had two part-time employees, our Chief Executive Officer
      and our Chief Operating Officer, working on reorganizing the company, managing
      technology development and day to day operations. We have not paid any cash
      salaries to these officers, but in 2005 we granted shares of restricted stock
      to
      these officers in consideration for their service on our board of directors.
      The
      timing of hiring full time employees is directly related to technology maturity
      timelines and obtaining adequate funding.




**Consultants**




All
      operations and technological development to date have been 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. The following is a summary description of legal
      proceedings involving us over the past several years, all of which have been
      resolved as described below:




BANKRUPTCY.
      On October 28, 1998, we commenced a reorganization case (“Chapter 11 Case”)
      under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court
      for the Northern District of California, San Francisco Division (“Bankruptcy
      Court”); designated as In re Telegen Corporation, case number 98-34876-DM-11.
      During the first half of 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 21, 2000, and the
      Bankruptcy Court confirmed the Plan of Reorganization on June 28, 2000. The
      final decree closing this bankruptcy case was issued on September 10,
      2005.




RATES
      TECHNOLOGY CASE. On August 10, 2001, Rates Technology Inc. (“Rates”) filed an
      action in the U.S. District Court for the Eastern District of New York against
      us and our inactive subsidiary, Telegen Communications Corporation, alleging
      that our U.S. Patent No. 5,590,182 infringed on a patent owned by Rates
      Technology. Rates sought injunctive relief, monetary damages and attorney’s
      fees. Subsequent to the end of fiscal 2005, the case was dismissed with
      prejudice on April 24, 2006.




-5-




LATHROP
      & GAGE JUDGEMENT (Case No. 2002 CV 1344). In 2002, a judgment was entered
      against us in District Court, Boulder County, Colorado for unpaid legal services
      to the law firm of Lathrop & Gage. In May 2004, we reached a settlement with
      the law firm and the judgment was satisfied.




VICTORIA
      S. KOLAKOWSKI JUDGEMENT (Case No. CA 12 - 50821). In 2003, a judgment was
      entered against us in Superior Court of the State of California, County of
      Santa
      Clara for past due wages from this former employee who served as our chief
      patent counsel. We settled this judgment in December 2005 by the issuance of
      200,000 shares of common stock and the exclusive assignment to her of patent
      application WO02/49732 subject to a 5% royalty should the patent be issued
      and
      revenues be achieved.




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




No
      matters were submitted to a vote of our security holders during the fiscal
      year
      ended December 31, 2005.




**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, 2005 and 2004. These quotations
      reflect inter-dealer prices, without mark-up, mark-down or commission and may
      not represent actual transactions.





High
            
            LowFiscal
                2004First
                Quarter (ended March 31, 2004)
            
            $
            0.300
            
            $
            0.035Second
                Quarter (ended June 30, 2004)
            
            
            0.350
            
            
            0.090Third
                Quarter (ended September 30, 2004)
            
            
            0.150
            
            
            0.050Fourth
                Quarter (ended December 31, 2004)
            
            
            0.085
            
            
            0.040Fiscal
                2005First
                Quarter (ended March 31, 2004)
            
            
            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
            
            
            0.080




We
      currently have a 2000 Stock Option Plan, 2000 Director Stock Option Plan, 2000
      Employee Stock Purchase Plan and 2000 Officer Stock Purchase Plan, but there
      are
      no grants of options or purchase rights currently outstanding under any of
      these
      plans. On December 5, 2006 the board of directors terminated the above mentioned
      plans.




As
      of
      December 31, 2005 there were 43,180,683 shares issued and outstanding and
      approximately 646 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 years ended December 31, 2005 and 2004, which were not registered
      under the Securities Act.




-6-


Fiscal
      2005 Issuances




·
            On
                January 27, 2005, we issued an aggregate of 280,750 shares of common
                stock
                to four consultants for services rendered. The shares were offered
                and
                sold pursuant to the exemption from registration under Section 4(2)
                of the
                Securities Act.




·
            On
                January 27, 2005, we issued an aggregate of 349,448 shares of common
                stock
                to three creditors in settlement of certain liabilities owing by
                us. The
                shares were offered and sold pursuant to the exemption from registration
                under Section 4(2) of the Securities
                Act.




·
            On
                February 28, 2005, we issued 10,000 shares of common stock to a consultant
                for services rendered. The shares were offered and sold pursuant
                to the
                exemption from registration under Section 4(2) of the Securities
                Act.




·
            On
                June 15, 2005, we issued 500,000 shares of common stock to Mark Weber,
                one
                of our directors, for service as a Board member. The shares were
                offered
                and sold pursuant to the exemption from registration under Section
                4(2) of
                the Securities Act.




·
            On
                August 30, 2005, we issued 216,250 shares of common stock to a consultant
                for services rendered. The shares were offered and sold pursuant
                to the
                exemption from registration under Section 4(2) of the Securities
                Act.




·
            From
                August 31, 2005 to October 31, 2005, we completed a private placement
                of
                an aggregate of 6,000,000 shares of common stock at a purchase price
                of
                $0.10 per share for gross proceeds of $600,000 to a group of 19 accredited
                investors. 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.




·
            On
                September 30, 2005, we issued 1,276,248 shares at the conversion
                price of
                $0.10 per share to Richard G. Sellers, one of our directors and officers,
                upon the conversion of debt of $127,625. The shares were offered
                and sold
                pursuant to the exemption from registration under Section 4(2) of
                the
                Securities Act.




·
            On
                December 1, 2005, we issued 50,000 shares of common stock to a consultant
                for services rendered. The shares were offered and sold pursuant
                to the
                exemption from registration under Section 4(2) of the Securities
                Act.




·
            On
                December 31, 2005, we issued 150,000 shares of common stock to a
                consultant for services rendered. The shares were offered and sold
                pursuant to the exemption from registration under Section 4(2) of
                the
                Securities Act.




Fiscal
      2004 Issuances




·
            On
                May 13, 2004, we completed a private placement of an aggregate of
                9,563,898 shares of common stock at a purchase price of $0.045 per
                share
                for gross proceeds of $430,375 to a group of five accredited non-U.S.
                investors under Regulation S. No commissions were paid in the private
                placement. All of the purchasers in the private placement were non-U.S.
                Persons as defined in Rule 903 of Regulation S. The shares issued
                in the
                private placement were offered and sold pursuant to the exemption
                from
                registration pursuant to Regulation S under the Securities Act.




·
            On
                May 13, 2004, we issued an aggregate of 3,915,000 shares of common
                stock
                to three of our directors as compensation for services: Duncan Troy,
                the
                Chairman of the Board received 1,400,000 shares; Richard G. Sellers
                received 1,400,000 shares; and Richard Herring received 1,115,000
                shares.






-7-




·
            On
                May 13, 2004, we issued to Private Equity III Limited, a company
                in which
                Duncan Troy, our Chairman has a 12.5% ownership stake and for which
                he
                serves as a director, 933,334 shares of common stock as reimbursement
                of
                expenses paid on our behalf. The shares were offered and sold pursuant
                to
                the exemption from registration under Section 4(2) of the Securities
                Act.




·
            On
                May 13, 2004, 2004, we issued to Richard G. Sellers, one of our officers
                and directors, 553,964 shares of common stock as reimbursement of
                expenses
                paid on our behalf. The shares were offered and sold pursuant to
                the
                exemption from registration under Section 4(2) of the Securities
                Act.




·
            On
                May 13, 2004, we issued an aggregate of 1,000,000 shares to two
                consultants as compensation for services rendered. The shares were
                offered
                and sold pursuant to the exemption from registration under Section
                4(2) of
                the Securities Act.




**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, 2005 and 2004, our Independent Registered Public Accounting Firm,
      Singer, Lewak, Greenbaum & Goldstein, LLP, 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 development of
      our
      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 solely dependent on
      research and development results achieved and specific market determined by
      the
      same. We currently have no revenues and no commercial products, and we have
      no
      established timeline to do so.




**Plan
      of Operations**




We
      have
      had no revenues in either fiscal 2004 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
      development of a revenue base.




For
      fiscal 2006, 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 2005. As of December 31, 2005, we do not
      have
      sufficient resources to fund our operations through 2006 without raising
      additional debt or equity financing. We expect that during the fourth quarter
      of
      2006 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 2006 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.




-8-




**Results
      of Operations for the Fiscal Years ended December 31, 2005 and
      2004**




**Research
      and Development Expenses**




For
      the
      twelve months ended December 31, 2005 we were involved in a single project
      to
      develop and commercialize our proprietary lighting technology. For the twelve
      months ended December 31, 2004, there were also projects to review the status
      of
      the flat panel display industry and embedding of digital data in an RF signal
      technology. These efforts were abandoned during the first quarter of fiscal
      2005. Research and development expenses increased $102,817 to $247,134 for
      the
      year ended December 31, 2005 compared to $144,317 for the year ended December
      31, 2004. For the years ended December 31, 2005 and 2004, research and
      development expenses were comprised primarily of technical consulting expenses,
      legal expenses for the development and protection of intellectual property
      and
      travel. The increase in fiscal 2005 is due to 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.




**General
      and Administrative Expenses**




General
      and administrative expenses are comprised primarily of compensation expenses
      related to stock issuances, professional and legal fees, consulting expenses,
      insurance, travel and general corporate related overheads and office expenses.
      General and administrative expenses decreased by $19,808 from $402,446 for
      the
      year ended December 31, 2005 compared to $422,254 for the year ended December
      31, 2004. The decrease is due primarily to decreases in professional fees
      related to lower legal fees incurred in 2005 offset by increases in insurance
      related expenses. In fiscal 2005, non-cash compensation expense for stock issued
      to directors and consultants was $171,138 compared to $176,175 for fiscal 2004.




**Recovery
      of Bad Debts and Write off of Advance to Affiliate**




The
      operating expenses for the year ended December 31, 2004 include the recovery
      of
      bad debts of $80,000 from a previously written off note receivable from WMS
      Financial Planners, an affiliated entity of William M. Swayne, II, one of our
      former directors and officers as well as a non-cash write off of $32,720 related
      to cash advanced in April 2003 to TNT Innovations, Inc, a company controlled
      by
      Jessica Stevens and Bonnie Crystal, two of our directors for which no comparable
      amount exists for the fiscal year ended December 31, 2005.




**Other
      Income and Expense**




Other
      income and expense for fiscal 2005 is comprised of interest income of $1,989,
      and a gain on debt settlements of $436,498. Other income and expense for fiscal
      2004 is comprised of a gain on debt settlements of $177,923.




**LIQUIDITY
      AND CAPITAL RESOURCES**




Our
      cash
      and cash equivalents of $408,782 as of December 31, 2005 are not sufficient
      to
      support our operations through fiscal 2006 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.




During
      2005, we settled and obtained 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,
      resulting in a gain on debt settlement of $436,498.




-9-




Richard
      Sellers, our Chief Operating Officer and a director, provided funding during
      fiscal 2005 for operations. During 2005, Mr. Sellers advanced cash in an
      aggregate amount of $127,625, which he subsequently converted into shares of
      common stock on September 30, 2005 at a price of $0.10 per share for a total
      of
      1,276,248 shares. On November 16, 2006 Richard Sellers, our Chief Operating
      Officer and a director advanced $100,000 to us to be used for working
      capital.




During
      2005 and completing on October 31, 2005, we sold an aggregate of 6,000,000
      shares of common stock to a group of 19 accredited investors at a purchase
      price
      of $0.10 per share for gross proceeds of $600,000 to be used for working
      capital. There were no offering expenses related to the offering. Mark Weber,
      one of our directors, participated in the private placement, purchasing 90,000
      shares and Richard Sellers, an officer and director, purchased 1,000,000 shares.
      The purchases by Mr. Weber and Mr. Sellers were made on identical terms to
      all
      other investors in the private placement. The private placement was conducted
      pursuant to Rule 506 of Regulation D under the Securities Act.




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. During 2005, Richard Sellers, our Chief Operating Officer
      and a director, made cash advances to us in an aggregate amount of $127,625
      to
      fund operations, which he subsequently converted into shares of common stock
      at
      a price of $0.10 per share for a total of 1,276,248 shares. On November 16,
      2006
      Richard Sellers, our Chief Operating Officer and a director advanced $100,000
      to
      us to be used for working capital. 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, 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 2005
      financial statements stating that there was substantial doubt about our ability
      to continue as a going concern.







**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.




**Stock
      Based Compensation**




We
      utilize the intrinsic-value method as provided by Accounting Principles Board
      Opinion (“APB”) No. 25 in accounting for our stock options and restricted stock
      plans and provide pro forma disclosure of the compensation expense determined
      under the fair value provisions of Statement of Financial Accounting Standards
      (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS
      No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure.”
There are no options outstanding as of December 31, 2005 and 2004.




-10-




**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
      December 2004, the FASB issued SFAS No. 123 (revised 2004),”Share-Based
      Payment,” which is an amendment to SFAS No. 123, “Accounting for Stock-Based
      Compensation” and supersedes Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees.” This new standard eliminates the
      ability to account for share-based compensation transactions using APB No.
      25
      and requires such transactions to be accounted for using a fair-valued-based
      method, with the resulting cost recognized in our financial statements. This
      new
      standard is effective for annual periods beginning after June 15, 2005. We
      have
      not awarded or granted any share-based compensation to date and, therefore,
      the
      adoption of this standard is not expected to have a material impact on our
      financial statements until such time as share-based compensation is
      granted.




In
      December 2004, the FASB issued SFAS No. 153, “Exchange of Non-monetary Assets.”
SFAS No. 153 amends APB Opinion No. 29, “Accounting for Non-monetary
      Transactions,” to eliminate the exception for non-monetary exchanges of similar
      productive assets. We will be required to apply this statement to non-monetary
      exchanges after December 31, 2005. The adoption of this standard is not expected
      to have a material impact on our financial statements.




In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”
which replaces APB Opinions No. 20 “Accounting Changes” and SFAS No. 3
“Reporting Accounting Changes in Interim Financial Statements - An Amendment
      of
      APB Opinion No. 28.” SFAS No. 154 provides guidance on the accounting for and
      reporting of accounting changes and error corrections. It establishes
      retrospective application, or the earliest practicable date, as the required
      method for reporting a change in accounting principle and restatement with
      respect to the reporting of a correction of an error. SFAS No. 154 is effective
      for accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005.




In
      June
      2005, the FASB’s Emerging Issues Task Force reached a consensus on Issue No.
      05-6, “Determining the Amortization Period for Leasehold Improvements.” The
      guidance requires that leasehold improvements acquired in a business combination
      or purchased subsequent to the inception of a lease be amortized over the lesser
      of the useful life of the assets or a term that includes renewals that are
      reasonably assured at the date of the business combination or purchase. The
      guidance is effective for periods beginning after June 29, 2005. The adoption
      of
      EITF No. 05-6 is not expected to have a material impact on our financial
      statements.




In
      February 2006, the FASB issued SFAS No. 155, 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.




-11-




In
      March
      2006, the FASB issued SFAS No. 156, 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
      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 “Statement of Financial Accounting Standards 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.




-12-




**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.




**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.




-13-




**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 2005 of $214,293 and have an accumulated deficit
      of
      $44,698,363 as of December 31, 2005. 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.”




**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 2005 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.




-14-




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
      certain our two employees and 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.




**We
      may be materially disadvantaged if we fails 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;






-15-




·
            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.




**Risks
      Relating to the 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.




-16-




**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 a s
      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.**




We
      are
      currently 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.




**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.






-17-




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




There
      were no changes in or disagreements with our accountants on accounting or
      financial disclosure during the fiscal year ended December 31, 2005.







**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 company’s 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, 2005. 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 2005 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






**PART
      III**




**ITEM
      9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; 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, 2005.





**Name**
            **Age**
            **Title**Duncan
                Troy
            47
            Chairman
                of the BoardRichard
                N. Herring
            67
            Chief
                Executive Officer and DirectorRichard
                G. Sellers
            45
            Chief
                Operating Officer and DirectorMark
                Weber
            49
            DirectorJessica
                L. Stevens
            49
            DirectorBonnie
                A. Crystal
            53
            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.




-18-




As
      of
      December 31, 2005, two of the six directors **** on
      our
      board of directors were “independent” within the meaning of the listing
      standards of The NASDAQ Stock Market.




Subsequent
      to the end of fiscal 2005, in October 2006 the Board appointed Dr. Charles
      Hunt
      as a new independent director to the Board and appointed Matthew DeVries as
      our
      new Chief Financial Officer.




The
      principal occupations and brief summary of the background of each of our
      directors and executive officers (including Messrs. Hunt and DeVries) 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, while developing internationally responsible
      engineering students.  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.





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.





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 1989. 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 1989.
      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 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.




-19-




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.




**Audit
      Committee Financial Expert**




Our
      entire Board of Directors currently functions as the Audit Committee .
      We do
      not have a financial expert due to our lack of operations, but we intend to
      locate such expert when possible.




**Policy
      on Stockholder Nomination of Directors**





Candidates
      for election to our Board of Directors are nominated by our Board of Directors
      for nomination to the stockholders.




-20-




In
      identifying candidates to be directors, the Board of Directors seeks persons
      it
      believes to be knowledgeable in our business or having industry experience,
      or
      some aspect of it which would benefit our company. Our Board believes that
      the
      minimum qualifications for serving on our Board of Directors are that each
      director has an exemplary reputation and record for honesty and integrity in
      his
      or her personal dealings and business or professional activity. All directors
      should possess a basic understanding of financial matters, and have an ability
      to review and understand our financial statements and other reports and to
      discuss such matters intelligently and effectively. The Board will take into
      account whether a candidate qualifies as “independent” under applicable SEC
      rules and exchange listing requirements. The Board will take into account the
      financial and accounting expertise of a candidate, including whether an
      individual qualifies as an “audit committee financial expert.” Each candidate
      also needs to exhibit qualities of independence in thought and action. Finally,
      a candidate should be committed to the interests of our stockholders;
      accordingly, persons who represent a particular special interest, ideology,
      narrow perspective or point of view would not, therefore, generally be
      considered good candidates for election to our Board.





Candidates
      have traditionally been recommended to the Board by our Chief Operating Officer
      or one of the other directors, and there has not been a formal process for
      identifying new director nominees. Our Board is open to receiving
      recommendations from stockholders as to potential candidates it might consider.
      The Board gives equal consideration to all director nominees, whether
      recommended by our stockholders, management or current directors.





Since
      the
      last election of directors in February 2004, the Board appointed two new
      directors, Mark Weber upon the recommendation of Richard Sellers and Charles
      Hunt upon the recommendation of Richard Herring.





A
      stockholder wishing to submit a director nomination should send a letter to
      the
      Board, c/o Corporate Secretary, 1830 Gateway Drive, Suite 200, San Mateo, CA
      94404. The mailing envelope must contain a clear notation indicating that the
      enclosed letter is a “Director Nominee Recommendation.” The notice must also be
      accompanied by a written consent of the proposed nominee to being named as
      a
      nominee and to serve as a director if elected. In making recommendations,
      stockholders should be mindful of the discussion of minimum qualifications
      set
      forth above; although satisfaction of such minimum qualification standards
      does
      not imply that the Board necessarily will nominate the person so recommended
      by
      a shareholder. In addition, for nominees for election to the Board proposed
      by
      stockholders to be considered, the following information must be timely
      submitted with the director nomination:




·
              the
                  name, age, business address and, if known, residence address of
                  each
                  nominee;


·
            the
                principal occupation or employment of each nominee;


·
            the
                number of shares of our common stock beneficially owned by each nominee;


·
            the
                name and address of the stockholder making the nomination and any
                other
                stockholders known by such stockholder to be supporting such nominee;


·
            the
                number of shares of our common stock beneficially owned by such
                stockholder making the nomination, and by each other stockholder
                known by
                such stockholder to be supporting such nominee;


·
            any
                other information relating to the nominee or nominating shareholder
                that
                is required to be disclosed under SEC rules in order to have a
                stockholders proposal included in our proxy statement; and


·
            a
                representation that the stockholder intends to appear in person or
                by
                proxy at the annual meeting to nominate the person named in its notice.




**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.




We
      do not
      believe that any of our officers, directors, or 10% stockholders complied with
      their Section 16(a) filing obligations during the fiscal year ended December
      31,
      2005. In particular, we are aware of the following deficiencies:




-21-




·
            Mark
                Weber failed to file a Form 3 upon his appointment to the Board and
                failed
                to file a Form 4 for a share issuance in
                2005; ·
            Richard
                Sellers failed to file a Form 4 to report two share issuances in
                2005;
                and ·
            We
                do not have any information regarding any stock transactions by Board
                members Jessica Stevens and Bonnie
                Crystal.




**Code
      of Ethics**




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 due to our lack of employees and limited operations.




**ITEM
      10. EXECUTIVE COMPENSATION**





The
      following table provides information about the compensation paid to, earned
      or
      received during the last three fiscal years ended December 31, 2005, 2004 and
      2003 by the executive officers listed below (the “Named Executive Officers”).
      None of our executive officers received salary and bonus in excess of $100,000
      during fiscal 2005.





Fiscal
            Annual
                Compensation
            Long
                Term Compensation AwardsName
                and Position of Principal
            Year
            Salary
                ($)
            Bonus
                ($)
            Restricted
                Stock Awards ($)Richard
                N. Herring
              President
                and CEO
            2005
              2004
              2003
            —
              —
              —
            —
              —
              —
            —
              $50,175
                (1)
              —Richard
                Sellers
              Chief
                Operating Officer
            2005
              2004
              2003
            —
              —
              —
            —
              —
              —
            —
              $63,000
                (1)
              —




(1)
            On
                May 13, 2004, we granted to Richard N. Herring 1,115,000 shares of
                common
                stock and Richard Sellers 1,400,000 shares of common stock for service
                as
                directors at a deemed value of $0.045 per
                share.





**Options
      Grants in the 2005 Fiscal Year**





During
      the 2005 fiscal year, we did not grant any stock options to the Named Executive
      Officers.





**Aggregated
      Option Exercises and Fiscal Year End Option Values**





There
      were no options outstanding to the Named Executive Officers as of December
      31,
      2005 and no Named Executive Officers exercised any stock options during fiscal
      2005.





**Termination
      of Employment, Change-in-Control Arrangements in Employment
      Contracts**





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





**Compensation
      of Directors**




During
      fiscal 2005, we issued 500,000 shares of common stock to Mark Weber for his
      service as a Board member.




During
      fiscal 2004, we issued an aggregate of 3,915,000 shares of common stock to
      three
      of our directors as compensation for services: Duncan Troy, the Chairman of
      the
      Board received 1,400,000 shares; Richard G. Sellers received 1,400,000 shares;
      and Richard Herring received 1,115,000 shares.




-22-


No
      cash
      compensation is paid to any director in return for their services, however,
      we
      reimburse each non-employee member of the Board of Directors and its committees
      for actual expenses incurred by such member in connection with board meeting
      attendance.




**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 November 30, 2006, 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;


·
            each
                of the Named Executive Officers; and


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





As
      of
      November 30, 2006, there were 44,430,683 shares of common stock issued and
      outstanding. Unless otherwise indicated, each person’s address is c/o Telegen
      Corporation, 1830 Gateway Drive, Suite 200, San Mateo, CA 94404.





Name
                and Address
            
            Number
                of Shares
              Beneficially
                Owned (1)
            
            PercentMichael
                Moors (2)
              Eaton
                Cottage
              Eaton
                Congleton UK
              CW12
                2NA
            
            
            5,258,364
            
            
            11.8
            %Richard
                Sellers
            
            
            4,860,212
            
            
            10.9Polymer
                Holdings, Ltd.
              Broomhill
                Road
              Stonehaven,
                UK AB39 2NH
            
            
            2,738,889
            
            
            6.2Duncan
                Troy (3)
            
            
            2,470,350
            
            
            5.6Jessica
                L. Stevens
              204
                E. 2ndAve #256
              San
                Mateo, CA 94401
            
            
            2,447,111
            
            
            5.5Eric
                Broadley
              Little
                Farm
              Causway
                Road
              Huntington,
                Cambridgeshire UK
              PE17
                3AS
            
            
            2,289,917
            
            
            5.2SG
                Trust (Asia), Ltd.
              80
                Robinson Road 28thFloor
              Singapore
                068898
            
            
            2,221,489
            
            
            5.0Bonnie
                Crystal
              204
                E. 2ndAve #256
              San
                Mateo, CA 94401
            
            
            1,845,818
            
            
            4.2Richard
                Herring
            
            
            1,315,000
            
            
            3.0Mark
                Weber (4)
            
            
            747,866
            
            
            1.7Charles
                Hunt
            
            
            500,000
            
            
            1.1Matthew
                DeVries
            
            
            —
            
            
            —All
                Directors and Executive Officers as a Group (8 persons)
                (5)
            
            
            13,686,357
            
            
            31.9
            %




(1)
            Beneficial
                ownershipis
                determined in accordance with the rules of the SEC and generallyincludes
                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.






-23-




(2)
            Includes
                4,325,040 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.


(3)
            Includes
                1,400,000 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
                590,000 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**




The
      following table gives information as of December 31, 2005, the end of our most
      recently completed fiscal year, about shares of common stock that may be issued
      upon the exercise of options under our 2000 Stock Option Plan and 2000 Director
      Option Plan, which are our only existing equity compensation plans. See also
      Note 6 to our Consolidated Financial Statements included in this Annual
      Report.





(a)
            
            (b)
            
            (c)
            
            (d)Plan
                Category
            
            No.
                of
              Shares
                to be
              Issued
                Upon
              Exercise
                of
              Outstanding
              Stock
              Options
            
            Weighted
              Average
              Exercise
              Price of
              Outstanding
              Stock
              Options
            
            No. of Shares
              Available for
              Future
              Issuance
                (1)
            
            Total
              of Shares
              Reflected
              in
              Columns
              (a)
                & (c)Equity
                Compensation Plans Approved by Stockholders (2)
            
            
            —
            
            $
            —
            
            
            —
            
            
            —Equity
                Compensation Plans Not Approved by Stockholders
            
            
            —
            
            $
            —
            
            
            3,800,000
            
            
            3,800,000TOTAL
            
            
            —
            
            $
            —
            
            
            3,800,000
            
            
            3,800,000





(1)
            
            Excludes
                from this calculation the number of shares reflected in Column
                (a).


(2)
            
            Consists
                of the 2000 Stock Option Plan and the 2000 Director Option
                Plan.




On
      December 5, 2006 the Board of Directors terminated the 2000 Stock Option Plan
      and the 2000 Director Option Plan.




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




**Related
      Party Transactions**




During
      fiscal 2005, Richard Sellers, our COO and a Director made cash advances from
      time to time to us to fund operations in the aggregate amount of $127,625.
      On
      September 30, 2005, we converted the aggregate amount of $127,625 advanced
      into
      1,276,248 shares of common stock at a conversion rate of $0.10 per share. The
      conversion price was based upon the offering price in the Regulation D Offering
      conducted during June through October of 2005. On November 16, 2006 Richard
      Sellers, our Chief Operating Officer and a director advanced $100,000 to us
      to
      be used for working capital.




-24-




On
      January 27, 2005, we negotiated the settlement of $40,334 of debt that we owed
      to Weber Marketing Group by the issuance of 134,448 shares of common stock,
      based on a value of $0.30 per share, in exchange for the cancellation in full
      of
      that debt. Mr. Weber owns 100% of and is the principal of Weber Marketing Group
      and currently serves on our board. The debt settlement was negotiated prior
      to
      Mr. Weber’s appointment to our board.




During
      fiscal 2004, we wrote off $32,720 related to advances made in 2003 by former
      management to TNT Innovations, Inc., a company controlled by Jessica Stevens
      and
      Bonnie Crystal, the two outside directors.




On
      June
      15, 2005 we issued 500,000 shares valued at $75,000 to Mark Weber as
      compensation for service as a Board member.




During
      2004, Richard Sellers was issued 553,964 shares at a deemed value of $0.045
      for
      the reimbursement of expenses paid on our behalf $24,928. In addition, Mr.
      Sellers made additional advances totaling $15,206. In December, 2004 we
      collected $80,000 relating to a note from our former director and officer.
      Due
      to our delinquent status with certain taxing authorities, we were unable to
      obtain a bank account. Mr. Sellers acted as custodian on our behalf and held
      the
      cash in trust as of December 31, 2004. The cash was subsequently returned to
      us
      and used to pay our expenses. We have since opened our own bank accounts to
      manage our operations.




Also
      during 2004, we issued an aggregate of 3,915,000 shares to three directors
      for
      service on the Board. Duncan Troy, the Chairman of the Board was issued
      1,400,000 shares, Richard G. Sellers was issued 1,400,000 shares and Richard
      Herring was issued 1,115,000 shares. The aggregate value of these shares is
      $176,175 and the amount was recorded as general and administrative expense
      in
      the accompanying statement of operations for the year ended December 31,
      2004.




In
      addition in 2004, Private Equity III Limited, a company in which Duncan Troy,
      our chairman, owns a 12.5% stake and is a director, received 933,334 shares
      of
      common stock as reimbursement of expenses paid on our behalf. The deemed value
      of these shares at a price of $0.045 is $42,001.




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 years ended December
      31, 2005 and 2004.




**ITEM
      13. EXHIBITS**




**Exhibit
                No.**
            
            **Description**3.1
            (2)
            Amended
                and Restated Articles of Incorporation of Telegen Corporation dated
                June
                30, 20003.2A
            (3)
            Bylaws
                of Telegen Corporation3.2B
            (1)
            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) Certificationof
                Matthew DeVries32.1
            **
            Certificationof
                Richard Herring, CEO, and 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,
                the
                Company’s Annual Report on Form 10-K filed on April 15,
                1998. (2)
            
            Previously filed as an exhibit to,
              and
              incorporated herein by reference from, the Company’s Form 8-K filed on
              December 20, 2000. (3)
            
            Previously filed as an exhibit to,
              and
              incorporated herein by reference from, the Company’s Quarterly Report on
              Form 10-QSB as filed with the Commission on November 12,
              1996. (4)
            
            Previously
              filed as an exhibit to, and incorporated herein by reference from,
              the
              Company’s Annual Report on Form 10-K filed on April 1,
              2002.





-25-




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




**Fees
      Paid to Singer Lewak Greenbaum & Goldstein LLP for Fiscal 2005 and
      2004**




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, 2005 and
      2004:







Fiscal
                2005
            
            Fiscal
                2004Audit
                Fees
            
            $
            20,280
            
            
            —Audit
                Related Fees
            
            
            —
            
            
            —Tax
                Fees (1)
            
            
            15,459
            
            
            —All
                Other Fees
            
            
            —
            
            
            —TOTAL
                Fees
            
            $
            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
      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 audit
      committee 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 audit committee
      considers whether such services are consistent with applicable rules regarding
      auditor independence.







-26-




**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: December
              6, 2006
            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
            December
                6, 2006Duncan
                Troy/s/
                Richard N. Herring
            Chief
                Executive Officer and Director
            December
                6, 2006Richard
                N. Herring
            (*Principal
                Executive Officer*)/s/
                Richard G. Sellers
            Chief
                Operating Officer and Director
            December
                6, 2006Richard
                G. Sellers/s/
                Matthew DeVries
            Chief
                Financial Officer
            December
                6, 2006Matthew
                DeVries
            (*Principal
                Financial Officer and*
              *Principal
                Accounting Officer*)/s/
                Mark Weber
            Director
            December
                6, 2006Mark
                Weber/s/
                Charles Hunt
            Director
            December
                6, 2006Charles
                HuntDirectorJessica
                L. StevensDirectorBonnie
                Crystal










-27-


**TELEGEN
      CORPORATION AND SUBSIDIARIES**


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**







Report
                of Independent Registered Public Accounting Firm
            F-1Consolidated
                Balance Sheets as of December 31, 2005 and 2004
            F-2Consolidated
                Statements of Operations for the Years Ended December 31, 2005 and
                December 31, 2004
            F-3Consolidated
                Statements of Stockholders’ Equity (Deficit) for the Years Ended December
                31, 2005 and December 31, 2004
            F-4Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2005 and
                December 31, 2004
            F-5Notes
                to the Consolidated Financial Statements
            F-6
                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 sheets of Telegen Corporation
      and
      subsidiaries (collectively, the “Company”) as of December 31, 2005 and 2004, and
      the related consolidated statements of operations, stockholders’ equity
      (deficit) and cash flows for the years 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
      audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits 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
      audits provide 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 2004, and the results of their
      operations and their cash flows for the years 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.








SINGER
      LEWAK GREENBAUM & GOLDSTEIN LLP





Los
      Angeles, California


October
      21, 2006






F-1


**TELEGEN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


December
      31, 2005 and 2004







**ASSETS**2005
            
            2004Current
                assetsCash
                and cash equivalents
            
            $
            408,782
            
            $
            —Due
                from officer
            
            
            —
            
            
            68,285Prepaid
                expenses
            
            
            —
            
            
            13,125Total
                current assets
            
            $
            408,782
            
            $
            81,410**LIABILITIES
                AND STOCKHOLDERS’ EQUITY (DEFICIT)**Current
                liabilitiesBankruptcy
                liability
            
            $
            153,019
            
            $
            153,019Accounts
                payable
            
            
            201,151
            
            
            660,660Accrued
                expenses
            
            
            —
            
            
            38,821Total
                current liabilities
            
            
            354,170
            
            
            852,500Commitments
                and contingenciesStockholders’
                equity (deficit)Preferred
                stock, $1 par value
              10,000,000
                shares authorized
              no
                shares issued and outstanding
            
            
            —
            
            
            —Common
                stock, no par value
              100,000,000
                shares authorized
              43,180,683
                and 34,347,987 shares
              issued
                and outstanding, respectively
            
            
            44,752,975
            
            
            43,836,230Subscription
                receivable
            
            
            —
            
            
            (123,250
            )Accumulated
                deficit
            
            
            (44,698,363
            )
            
            (44,484,070
            )Total
                Stockholders’ equity (deficit)
            
            
            54,612
            
            
            (771,090
            )Total
                liabilities and Stockholders’ equity (deficit)
            
            $
            408,782
            
            $
            81,410






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


F-2




**TELEGEN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





Years
                EndedDecember
                31,2005
            
            2004Operating
                expenses:Research
                and development
            
            $
            247,134
            
            $
            144,317General
                and administrative
            
            
            402,446
            
            
            422,254Recovery
                of bad debts
            
            
            —
            
            
            (80,000
            )Write
                off of due from affiliate
            
            
            —
            
            
            32,720Total
                operating expenses
            
            
            649,580
            
            
            519,291Loss
                from operations
            
            
            (649,580
            )
            
            (519,291
            )Other
                income (expense)Interest
                income
            
            
            1,989
            
            
            —Gain
                on debt settlements
            
            
            436,498
            
            
            177,923Total
                other income (expense)
            
            
            438,487
            
            
            177,923Loss
                before provision for income taxes
            
            
            (211,093
            )
            
            (341,368
            )Provision
                for income taxes
            
            
            (3,200
            )
            
            (2,400
            )Net
                loss
            
            $
            (214,293
            )
            $
            (343,768
            )Basic
                and diluted loss per share
            
            $
            (0.01
            )
            $
            (0.01
            )Weighted-average
                common shares outstanding
            
            
            36,925,322
            
            
            28,603,035







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


F-3


**TELEGEN
      CORPORATION AND SUBSIDIARIES**


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


**For
      the Years Ended December 31, 2005 and 2004**





Common
                StockSubscription
            
            AccumulatedShares
            
            Amount
            
            Receivable
            
            Deficit
            
            TotalBalance,
                December 31, 2003
            
            
            18,381,791
            
            $
            43,117,752
            
            $
            —
            
            $
            (44,140,302
            )
            $
            (1,022,550
            )Issuance
                of common stock forCash
            
            
            9,563,898
            
            
            430,375
            
            
            (123,250
            )
            
            
            
            
            307,125Services
            
            
            4,915,000
            
            
            221,175
            
            
            
            
            
            
            
            
            221,175Expense
                reimbursement
            
            
            1,487,298
            
            
            66,928
            
            
            
            
            
            
            
            
            66,928Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            (343,768
            )
            
            (343,768
            )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
            )
            $
            54,612







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


F-4


**TELEGEN
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**For
      the Years Ended December 31, 2005 and 2004**





Years
                EndedDecember
                31,2005
            
            2004Cash
                flows from operating activities:Net
                loss
            
            $
            (214,293
            )
            $
            (343,768
            )Adjustments
                to reconcile net loss to net cashfrom
                operating activitiesIssuance
                of common stock for services rendered
            
            
            189,120
            
            
            221,175Issuance
                of common stock for expense reimbursement
            
            
            —
            
            
            66,928Gain
                on debt settlements
            
            
            (436,498
            )
            
            (177,923
            )Write
                off of due from affiliate
            
            
            —
            
            
            32,720Changes
                in assets and liabilities:Due
                from officer
            
            
            68,285
            
            
            (68,285
            )Prepaid
                expenses
            
            
            13,125
            
            
            (13,125
            )Accounts
                payable
            
            
            (61,832
            )
            
            (24,847
            )Net
                cash flows from operating activities
            
            
            (442,093
            )
            
            (307,125
            )Cash
                flows from investing activities:Net
                cash flows from investing activities
            
            
            —
            
            
            —Cash
                flows from financing activities:Collection
                of subscription receivable
            
            
            123,250
            
            
            —Proceeds
                from related party loans
            
            
            127,625
            
            
            —Net
                proceeds from sale of common stock
            
            
            600,000
            
            
            307,125Net
                cash flows from financing activities
            
            
            850,875
            
            
            307,125Net
                change in cash and cash equivalents
            
            
            408,782
            
            
            —Cash
                and cash equivalents, beginning of year
            
            
            —
            
            
            —Cash
                and cash equivalents, end of year
            
            $
            408,782
            
            $
            —Supplemental
                disclosures of cash flow informationInterest
                paid
            
            
            —
            
            
            —Income
                taxes paid
            
            $
            6,508
            
            
            —Supplemental
                disclosure of non-cash investing and financing activitiesStock
                issued upon conversion of related party loans
            
            $
            127,625
            
            
            —




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


F-5


**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, 2005 and 2004, 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, 2005 and 2004 the Company had cash of $308,782
      and
      zero, respectively, in excess of federally insured limits.





**Property
      and Equipment**





Property
      and equipment are 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-6




**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, 2005 and 2004, research and development expenses were
      comprised primarily of technical consulting expenses, legal expenses for the
      development and protection of intellectual property and travel.




**Stock
      Based Compensation**




The
      Company utilizes the intrinsic-value method as provided by Accounting Principles
      Board Opinion (“APB”) No. 25 in accounting for its stock options and restricted
      stock plans and provides pro forma disclosure of the compensation expense
      determined under the fair value provisions of Statement of Financial Accounting
      Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended
      by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and
      Disclosure.” There are no options outstanding as of December 31, 2005 and
      2004.




**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.




F-7




**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 31,2005
            
            2004Warrants
                issued for private placements
            
            
            —
            
            
            250,000Warrants
                issued to purchase technology
            
            
            —
            
            
            2,000,000Warrants
                issued as compensation
            
            
            300,000
            
            
            75,000Total
                potentially dilutive securities
            
            
            300,000
            
            
            2,325,000




**Recently
      Issued Accounting Pronouncements**




In
      December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
      Payment,” which is an amendment to SFAS No. 123, “Accounting for Stock-Based
      Compensation” and supersedes Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees.” This new standard eliminates the
      ability to account for share-based compensation transactions using APB No.
      25
      and requires such transactions to be accounted for using a fair-valued-based
      method, with the resulting cost recognized in the Company’s financial
      statements. This new standard is effective for annual periods beginning after
      June 15, 2005. The Company has not awarded or granted any share-based
      compensation to date and, therefore, the adoption of this standard is not
      expected to have a material impact on the Company’s financial statements until
      such time as share-based compensation is granted.




In
      December 2004, the FASB issued SFAS No. 153, “Exchange of Non-monetary Assets.”
SFAS No. 153 amends APB Opinion No. 29, “Accounting for Non-monetary
      Transactions,” to eliminate the exception for non-monetary exchanges of similar
      productive assets. The Company will be required to apply this statement to
      non-monetary exchanges after December 31, 2005. The adoption of this standard
      is
      not expected to have a material impact on the Company’s financial
      statements.




In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”
which replaces APB Opinions No. 20 “Accounting Changes” and SFAS No. 3
“Reporting Accounting Changes in Interim Financial Statements - An Amendment
      of
      APB Opinion No. 28.” SFAS No. 154 provides guidance on the accounting for and
      reporting of accounting changes and error corrections. It establishes
      retrospective application, or the earliest practicable date, as the required
      method for reporting a change in accounting principle and restatement with
      respect to the reporting of a correction of an error. SFAS No. 154 is effective
      for accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005.




In
      June
      2005, the FASB’s Emerging Issues Task Force reached a consensus on Issue No.
      05-6, “Determining the Amortization Period for Leasehold Improvements.” The
      guidance requires that leasehold improvements acquired in a business combination
      or purchased subsequent to the inception of a lease be amortized over the lesser
      of the useful life of the assets or a term that includes renewals that are
      reasonably assured at the date of the business combination or purchase. The
      guidance is effective for periods beginning after June 29, 2005. The adoption
      of
      EITF No. 05-6 is not expected to have a material impact on the Company’s
      financial statements.




F-8




In
      February 2006, the FASB issued SFAS No. 155, 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.




In
      March
      2006, the FASB issued SFAS No. 156, 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
      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.




F-9




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 “Statement of Financial Accounting Standards 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.




**NOTE
      3 - GOING CONCERN MATTERS**




The
      accompanying financial statements have been prepared in conformity with
      generally accepted accounting principles which contemplate continuation of
      the
      Company as a going concern. During the year ended December 31, 2005, 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 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 may
      be
      forced to curtail its current level of operations.




**NOTE
      4 - RELATED PARTY TRANSACTIONS**




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. Mr. Sellers also returned the
      $64,794 held by him as custodian and presented as Advance to Officer in the
      accompanying consolidated balance sheet at December 31, 2004.




On
      June
      15, 2005 the Company issued 500,000 shares valued at $75,000 to Mark Weber
      as
      compensation for service as a Board member.




F-10




During
      2004, Richard Sellers was issued 553,964 shares at a deemed value of $0.045
      for
      the reimbursement of expenses paid on behalf of the Company totaling $24,928.
      The amount was recorded as general and administrative expense in the
      accompanying statement of operations for the year ended December 31, 2004.
      Mr.
      Sellers made loans totaling $15,206 during 2004. In December, 2004 the Company
      collected $80,000 relating to a note from a former director and officer of
      the
      Company. These proceeds were paid directly to Mr. Sellers, and used to repay
      these loans. Due to the Company’s delinquent status with certain taxing
      authorities, it was unable to obtain a bank account. Mr. Sellers acted as
      custodian on behalf of the Company and held the cash in trust as of December
      31,
      2004. The net balance of $64,794 is presented as Advance to Officer in the
      accompanying consolidated balance sheet at December 31, 2004. The Company has
      since opened its own bank accounts to manage its operations. The cash was
      subsequently disbursed by Mr. Sellers to pay the expenses of the
      Company.




During
      2004, the Company wrote off $32,720 related to advances made in 2003 by former
      management to TNT Innovations, Inc., a Company controlled by the Company’s two
      non-participating directors.




Also
      during 2004, the Company issued an aggregate of 3,915,000 shares to three of
      its
      directors for service on the Board. Duncan Troy, the Chairman of the Board
      was
      issued 1,400,000 shares, Richard G. Sellers was issued 1,400,000 shares and
      Richard Herring was issued 1,115,000 shares. The aggregate value of these shares
      is $176,175 and the amount was recorded as general and administrative expense
      in
      the accompanying statement of operations for the year ended December 31,
      2004.




In
      addition in 2004, Private Equity III Limited, a company in which Duncan Troy,
      the Company’s chairman, owns a 12.5% stake and is a director, received 933,334
      shares of common stock as reimbursement of expenses paid on behalf of the
      Company. The aggregate value of these shares is $42,001 and the amount was
      recorded as general and administrative expense in the accompanying statement
      of
      operations for the year ended December 31, 2004.




**NOTE
      5 - COMMITMENTS AND CONTINGENCIES**





The
      Company leases space for its corporate headquarters on a month to month basis.
      Total rent expense was $1,096 and $444 for the twelve months ended December
      31,
      2005 and 2004, respectively.




**NOTE
      6 - STOCKHOLDERS’ EQUITY**





**Common
      Stock Issuances**





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




·
            The
                Company issued an aggregate of 707,000 shares of its common stock
                at
                prices ranging from $0.03 to $0.46 to eight consultants for services
                rendered. The aggregate value of the common stock was $100,143 and
                the
                amount was recorded as 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.




·
            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.




·
            The
                Company issued an aggregate of 349,448 shares of its common stock
                to three
                creditors with an aggregate value of $13,978 in settlement of certain
                liabilities of the Company.




·
            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.






F-11




During
      the year ended December 31, 2004, the Company completed the
      following:




·
            On
                May 13, 2004, the Company completed an offering of an aggregate of
                9,563,898 shares at an offering price of $0.045 per share for net
                proceeds
                of $430,375 to a group of five foreign investors. At December 31,
                2004 an
                aggregate of $123,250 of the proceeds from the offering had not been
                received and accordingly, is treated as a subscription receivable
                in the
                accompanying balance sheet as of December 31, 2004. The proceeds
                were
                received in January 2005.




·
            The
                Company issued an aggregate of 3,915,000 shares to three of its directors
                for service on the Board. Duncan Troy, the Chairman of the Board,
                was
                issued 1,400,000 shares, Richard G. Sellers was issued 1,400,000
                shares
                and Richard Herring was issued 1,115,000 shares. The aggregate value
                of
                these shares is $176,175 and the amount was recorded as general and
                administrative expense in the accompanying statement of operations
                for the
                year ended December 31, 2004.




·
            In
                addition in 2004, Private Equity III Limited, a company in which
                Duncan
                Troy, our Chairman, owns a 12.5% stake and is a director, received
                933,334
                shares and Richard G. Sellers, an officer and director of the Company,
                received 553,964 shares as reimbursement of expenses paid on behalf
                of the
                Company. The aggregate value of these shares is $66,928 and the amount
                was
                recorded as general and administrative expense in the accompanying
                statement of operations for the year ended December 31,
                2004.




**·**
            The
                Company issued an aggregate of 1,000,000 shares to two consultants
                as
                compensation for services rendered. The aggregate value of the shares
                was
                $45,000. A total of $31,500 has been charged to research and development
                expense and $13,500 has been charged to general and administrative
                expense
                in the accompanying statement of operations for the year ended December
                31, 2004.




**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 (“ESPP”). Under the ESPP, all qualified
      employees, defined as any individual who is an employee of the Company for
      tax
      purposes and more than five months in any calendar year, (but excluding any
      employee who (i) would own capital stock of the Company and/or hold outstanding
      options to purchase such stock equal to or greater than 5% or more of the total
      combined voting power or value of all classes of the capital stock of the
      Company or of any subsidiary or (ii) to the extent that his/her rights to
      purchase stock under all employee stock purchase plans of the Company accrues
      at
      a rate which exceeds $25,000 worth of stock), may authorize payroll deductions
      of up to 15% of their total compensation towards the purchase, on a half-year
      basis on January 1 and July 1, of common stock in the Company at 85% of the
      fair
      market value of a share of common stock on the enrollment date or on the
      exercise date, whichever is lower. There was no activity in this plan during
      2005 and 2004.




**2000
      Officer Stock Purchase Plan**




On
      June
      30, 2000, the Company adopted the 2000 Officer Stock Purchase Plan (“OSPP”).
      Under the OSPP, all qualified employees, defined as any individual who would
      own
      capital stock of the Company and/or hold outstanding options to purchase such
      stock equal to or greater than 5% or more of the total combined voting power
      or
      value of all classes of the capital stock of the Company or of any subsidiary
      (but excluding any employee who to the extent that his/her rights to purchase
      stock under all employee stock purchase plans of the Company accrues at a rate
      which exceeds $25,000 worth of stock), may authorize payroll deductions of
      up to
      15% of their total compensation towards the purchase, on a half-year basis
      on
      January 1 and July 1, of common stock in the Company at 85% of the fair market
      value of a share of common stock on the enrollment date or on the exercise
      date,
      whichever is lower. There was no activity in this plan during 2005 and
      2004.




F-12




**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, a strike price of $0.10 and vested in three tranches
      upon
      the achievement of certain performance milestones. Subsequent to year end,
      the
      contract was terminated under its terms by the Company 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, a strike price of $0.10 and vested in three
      tranches upon the achievement of certain performance milestones. Subsequent
      to
      year end, the contract was terminated under its terms by the Company prior
      to
      the completion of the performance milestones and the warrants expired unvested.





Weighted
            
            WeightedWarrants
            
            Average
            
            AverageOutstanding
            
            Exercise
                Price
            
            LifeOutstanding,
                December 31, 2003
            
            
            3,195,000
            
            $
            1.76
            
            
            1.3Granted
            
            
            —Expired
                /canceled
            
            
            (925,000
            )
            $
            2.00Outstanding,
                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
            
            
            1.0Exercisable,
                December 31, 2005
            
            
            —
            
            
            —
            
            
            —




**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. The Company reserved
      200,000 shares of its common stock for issuance under the Option Plan.




On
      June
      30, 2000, the Company readopted its 1996 Stock Option Plan and renamed it the
      2000 Stock Option Plan (the “Option Plan”), which expires in 2010. Options
      granted may be incentive options or non-statutory stock options, as determined
      by the Board of Directors at the time of grant. In addition, stock purchase
      rights and stock awards many also be granted under the Option Plan.




Under
      the
      Option Plan, the options are granted to employees for a term of no more than
      five years at an exercise price not less than the fair market value of the
      Company’s common stock as determined by the Board of Directors at the time of
      the option grant. For employees owning more than 10% of the total combined
      voting power of all class of stock of Telegen or any parent or subsidiary,
      the
      term of the options shall be three years from the date of grant at an exercise
      price shall be no less than 110% of the fair market value per share on the
      date
      of grant. The aggregate number of shares that may be issued pursuant to the
      plan
      is 3,500,000 over the life of the plan. There was no activity in this plan
      during 2005 and 2004 and there were no options outstanding at any time during
      those years.




F-13




2000
      Director Option Plan




On
      June
      30, 2000, the Company adopted the 2000 Director Option Plan (the “Director
      Plan”) to attract and retain outside directors. Under the plan agreement, each
      outside director will be automatically granted an option to purchase 20,000
      shares of common stock on each date such outside director is elected by the
      Stockholders. This option may be granted only once in any given calendar year
      at
      an exercise price equal to the fair market value of the Company’s common stock
      on the date of grant. The term of the option will be 10 years from the date
      of
      grant. The option will vest equally over 12 months on the anniversary date
      of
      each month, provided that the optionee continues to serve as a director on
      such
      dates. There was no activity in this plan during 2005 and 2004 and there were
      no
      options outstanding at any time during those years.




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
      2005
      and 2004 and there were no options outstanding at any time during those
      years.




**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.




During
      2004, the Company settled and obtained releases for an aggregate of $249,303
      of
      its historic liabilities with three vendors for aggregate consideration of
      cash
      of $71,380 resulting in a gain on debt settlement of $177,923.




**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, 2005 and 2004,
      respectively:





2005
            
            2004CurrentFederal
            
            $
            —
            
            $
            —State
            
            
            3,200
            
            
            2,4003,200
            
            
            2,400DeferredFederal
            
            
            —
            
            
            —State
            
            
            —
            
            
            ——
            
            
            —Provision
                for income taxes
            
            $
            3,200
            
            $
            2,400






F-14




The
      provision for (benefit from) income taxes differs from the amount that would
      result from applying the federal statutory rate for the years ended December
      31,
      2005 and 2004 as follows:








2005
            
            2004Statutory
                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, 2005 and 2004, respectively consist of:





2005
            
            2004Deferred
                tax assetsFederal
                net operating loss carryforward
            
            $
            15,033,518
            
            $
            14,968,274Total
                gross deferred tax assets
            
            
            15,033,518
            
            
            14,968,274Less
                valuation allowance
            
            
            (15,033,518
            )
            
            (14,968,274
            )Net
                deferred tax assets
            
            $
            —
            
            $
            —




During
      the year ended December 31, 2005 the valuation allowance recorded on the
      deferred tax assets increased by $65,244. As of December 31, 2005 and December
      31, 2004, the Company had net operating loss carry forwards for federal and
      state income tax reporting purposes of $44,216,229 and $44,024,336,
      respectively, which if unused, will expire in 2025 and 2024, respectively.
      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
      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.




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.




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 will be granted upon Mr.
      DeVries’ satisfaction of certain performance and time based vesting criteria.




On
      October 17, 2006 the Company granted a consultant 50,000 shares of common stock
      valued at $10,000 using the closing price as of that date of $0.20 for
      services.




The
      expense for the shares issued on October 17, 2006 in the preceding paragraphs
      will be recognized in the fourth quarter of 2006.




On
      November 16, 2006 Richard Sellers, our Chief Operating Officer and a director
      advanced $100,000 to the Company to be used for working capital.




On
      December 5, 2006 the Board of Directors terminated the 2000 Stock Option Plan,
      the 2000 Director Option Plan, the 2000 Officer Stock Purchase Plan and the
      2000
      Employee Stock Purchase Plan.




F-15