SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(MARK ONE)

[X]   ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
      ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                       OR

[ ]   TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR 15(d)  OF THE  SECURITIES
      EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                         COMMISSION FILE NUMBER: 0-14836
                               TELEGEN CORPORATION
             (Exact name of Registrant as Specified in its Charter)

                                   CALIFORNIA
                         (State or other jurisdiction of
                         incorporation or organization)
                                    84-067214
                      (I.R.S. Employer Identification No.)

                                101 SAGINAW DRIVE
                             REDWOOD CITY, CA 94063
               (Address of principal executive offices) (Zip Code)
       Registrant's Telephone Number, Including Area Code: (650) 261-9400

           Securities registered pursuant to Section 12(b) of the Act:
                                      NONE

           Securities registered pursuant to Section 12(g) of the Act:
                                  COMMON STOCK
                                (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such shorter  periods that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. YES [X] NO [ ]


         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K (S)229.405 of this chapter) is not contained  herein,
and will not be contained,  to the best of Registrant's knowledge, in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]

         The  aggregate  market value of the  Registrant's  Common Stock held by
non-affiliates of the Registrant was approximately  $1,933,742.30 as of February
13, 1998, based upon the closing sale price on the Electronic Bulletin Board for
that date.

         There were 8,236,216 shares of the Registrant's Common Stock issued and
outstanding as of February 13, 1998.


<PAGE>



                               Telegen Corporation
                           Annual Report on Form 10-K
                                Table of Contents


PART I

         ITEM 1.  BUSINESS OF TELEGEN........................................  1
         ITEM 2.  DESCRIPTION OF PROPERTY....................................  8
         ITEM 3.  LEGAL PROCEEDINGS..........................................  8

PART II

         ITEM 5.  MARKET FOR COMMON EQUITY...................................  8
         ITEM 6.  SELECTED FINANCIAL DATA.................................... 10
         ITEM 7.  TELEGEN MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 11
         ITEM 8.  FINANCIALS & SUPPLEMENTARY DATA............................ 19
         ITEM 9.  TELEGEN CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 
                  ON ACCOUNTING AND FINANCIAL DISCLOSURE..................... 19

PART III   .................................................................. 20

PART IV

         ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
                  ON FORM 8-K ............................................... 20

SIGNATURES







<PAGE>


                               TELEGEN CORPORATION

ITEM 1.  BUSINESS OF TELEGEN

         Telegen  Corporation  ("Telegen" or the "Company") is a high technology
company  with  products in  development  in the flat panel  display  market.  At
present,  Telegen is  organized  into one  active  subsidiary  and one  inactive
subsidiary. Telegen Display Laboratories, Inc. ("TDL"), a California corporation
and a controlled  second tier  subsidiary  of the Company,  has developed a low-
cost flat panel  display  technology  to compete  with other types of flat panel
displays.  Telegen Communications  Corporation ("TCC"), a California corporation
and a wholly-owned subsidiary of the Company,  formerly developed,  manufactured
and  marketed a line of internet  products  and  intelligent  telecommunications
which  provide  additional  features to  existing  telephone  equipment  used by
consumers and small  businesses.  All of the assets of TCC were sold on April 1,
1998.  Morning Start Multimedia Inc., a New Jersey  Corporation  ("MSM"),  was a
wholly-owned  subsidiary  of the Company until it was sold on December 31, 1997.
MSM  is  a  creator  and  supplier  of  interactive  CD-ROM  and  internet-based
edutainment,  infotainment and  entertainment  programs and software.  Telegen's
corporate offices are located at 101 Saginaw Road, Redwood City, CA 94063, (650)
261-9400.

         Telegen  was  incorporated  in  California  on August  30,  1996.  This
corporation was formed to acquire Telegen Communications  Corporation,  formerly
known as Telegen  Corporation,  and Solar Energy Research Corp., a publicly held
shell  corporation.  In the year ending December 31, 1997,  certain  significant
developments  occurred.  On October 31, 1997 the  Company's  Board of  Directors
terminated  its three top  executives  and appointed Fred Y. Kashkooli as acting
Chief Executive Officer.  On December 31, 1997 the Company completed its sale of
MSM. In return for all the capital stock of MSM, Telegen received $200,000, plus
certain future  royalties.  As a subsequent event, on April 1, 1998, the Company
sold substantially all of its assets in TCC. In consideration for such sale, the
Company  received  (i) a total  of  $500,000,  including  $350,000  in cash  and
$150,000 in a promissory  note, (ii) certain future  royalties,  and certain TCC
liabilities were assumed by the purchasing entity.


         Telegen Display Laboratories, Inc.

         Flat Panel Display Technology. Telegen has developed a proprietary flat
panel  technology  which  represents a major  departure from the current product
offerings on the market today.  The Company  believes that such  technology  has
visual  characteristics  and potentially  relative ease of manufacturing and low
costs  that could  enable  Telegen to become a  significant  participant  in the
display business.

         Telegen  expects  its  proprietary  flat panel  display  technology  to
compete  favorably with existing Active Matrix Liquid Crystal Display  ("AMLCD")
technology in terms of resolution,  brightness, color, viewing angle, durability
and cost.  Telegen also believes a second  generation of its  technology,  to be
developed in the future, could be manufactured in large scale at a significantly
lower cost than AMLCD and other flat  panel  technologies.  Primary  differences
between the Telegen 

<PAGE>


flat panel display and a good quality CRT monitor include its reduced  thickness
and weight,  lower operating cost, higher  reliability and potentially  brighter
presentation.  Telegen  believes that these features make its display  desirable
for many products in the industry.

         Telegen believes that its flat panel technology exceeds the performance
of active matrix liquid  crystal  displays,  or AMLCDs,  which are currently the
premium laptop computer  display and cost the consumer  significantly  more than
the  monochromatic  displays and low  performing,  passive color  displays.  The
Telegen technology has been fabricated in 10.5" diagonal,  full color, full gray
scale prototypes  which run a standard NTSC (television  standard) signal from a
video tape.  Additionally,  high brightness test cells have been  constructed in
the next step of  development  for a more  advanced and  potentially  lower cost
display.

         Telegen believes that its flat panel technology has substantial  value.
Telegen is in active  discussion  with  several  prospective  partners to obtain
substantial  new capital in the form of either equity  investment in Telegen,  a
new joint  venture  company or project  financing,  which  Telegen  will need to
develop  plant  and  product  specifications,  and to  build a pilot  production
facility.  TDL's  initial  research and  development  facilities  are located in
Silicon Valley and it plans to license the  manufacturing  of the display into a
broad range of display  markets in order to  facilitate  the  quickest  possible
market acceptance.

         Telegen  plans  to  establish  a  prototype   production  line  in  new
facilities  in 1998 which could  produce a limited  number of displays per year,
and build a full scale production plant (one million displays per year capacity)
in 1999/2000  with the proceeds from future  funding.  Further,  in 1996 Telegen
sold a 10% equity interest in TDL to a joint venture  investment  group based in
Singapore for an investment in TDL. Along with the investment, the joint venture
has an option to acquire  licenses to build four plants,  each with the capacity
to produce  one  million  flat  panel  displays  per year.  If all  options  are
exercised  the total  license fees for these  plants will be $40  million,  plus
royalties.  On January 7, 1998,  the Singapore  based joint  venture  investment
group (the "Plaintiffs")  filed a complaint (the "Complaint") in Superior Court,
San Mateo County,  against the Company and certain named directors.  The Company
believes that the  Complaint is without  merit and intends to vigorously  defend
such  matter.  To the extent  the  Plaintiffs  were to  succeed in this  matter,
Telegen's  results of  operations  and financial  condition  would be materially
adversely affected (See Item 3. Legal Proceedings).

         Display Patents and Manufacturing.  In December 1995, Telegen filed for
its first U.S.  patent  (of an  estimated  total of seven) on the basic  Telegen
technology  with broad claims  covering  displays  targeting the  entertainment,
computer,  automotive and military  markets.  The Company expects this patent to
protect its proprietary techniques for building highly cost effective flat panel
displays  without  the use of  high-tech  semiconductor  facilities.  A  second,
similarly based patent was filed in December,  1996 and a third patent was filed
in March, 1997.  Although it is difficult to precisely project the capital costs
for  establishing  a  high  volume  manufacturing  facility,  Telegen's  initial
estimates  indicate the display  business  entry cost  utilizing its  technology
could be significantly lower than other competitive emerging technologies.

                                      -2-
<PAGE>

         Flat  Panel  Market.  The flat panel  display  market  today  generates
approximately  $17 billion in sales and is predicted by industry sources to grow
to greater than $20 billion by the year 2000. Since Telegen anticipates that its
display may cost less than an equivalent AMLCD display,  Telegen expects to have
a  significant  competitive  advantage  in a number  of the flat  panel  display
markets.

         Telegen's  comparisons of its  technology  costs versus AMLCD costs are
drawn from the current known market costs of AMLCD products readily available on
the market today, as compared with Telegen's  estimates of its costs.  Telegen's
costs are  derived  from a careful  analysis of (i) the cost of  components  and
materials,  most of which come from specific bids from suppliers, (ii) estimates
of the cost to purchase manufacturing equipment (some of which already have been
bid) to be  amortized  and  charged  as a cost of the  product,  and  (iii)  the
estimate  of labor  and  other  overhead  costs  required  for each  step of the
manufacturing   process.  The  labor  estimates  are  derived  from  the  actual
experience Telegen has gained from assembly of prototypes in the past.

         Flat Panel Competition.  The market for information  displays is highly
competitive, and the Company expects this to continue. Telegen believes there is
currently no comparable  flat panel  display with the  potential low cost,  full
color, gray scale and other attributes of its technology available  commercially
from any other source in volume.  The  standard  flat panel  displays  currently
available are Passive Matrix LCD and AMLCD.  These displays are  manufactured in
high volume by a number of Japanese companies,  including Toshiba,  Hitachi, NEC
and Sharp  Electronics.  The largest commonly available AMLCD full color screens
are 14" diagonal and cost from $15-$17 per square inch to manufacture.


         Several Japanese companies have recently introduced color plasma driven
liquid  crystal  display  ("LCD") flat panel displays of 40" diagonal size which
are available in the U.S. for about $8,000  retail.  Full-color  plasma  screens
which  are not in any  volume  production  yet,  lack  good  gray  scale and are
estimated to cost upwards of $20-$30 per square inch to manufacture.

         Additionally,  a number of companies,  including  Micron  Technologies,
Inc. and Candescent,  Inc., are developing a technology  known as Field Emission
Display  (FED).  Displays  based upon the FED  technology are not expected to be
available in volume until the end of the decade and are expected to cost between
$12-$15 per square inch.

         The Telegen  technology  in volume  production  is expected to sell for
under $5.00 per square inch.  Telegen  believes  that pricing at this level,  if
achieved,  will give it a competitive advantage,  assuming the cost of competing
technologies  cannot also be reduced to these levels. No assurances can be given
that these manufacturing costs can ever be achieved.

         The  market  for   Telegen's   products  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 obsolete and unmarketable. Telegen's success will be dependent
in part upon its  ability to  anticipate  changes  in  technology  and  industry
standards and to successfully develop and introduce new and enhanced products on
a timely basis. If Telegen is unable to do so, 

                                      -3-

<PAGE>

Telegen's  results of operations  will be materially  adversely  affected.  With
regard to its flat panel display technology,  there are other more developed and
accepted flat panel display technologies already in commercial  production which
will compete with Telegen's technology. The Company has finished the development
of a completed  "proof of concept" of the current  generation  of its flat panel
display  technology.  The Company  believes it can  successfully  scale its flat
panel display technology to 10.5 inch diagonal displays. At present, the Company
does not believe that  scalability of this  generation of its technology  beyond
such levels is  feasible.  However,  the Company  does have  preliminary  design
concepts  for  a  second  generation  of  its  technology  which  might  provide
additional  scalability.  There  can  be  no  assurance  that  Telegen  will  be
successful in the development of its flat panel  technology or that Telegen will
not  encounter  technical  or other  serious  difficulties  in its  development,
commercialization  or volume  manufacturing which would be materially adverse to
Telegen's results of operations.

         The market for flat  panel  displays  is  dominated  by major  Japanese
companies  such as Sharp  Electronics,  Toshiba and Sony.  Telegen  expects this
competition to continually increase. There can be no assurance that Telegen will
be able to compete  effectively  against its competitors,  many of whom may have
substantially  greater  financial  resources  than Telegen.  Flat panel displays
manufactured  utilizing  AMLCD  technology have been in production for almost 10
years and have proven market acceptance. New technologies, such as FED and Color
Plasma,  are in development by a number of potential  competitors,  most, if not
all, of whom have greater financial resources than Telegen. Telegen does not own
or lease a manufacturing  facility for, and has not begun the process of, volume
manufacturing  of flat panel displays.  There can be no assurance that Telegen's
unique  flat panel  technology  can  compete  successfully  on a cost or display
quality basis with these other technologies.  Further, there can be no assurance
that  Telegen's  efforts to obtain patent  protection  for its unique flat panel
technology  will be  successful  or,  if patent  protection  is  obtained,  that
Telegen's patent(s) will provide adequate protection.


         Morning Star Multimedia, Inc.

         MSM develops  computer  software in the following areas:  entertainment
CD-ROMs,  personal  productivity  software  and  movie  and  recording  industry
CD-ROMs.  MSM also develops Internet web site content for major corporations and
provides multimedia  development services.  MSM has developed interactive CD-ROM
multimedia  software  relating to the "Casper" movie by Steven  Spielberg  based
upon an adventure  through  Whipstaff  Manor. MSM also developed and released in
early 1998, an interactive  CD/ROM  featuring  Kristi  Yamaguchi.  Additionally,
scheduled  for  release  in 1998  is  similar  software  relating  to the  "Swan
Princess" movie which will feature games and activities  using actual scenes and
backgrounds from original  hand-painted  animation cells. MSM has also developed
"Plan and Track"  software  for Weight  Watchers/(R)/  which will  simplify  and
virtually  eliminate the need for tedious paper record  keeping and  nutritional
planning  by  helping  the dieter  plan and track  meals  with  easily  produced
computerized  text records and charted and graphed  records.  MSM is  developing
another software product for Weight  Watchers/(R)/  which is similar to the plan
and track software,  but is based upon the newly revamped  Weight  Watchers/(R)/
system, with more user-friendly graphical icon driven operations.

                                      -4-
<PAGE>

         MSM Sale.  On December 31, 1997 Telegen sold all of the stock in MSM to
its founders for $200,000 in cash plus certain royalties on certain MSM products
for a period of two years.

         Telegen Communications Corporation

         Telegen   Communication   Corporation,   formerly   known  as   Telegen
Corporation,  was  organized  in  May,  1990,  for  the  purpose  of  designing,
developing,  manufacturing and marketing a line of telephone  accessory products
for the consumer and small business markets.

         The telephone  equipment  market is a  long-standing,  well-established
industry.  The basis of the industry has historically been the telephone itself.
In the late 1970's,  however, a market for telephone  peripheral equipment began
to develop because of the invention of the microprocessor  chip and deregulation
of the industry. This new peripherals market expanded rapidly and today consists
of designer  and  specialty  telephones,  including  full-feature  and  cordless
telephones, cellular telephones,  telephone answering machines, FAX machines and
computer modems. This condition in the market has created a business opportunity
for  the  marketing  of  Telegen's  ACS and MLD to  automatically  re-route  the
appropriate  calls to a long distance carrier without  additional  effort by the
caller,  saving the  caller  money and giving  the long  distance  carriers  new
business.


         TCC  develops,   manufactures   and  markets  a  line  of   intelligent
telecommunications  products,  providing enhanced features to existing telephone
equipment  and  services  for  consumers  and  small  businesses.  In 1991,  TCC
introduced its initial  telecommunications  product,  telephone call  restrictor
known as  "TeleBlocker",  to provide  consumers  and small  businesses  with the
ability to restrict outgoing  telephone usage in order to control costs. In 1995
- 1996 TCC developed a line of telephone  dialers,  known as "Automated  Carrier
Selector",  to give users the ability to automatically reroute outgoing calls to
alternative  long  distance  companies.  TCC products  incorporate a proprietary
technology  known as "Parallel  Technology",  which  allows one device,  plugged
anywhere on a telephone  line, to control all instruments on the line regardless
of location and with no requirement for re-wiring.

         All of TCC's  programmable  products  utilize a proprietary  technology
known  as  the  Remote  Programming  System  ("RPS").  RPS is a  combination  of
communications  hardware,  protocols and automated computer systems which enable
TCC's Customer Service  Representatives  to directly service and program any TCC
product over the  telephone  line when a customer  calls for  assistance  on the
toll-free Customer Service line.

         TCC was granted a very broad (60 claim) patent covering its proprietary
telecom  technologies  on  December  31,  1996.  These  technologies  embody two
especially  valuable  capabilities  known as  "Remote  Programming  System"  and
"Parallel Control."

         TCC telecom products are currently being  manufactured in Hong Kong and
The People's Republic of China by Crystal Field Ltd., a local small manufacturer
who meets TCC's specifications for quality.

         All of the  assets  of TCC  were  sold  to  SynerCom,  Inc.,  a  Nevada
corporation  ("Synercom")  organized by a group of investors led by Frederick T.
Lezak, Jr., an executive  officer and director of 

                                      -5-
<PAGE>

the  Company,  on April 1, 1998 for  $500,000,  including  $350,000  in cash and
$150,000 in the form of an eighteen (18) month  promissory  note, the assumption
of certain wage,  tax and other  liabilities,  and certain  royalties on certain
assets sold for a period of three (3) years.


         Telegen Research and Development

         Telegen's  research  and  development  expenses  for the  years  ending
December 31, 1997, 1996 and 1995 were approximately  $4,400,036,  $2,386,331 and
$842,026  respectively.  Telegen  estimates  that  its  total  expenditures  for
research and development  will aggregate at least  $4,000,000 for the flat panel
display  during  1998.  Telegen  Display  Laboratories  portion of 1997 and 1996
research  and  development   which  totaled  about  $2,687,840  and  $1,416,540,
respectively,  was  equipment  and  related  overhead  costs.  In 1997 and 1996,
Telegen's  research  and  development   activities   included  work  toward  the
development of MSM and TCC products.  In 1995 and prior  thereto,  substantially
all of the Company's  research and  development  expenses were  attributable  to
TCC's products.  Continued development of the flat panel display technology will
continue to represent  significant  capital  expenditures  in the Company's near
term.

         Telegen's  strong  emphasis on new product and technology  research and
development will command management's primary attention through 1998 and much of
1999. It will also comprise the primary use of Telegen's financial resources for
these  periods.  The market for  Telegen's  products 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 obsolete and unmarketable. Telegen's success will be dependent
in part upon its  ability to  anticipate  changes  in  technology  and  industry
standards and to successfully develop and introduce new and enhanced products on
a timely  basis.  If  Telegen is unable for  technological  or other  reasons to
develop products in a timely manner in response to changes in the industry or if
products or product  enhancements  that Telegen  develops do not achieve  market
acceptance,   Telegen's  results  of  operation  will  be  materially  adversely
affected.  Telegen has  experienced  delays in its development of its flat panel
display technology.


         Telegen Intellectual Property

         Telegen has acquired all rights to the underlying technologies embodied
in its  product  lines  from the  founders  of  Telegen  or has  developed  such
intellectual property internally. Telegen routinely files for both United States
and foreign patents on its technologies. Telegen believes, based upon the advice
of patent  counsel,  that  patent  protection  may be  available  to  Telegen on
substantial portions of its technologies.

         Telegen  Display  Laboratories  filed its first very broad and basic US
patent on the flat panel display in December  1995, its second in December 1996,
its  third  in March  1997  and  plans to file  several  more key  patents  on a
continuing basis.

                                      -6-
<PAGE>

         Additionally,  Telegen believes it retains copyright protection for the
software used in its products as well as for its integrated circuit designs.  It
is the policy of Telegen to aggressively protect, through all appropriate means,
all of its legal rights to its technologies.

         Telegen  relies on a  combination  of patents,  trade  secret and other
intellectual  property  law,  nondisclosure   agreements  and  other  protective
measures to protect its rights  pertaining  to its  products.  Such  protection,
however,  may not  preclude  competitors  from  developing  products  similar to
Telegen's  products.  In addition,  the laws of certain foreign countries do not
protect Telegen's intellectual property rights to the same extent as do the laws
of the  United  States.  Although  Telegen  continues  to  implement  protective
measures and intends to defend its proprietary rights  vigorously,  there can be
no assurance that these efforts will be successful.


         Regulatory Matters

         Federal law requires  that all products  which  connect with the public
telephone  system must comply with  Federal  Communications  Commission  ("FCC")
Rules Part 68, as amended.  Before such  products are sold,  they must be tested
for  compliance by an accredited  independent  testing  laboratory  and the test
results  must be submitted to the FCC.  The  manufacturer  then  receives an FCC
Registration  number which must be displayed on each  product.  To the Company's
knowledge,  up to the sale of  substantially  all of TCC's assets,  TCC has been
compliant with all FCC requirements for its telecommunications products.


         Employees

Telegen  currently  employs 18  persons  on a  full-time  basis,  including  two
executive  officers,  6 senior  scientists and a general support staff.  Telegen
believes  that its  relationship  with its current  employees  is  satisfactory.
Telegen's  future  success will depend in  significant  part upon the  continued
service of certain key technical and senior management personnel,  and Telegen's
continuing ability to attract, assimilate and retain highly qualified technical,
managerial and sales and marketing personnel.  Competition for such personnel is
intense.

         Telegen has entered into agreements with each of its executive officers
(as  well  as  all  other  full-time  employees)  that  prohibit  disclosure  of
confidential information to anyone outside of Telegen both during and subsequent
to  employment  and  require   disclosure  and  assignment  to  Telegen  of  all
proprietary  rights to any  ideas,  discoveries  or  inventions  relating  to or
resulting from the officer's work for Telegen.

         Telegen  has  limited  marketing  experience  and  expanding  Telegen's
markets will require  significant  expenses,  including  additions to personnel.
There can be no  assurance  that  Telegen  will have all the  capital  resources
necessary  to expand  its  sales and  marketing  operations,  or that  Telegen's
attempts to expand its sales and marketing efforts will be successful.

                                      -7-

<PAGE>

ITEM 2.  DESCRIPTION OF PROPERTY

         Telegen maintains its corporate  offices at 101 Saginaw Drive,  Redwood
City, California, 94063. Also located at this address are Telegen's subsidiaries
Telegen Communications Corporation and Telegen Display Laboratories, Inc.


         The facilities include 38,000 square feet of office space at a net cost
of approximately $52,000 per month,  including Telegen's respective share of the
building's  operating expenses.  As part of the asset purchase agreement for the
sale of all of the assets of TCC by and between Telegen and Synercom dated April
1, 1998,  the  Company is  subleasing  2,500  square feet of its  facilities  to
Synercom, rent free until the earlier of (i) December 31, 1998 or (ii) Telegen's
vacating of such  facilities.  Telegen  believes  that there is  adequate  space
available  in its  location for  expansion,  but there can be no assurance  that
additional space necessary to support its future  requirements can be located on
favorable terms or that Telegen will not incur significant expenses if it has to
obtain additional facilities.

ITEM 3.  LEGAL PROCEEDINGS

         The  Company  and its  Telegen  Display  Laboratories  Inc.  subsidiary
("TDL") are named defendants in a complaint (the  "Complaint")  filed January 7,
1998 in  Superior  Court,  San Mateo  County,  filed by IPC  Corporation,  Ltd.,
Transtech   Electronics,   PTE,  LTD.,  and  IPC  Transtech   Display  PTE,  LTD
(collectively,  the  "Plaintiffs").  The  Complaint  alleges  that  the  Company
committed material  misrepresentations when the Company sold TDL Common Stock to
the  Plaintiffs  for  $5,000,000 on May 30, 1996.  Additional  named  defendants
include Jessica L. Stevens,  Warren M. Dillard, Bonnie Crystal, and William J.P.
Weiland, all former officers of the Company. The Plaintiffs seek recision of the
original purchase,  complete restitution of the $5,000,000,  interest,  punitive
damages,  costs and attorneys' fees. Neither the Company nor TDL has been served
with the Complaint and no action has been  initiated  against the Company beyond
filing the Complaint.  The Company  believes that the Complaint is without merit
and intends to vigorously  defend such matter. To the extent the Plaintiffs were
to  succeed  in this  matter,  Telegen's  results of  operations  and  financial
condition would be materially adversely affected.


                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY

         The  Company  currently  trades  its  stock  on  the   over-the-counter
Electronic  Bulletin  Board  (the  "EBB").  The  EBB is a  real-time  electronic
quotation service for over-the-counter  securities.  The EBB is not an automated
quotation  system and is  characterized  by low volume of  trading.  There is no
assurance  that the EBB can or will provide  sufficient  liquidity to holders of
the  Company's  Common  Stock.  The Company  was trading on the Nasdaq  SmallCap
Market  until  January  22, 1998 and intends to return to it as soon as it meets
the listing and maintenance  requirements.  On February 22, 1998,  Nasdaq raised
such  listing  and  maintenance  requirements.  There can be no  assurance  that

                                      -8-

<PAGE>

trading on the EBB will provide  investors  with  sufficient  liquidity  for the
purchase  and sale of the Common  Stock or that the Company will be able to meet
the  higher  Nasdaq  SmallCap  Market   ("SmallCap")   listing  and  maintenance
requirements  that have been in effect  since  February  22,  1998,  in the near
future, or if at all, or that if the Company does meet the SmallCap requirements
that a broad trading market will develop in the Common Stock.

         The  following  table sets  forth the  quarterly  high and low  closing
prices of the Company's  Common Stock from October 28, 1996 through December 31,
1997.  Such prices  represent  prices  between  dealers,  do not include  retail
mark-ups, mark-downs or commissions and may not represent actual transactions.

                                                             High         Low
        *Fourth Quarter 1996   . . . . . . . . . . . .       $19.00       $10.50
         First Quarter  1997   . . . . . . . . . . . .       $20.25        $6.00
         Second Quarter 1997   . . . . . . . . . . . .        $8.37        $2.93
         Third Quarter 1997    . . . . . . . . . . . .        $3.50        $2.12
         Fourth Quarter 1997   . . . . . . . . . . . .        $2.56        $0.56

         *Active  trading in Telegen  Corporation  Common Stock began on October
         28, 1996 upon the  completion of the  Company's  merger with and into a
         dormant public shell company,  Solar Energy  Research Corp., a Colorado
         corporation.

         As of April 13, 1998, there were approximately 2,981  holders of record
of the Company's Common Stock. The Company believes that a significant number of
beneficial  owners of its Common Stock hold shares in street name.  No dividends
were paid to Telegen's Common Stock shareholders during the last fiscal year and
Telegen does not anticipate paying dividends in the future.

                                      -9-

<PAGE>

<TABLE>

ITEM 6.  SELECTED FINANCIAL DATA

The  following  selected  financial  data  should  be read in  conjunction  with
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations,"  the Financial  Statements  and Notes  thereto and other  financial
information included elsewhere in this report.
<CAPTION>

                                                                     Years Ended December 31,
                                           ----------------------------------------------------------------------------
                                               1997              1996           1995             1994            1993
                                           ---------------   -----------     ----------      ----------        -------- 
<S>                                        <C>                            <C>             <C>             <C>          
STATEMENT OF OPERATIONS DATA
Revenues
   Sales                                   $   463,486     $      23,700  $     145,795   $     432,972   $     498,358
   Services                                    574,916           517,356              0               0               0
     Total Revenues                          1,038,402           541,056        145,795         432,972         498,358
Cost of Revenues
   Sales                                       234,292            18,083        170,421         314,239         296,285
   Services                                     93,793            68,612              0               0               0
     Total Cost of Revenues                    328,085            86,695        170,421         314,239         296,285
Gross Profit                                   710,317           454,361        (24,626)        118,733         202,073
Operating Expenses
   Sales and marketing                       1,368,767           439,350         89,275          92,170          29,980
   Research and development                  4,400,036         2,386,331        842,026         830,913          37,955
   General and administrative                5,553,209         3,043,530      1,506,531       1,118,312         294,526
     Total operating expenses               11,322,012         5,869,211      2,437,832       2,041,395         362,461
Income (loss) from operations              (10,611,695)       (5,414,850)    (2,462,458)     (1,922,662)       (160,388)
Other income (loss), net                      (109,098)          194,443            725           9,608           3,154
Interest Expense                                60,195           146,650         81,105          30,658          11,488
Minority Interest                              325,077           252,031              0               0               0
Income (loss) before provision for
   Taxes and extraordinary items           (10,455,911)       (5,115,026)    (2,542,838)     (1,943,712)       (168,722)
Extraordinary gain                             536,179                 0              0               0               0
Provision for income taxes                           0                 0              0               0               0
Net income (loss)                           (9,919,732)       (5,115,026)    (2,542,838)     (1,943,721)       (168,722)
Net income (loss) per share                      (2.01)            (1.16)         (0.88)          (0.70)          (0.07)
Shares used in per share calculation         5,547,015         4,418,099      2,882,961       2,785,957       2,294,627
BALANCE SHEET DATA
Working capital (deficit)                   (2,291,117)        2,702,061     (1,794,634)       (390,017)        827,517

Total assets                                 2,231,614         5,727,322        935,788         566,952       1,398,635
Notes payable and capital lease                500,000            18,549        167,649         178,976         151,090
   Obligations less current portion
Accumulated deficit                        (21,634,728)      (10,441,795)    (5,326,769)     (2,763,931)       (840,219)
Shareholders' equity (deficit)              (1,469,752)        4,091,163     (1,589,540)       (321,485)        381,088

</TABLE>

                                                          -10-

<PAGE>


ITEM 7.  TELEGEN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

         THIS REPORT CONTAINS FORWARD LOOKING  STATEMENTS  WITHIN THE MEANING OF
SECTION 27A OF THE  SECURITIES  ACT OF 1933 AND  SECTION  21E OF THE  SECURITIES
EXCHANGE ACT OF 1934.  THESE FORWARD  LOOKING  STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND  UNCERTAINTIES  THAT COULD CAUSE ACTUAL  RESULTS TO DIFFER  MATERIALLY
FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS,  INCLUDING THOSE SET FORTH UNDER
"FACTORS THAT MAY AFFECT FUTURE  RESULTS" IN THIS  MANAGEMENT'S  DISCUSSION  AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS
REPORT. THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED  FINANCIAL  DATA" AND THE  COMPANY'S  FINANCIAL  STATEMENTS  AND NOTES
THERETO INCLUDED ELSEWHERE IN THIS REPORT.

         Telegen,  through its  subsidiary  TCC,  was  organized  and  commenced
operations  in May 1990.  From  inception  until 1993,  Telegen was  principally
engaged  in the  development  and  testing of its  telecommunications  products.
Telegen's  first product  sales and revenues were realized in 1991.  Revenues in
1991   through   1995  were   derived   primarily   from   sales  of   Telegen's
telecommunications  products.  In 1996, revenues were derived primarily from the
operations of MSM. In 1997 revenues were derived from the  operations of MSM and
TCC.  Telegen has  incurred  significant  operating  losses in every fiscal year
since its  inception,  and, as of December 31, 1997,  Telegen had an accumulated
deficit of  $21,634,728.  As of December 31, 1997 Telegen had a working  capital
deficit  of  $2,291,117.  Telegen  expects  to  continue  to  incur  substantial
operating  losses  through  1998.  In order to become  profitable,  Telegen must
successfully  develop  commercial  products,   manage  its  operating  expenses,
establish manufacturing capabilities, create sales for its products and create a
distribution capability.

         Telegen has made significant  expenditures for research and development
of  its  products.  In  order  to  become  competitive  in a  changing  business
environment,  Telegen must continue to make  significant  expenditures  in these
areas.  Therefore,  Telegen's  operating  results  will  depend in large part on
development of a revenue base.


         Results of Operations

         Revenues.  Revenues for 1997 were  $1,038,402  compared to $541,056 for
1996, and $145,795 for 1995. 1997 revenues consisted of $574,916 of MSM revenues
from  software  services  under  contract and product  sales and $463,486 of TCC
revenues.  TCC  revenues in 1997  included a $300,000  final  payment  under MCI
contracts  with the  remainder  from  product  sales.  1996  revenues  consisted
primarily of Morning Star Multimedia revenues of $517,356 from software services
under contract.  The remaining $23,700 of 1996 revenues consisted of TCC product
sales.  Prior to 1996 all revenues were derived from TCC product sales. 1995 TCC
revenues consisted primarily of sales of the ACS 2000.

                                      -11-
<PAGE>

TCC's Teleblocker  product which made up the bulk of revenues for the first half
of 1995 was taken off the market in June of 1995 for  redesign.  The  redesigned
Teleblocker product was returned to the market in the spring of 1997.

         Cost of Goods  Sold.  Cost of  goods  sold and  contract  services  was
$328,085  for the year  ended  December  31,  1997,  $86,695  for the year ended
December  31, 1996 and $170,421  for the year ended  December 31, 1995.  Cost of
goods sold for 1997  consisted  of $93,793  for  revenues  derived  from MSM and
$234,292 for revenues derived from TCC. Cost of goods sold for 1996 consisted of
$68,612 for revenues derived from MSM and $18,083 for revenues derived from TCC.
Prior to 1996 all cost of goods sold was  related to TCC  product  sales.  TCC's
cost of goods  sold for 1995  included  a $22,377  charge to write off  obsolete
inventory.  Excluding  this write off, cost of goods sold for 1996 and 1995 were
consistent with revenues from the same periods. 

         Research  and  Development.  Research  and  development  expenses  were
$4,400,036 for the year ended  December 31, 1997,  $2,386,331 for the year ended
December 31, 1996, and $842,026 for the year ended December 31, 1995.  Increased
research  and  development  expenses  for  1997  resulted  from a full  year  of
operation  of the  research  facility  in TDL  and  expansion  of  research  and
development  activities  for MSM and TCC; of the 1997 research and  development,
$2,687,840  were  attributable to TDL,  $1,088,337 were  attributable to MSM and
$623,859 were attributable to TCC. Increased  research and development  expenses
for 1996 resulted from the  establishment  of a full scale research  facility in
TDL and  research  and  development  expenses of MSM; of the 1996  research  and
development  expenses,  $1,416,540  were  attributable  to  TDL,  $279,175  were
attributable to MSM and $690,616 were  attributable to TCC. Of the 1995 research
and  development  expenses,  $15,042 was  attributable  to MSM and  $826,984 was
attributable  to TCC.  Lower  expenses  for  TCC in  1996  were  the  result  of
completion of development of the ACS product.

         Sales and  marketing.  Sales and marketing  expenses for the year ended
December  31, 1997 were  $1,368,767  compared  with  $439,350 for the year ended
December 31, 1996, and $89,275 for the year ended December 31, 1995. Of the 1997
sales and  marketing  expenses  $516,000 was  attributable  to TDL,  $95,949 was
attributable to MSM and $756,818 was  attributable  to TCC/Telegen  Corporation.
Approximately  51% of the sales and marketing  expenses  attributable to TDL and
TCC/Telegen   Corporation   were  related  to   participation  in  the  Consumer
Electronics  Show in Las  Vegas in  January  of  1997.  Of the  1996  sales  and
marketing  expenses,  $14,711 was attributable to TDL, $149,618 was attributable
to MSM, and $275,021 was  attributable  to TCC and Telegen  Corporation.  Of the
1995 sales and marketing  expenses,  $4,808 was attributable to MSM and $275,021
was  attributable to TCC. The increase in sales and marketing  expenses for 1996
not related to TDL or MSM were related to increases in marketing staff, creation
of new  marketing  materials,  public  relations  costs  related to Telegen as a
public company,  and costs related to the Consumer  Electronics  show in January
1997.

                                      -12-
<PAGE>

         General and  Administrative.  General and  Administrative  expenses for
1997 were  $5,553,209 as compared with  $3,043,470  for 1996, and $1,506,531 for
1995. Of the 1997 general and administrative expenses $368,791 were attributable
to TDL,  $807,723 were  attributable to MSM and $4,376,695 were  attributable to
TCC and Telegen  Corporation.  Of the 1996 general and  administrative  expenses
$306,901  were  attributable  to  TDL,  $265,855  were  attributable  to MSM and
$2,470,714 were attributable to TCC and Telegen Corporation. Of the 1995 general
and administrative  expenses,  $5,062 was attributable to MSM and $1,501,469 was
attributable  to TCC.  Increases  in TCC and  Telegen  Corporation  in 1997 were
related to legal and consulting fees associated with patent activity,  increased
staffing  and a full year of  occupancy at its larger  facility,  and  increased
legal and accounting fees related to SEC compliance. The increase in general and
administrative  expenses  not related to TDL or MSM for 1996 as compared to 1995
were related to legal and consulting fees associated with patent activity, legal
and  accounting  fees  related to the merger,  the  amortization  of bridge loan
expenses and the relocation of Telegen to a new and larger facility. The primary
components  of  general  and  administrative  expenses  for 1995  were  employee
salaries and legal and accounting expenses.

         Interest  Income and Expense.  Net interest income for 1997 was $60,195
as  compared  with net  interest  income of $47,793 for 1996,  and net  interest
expense  of $80,380  for 1995.  Of the 1997  interest  income  and  expense  TDL
contributed $18,754 of interest income and no interest expense,  MSM contributed
no  interest  income  and  $6,719  of  interest  expense,  and TCC  and  Telegen
Corporation  contributed  $10,415 of  interest  income and  $14,645 of  interest
expense.  Of the 1996  interest  income and expense TDL  contributed  $94,112 of
interest income and no interest expense,  MSM contributed no interest income and
$8,864 of interest expense, and TCC and Telegen Corporation contributed $100,331
of  interest  income and  $137,786 of interest  expense.  Decreases  in interest
income  for 1997 for TDL were the  result of  decreasing  balances  in  interest
bearing accounts.  Increases in interest expense for TCC and Telegen Corporation
for 1997 resulted from decrease in interest bearing accounts and amortization of
the  discount  related to the  conversion  feature on the  $500,000  Convertible
Promissory  Notes  issued by Telegen in  November  1997.  Increases  in interest
income for 1996 as compared with 1995 for TDL, TCC and Telegen  Corporation were
the result of increased  interest bearing deposits on account  following private
placements  of  stock.  Increases  in  interest  expenses  for TCC  and  Telegen
Corporation for 1996 were the direct result of bridge loan expenses;  the bridge
loans  were  paid  off in May 1996  from the  proceeds  of a  private  placement
completed in April 1996.  This increase in interest  expense for 1996 was offset
by a negative  interest  expense for TCC and Telegen  Corporation  for the third
quarter of 1996 as a result of a one-time  adjustment,  a reduction  of interest
expense in the amount of $83,798,  reflecting  a  settlement  with Bank  Sadarat
$100,000 which was  significantly  less than the combined  principal and accrued
interest that the Company had recorded on its books.

         Liquidity and Capital Resources

         Telegen has funded its operations  primarily through private placements
of its equity  securities with  individual and  institutional  investors.  As of
December 31, 1997,  Telegen had raised  $15,559,966  in net capital  through the
sale of Telegen Common Stock,  and $4,605,010 in net capital through the sale of
TDL common stock.  Telegen  completed in March 1997 a private placement of a new
Series A  Convertible  preferred  stock which  resulted  in $2.9  million in net
proceeds  to  Telegen.  Prior to the end of 1997 all  shares of the new Series A
Convertible preferred stock had been converted into the Company's Common Stock.

                                      -13-
<PAGE>


         In May 1996, Telegen formed Telegen Display Laboratories, Inc. ("TDL"),
a subsidiary organized for the development and  commercialization of it's unique
flat panel  display  technology.  Shortly after TDL's  formation,  IPC-Transtech
Display Pte. Ltd.  ("IPC-Transtech"),  a Singapore-based  joint venture company,
acquired a 10% equity interest in TDL for a net investment in TDL of $4,600,000.
Along with its investment in TDL,  IPC-Transtech  acquired an option to purchase
licenses to build up to four flat panel display production plants.

         Due to the  unavailability  of cash resources for  operations,  Telegen
issued  58,799 shares of common  stock,  57,330 shares of common stock,  119,252
shares of common stock and common stock equivalents  during 1997, 1996 and 1995,
respectively,  in lieu of cash as payment for certain  operating  expenses,  and
primarily  legal fees and employee  services,  amounting to $252,174,  $265,954,
and $596,200, respectively.


         Telegen's  current working  capital is very limited.  The Company has a
limited amount of readily  available  funds to cover  immediate  working capital
needs such as employee  wages,  wage taxes,  social  security  taxes,  and lease
payments.  Furthermore,  the Company  currently  has tax debts  associated  with
federal and state wage withholding taxes and social security taxes in the amount
of $350,000.  Under the  Agreement to sell the assets of TCC, the  purchasers of
TCC assumed $100,000 of such liabilities. To meet such immediate working capital
needs, the Company will need to raise immediate funds,  whether through the sale
of the Company's assets or through attracting immediate financing.  There can be
no assurance  that the Company will be able to obtain such funding on acceptable
terms, or if at all to meet its immediate capital demands. If adequate funds are
not available as required, Telegen will not be able to continue operations.

         Assuming  Telegen can obtain  adequate  short-term  capital,  Telegen's
future capital requirements will depend upon many factors,  including the extent
and timing of  acceptance of Telegen's  products in the market,  the progress of
Telegen's research and development,  Telegen's  operating results and the status
of competitive products.  Additionally,  Telegen's general working capital needs
will depend upon numerous factors,  including the progress of Telegen's research
and development  activities,  the cost of increasing Telegen's sales,  marketing
and  manufacturing   activities  and  the  amount  of  revenues  generated  from
operations.  Although  Telegen  believes it will obtain  significant  additional
funding  through  1998,  there can be no assurance  that Telegen will be able to
obtain such funding or that it will not require additional  funding, or that any
additional financing will be available to Telegen on acceptable terms, if at all
to meet its capital demands through 1998. If adequate funds are not available as
required, Telegen's results of operations will be materially adversely affected.
Telegen believes it requires  substantial  capital to complete  development of a
finished  prototype of the flat panel display  technology,  and that  additional
capital will be needed to establish a high volume production  capability.  There
can be no assurance that any  additional  financing will be available to Telegen
on acceptable terms, if at all. If adequate funds are not available as required,
Telegen's  results  of  operations  from  the  flat  panel  technology  will  be
materially adversely affected.

         Telegen does not have a final estimate of cost nor the funds  available
to build a full scale  production  plant for the flat panel display and will not
be able to build this plant without  securing  significant  additional  capital.
Telegen  plans to secure  these  funds  either  (1) from a large  joint  

                                      -14-
<PAGE>

venture  partner  who would  then be a  co-owner  of the plant or (2)  through a
future  public  or  private  offering  of  stock.  Even if such  funding  can be
obtained,  which cannot be assured,  it is currently estimated that a full scale
production  plant could not be completed  and producing  significant  numbers of
flat  panel   displays   before  late  1999.   However,   Telegen  is  currently
contemplating  entering into license agreements with large enterprises,  such as
IPC-Transtech,  to manufacture the displays.  The manufacturers  would also have
the attributes of established manufacturing expertise,  distribution channels to
assure a ready market for the displays and  established  reputations,  enhancing
market  acceptance.  Further,  Telegen would benefit from front-end license fees
plus ongoing royalties for income. However, Telegen does not currently expect to
have any such manufacturing license agreements in place before June 1998, or any
significant  production  of  displays  thereunder  before late  1999.Telegen  is
currently  planning  a limited  production/prototype  line  which  will have the
capacity  to  manufacture  a limited  number of  marketable  displays to produce
moderate revenues.  The cost of that production line is estimated to be about $5
million.

         Telegen's future capital  infusions will depend entirely on its ability
to attract new investment capital based on the appeal of the inherent attributes
of its technology and the belief that that technology can be developed and taken
to profitable  manufacturing  in the foreseeable  future.  Efforts are currently
being made with parties  with  substantial  resources  to conclude  such capital
formation.  Such  capital  formation  efforts are intended to infuse $20 million
over a period of two (2) years, including $5 million for a prototype plant.


         Telegen's  actual  working  capital  needs will  depend  upon  numerous
factors including the progress of Telegen's research and development activities,
the cost of increasing Telegen's sales,  marketing and manufacturing  activities
and the  amount of  revenues  generated  from  operations,  none of which can be
predicted with certainty.

         Telegen  anticipates  incurring  substantial  costs  for  research  and
development,  sales and marketing  activities in 1998.  Management believes that
development  of  commercial   products,   an  active  marketing  program  and  a
significant  field sales force are essential for  Telegen's  long-term  success.
Telegen  estimates that its total  expenditures for research and development and
related equipment and overhead costs will aggregate over $4,000,000 during 1998.
Telegen  estimates  that its total  expenditures  for sales and  marketing  will
aggregate over $1,000,000  during 1998. Almost none of such funds outlined above
are presently available to Telegen.


                                  RISK FACTORS

         In addition to the other  information  in this Report on Form 10-K, the
following risk factors should be considered  carefully in evaluating the Company
and its business:

Telegen's Capital Needs

         Telegen's  current working  capital is very limited.  The Company has a
limited amount of readily  available  funds to cover  immediate  working capital
needs such as employee  wages,  wage taxes,  social  security  taxes,  and lease
payments. There can be no assurance that the Company will be

                                      -15-
<PAGE>

able to  obtain  such  funding  on  acceptable  terms,  or if at all to meet its
immediate  capital  demands.  If adequate  funds are not  available as required,
Telegen  will not be able to continue  operations.  Assuming  Telegen can obtain
adequate short-term capital,  Telegen's future capital  requirements will depend
upon many  factors,  including  the extent and timing of acceptance of Telegen's
products in the market,  the  progress of Telegen's  research  and  development,
Telegen's   operating   results   and  the  status  of   competitive   products.
Additionally,  Telegen's general working capital needs will depend upon numerous
factors,   including  the  progress  of  Telegen's   research  and   development
activities,  the cost of increasing Telegen's sales, marketing and manufacturing
activities  and the  amount of  revenues  generated  from  operations.  Although
Telegen  believes it will obtain  significant  additional  funding through 1998,
there can be no  assurance  that  Telegen will be able to obtain such funding or
that it will not require additional  funding,  or that any additional  financing
will be available to Telegen on acceptable  terms, if at all to meet its capital
demands through 1998. If adequate funds are not available as required, Telegen's
results of operations will be materially adversely affected. Telegen believes it
requires  substantial capital to complete development of a finished prototype of
its flat panel display technology, and that additional capital will be needed to
establish a high volume  production  capability.  There can be no assurance that
any additional financing will be available to Telegen on acceptable terms, if at
all. If adequate  funds are not  available  as  required,  Telegen's  results of
operations from the flat panel technology will be materially adversely affected.


History of Telegen Operating Losses; Accumulated Deficit and Minimum Revenues

         Telegen's   predecessor,   now   an   operating   subsidiary,   Telegen
Communications  Corporation  ("TCC"), was incorporated in 1990 and first shipped
products  in 1991.  Telegen  has been  engaged  in  lengthy  development  of its
products  and has  incurred  significant  operating  losses in every fiscal year
since its  inception.  The  cumulative  net loss for the period  from  inception
through  December  31,  1997 was  $21,634,728.  In order to  become  profitable,
Telegen must increase sales of its existing products, develop, commercialize and
sustain volume  manufacturing  of its flat panel products,  develop new products
for new and  existing  markets,  manage its  operating  expenses  and expand its
distribution  capability.  There can be no assurance  that Telegen will meet and
realize these objectives or ever achieve profitability.


Litigation

         The  Company  and its  Telegen  Display  Laboratories  Inc.  subsidiary
("TDL") are named defendants in a complaint (the  "Complaint")  filed January 7,
1998 in  Superior  Court,  San Mateo  County,  filed by IPC  Corporation,  Ltd.,
Transtech   Electronics,   PTE,  LTD.,  and  IPC  Transtech   Display  PTE,  LTD
(collectively,  the  "Plaintiffs").  The  Complaint  alleges  that  the  Company
committed material  misrepresentations when the Company sold TDL Common Stock to
the  Plaintiffs  for  $5,000,000 on May 30, 1996.  Additional  named  defendants
include Jessica L. Stevens,  Warren M. Dillard, Bonnie Crystal, and William J.P.
Weiland, all former officers of the Company. The Plaintiffs seek recision of the
original purchase,  complete restitution of the $5,000,000,  interest,  punitive
damages,  costs and attorneys' fees. Neither the Company nor TDL has been served
with the Complaint and no action has been  initiated  against the Company beyond
filing the Complaint.  The Company  believes that the Complaint is without merit
and intends to vigorously  defend such matter. 

                                      -16-
<PAGE>


         To the extent the Plaintiffs were to succeed in this matter,  Telegen's
results of operations  and  financial  condition  would be materially  adversely
affected.


Telegen's Exposure to Technological and Market Change;  Difficulty in Developing
Flat Panel Technology

         The  market  for   Telegen's   products  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 obsolete and unmarketable. Telegen's success will be dependent
in part upon its  ability to  anticipate  changes  in  technology  and  industry
standards and to successfully develop and introduce new and enhanced products on
a timely basis. If Telegen is unable to do so,  Telegen's  results of operations
will be  materially  adversely  affected.  With regard to its flat panel display
technology,  there are other more  developed  and  accepted  flat panel  display
technologies already in commercial  production which will compete with Telegen's
technology.  The  Company  has  not  finished  the  development  of a  completed
prototype of the HGED flat panel display technology. The Company believes it can
successfully  scale its HGED flat panel display technology to 10.5 inch diagonal
displays.  At present,  the Company  does not believe that  scalability  of this
generation of its technology  beyond such levels is feasible.  However,  it does
have  preliminary  design concepts which would take it to a larger scale.  There
can be no assurance  that Telegen will be successful in the  development  of its
flat panel  technology  or that  Telegen will not  encounter  technical or other
serious   difficulties   in  its   development,   commercialization   or  volume
manufacturing  which  would  be  materially  adverse  to  Telegen's  results  of
operations.


Telegen's Dependence Upon Key Personnel

         Telegen's  future  success  will  depend in  significant  part upon the
continued service of certain key technical and senior management personnel,  and
Telegen's ability to attract,  assimilate and retain highly qualified technical,
managerial and sales and marketing personnel.  Competition for such personnel is
intense,  and there can be no assurance that Telegen can retain its existing key
managerial,  technical or sales and marketing  personnel or that it can attract,
assimilate and retain such employees in the future. 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 Telegen's results of operations.

         Telegen has entered into agreements with each of its executive officers
(as  well  as  all  other  full-time  employees)  that  prohibit  disclosure  of
confidential information to anyone outside of Telegen both during and subsequent
to  employment  and  require   disclosure  and  assignment  to  Telegen  of  all
proprietary  rights to any  ideas,  discoveries  or  inventions  relating  to or
resulting from the officer's work for Telegen.


Flat Panel Competition; Flat Panel Patent(s)

         The market for flat  panel  displays  is  dominated  by major  Japanese
companies  such as Sharp  Electronics,  Toshiba and Sony.  Telegen  expects this
competition to continually increase. There can be no assurance that Telegen will
be able to compete  effectively  against its competitors,  many of

                                      -17-

<PAGE>

whom may have substantially greater financial resources than Telegen. Flat panel
displays  manufactured  utilizing  AMLCD  technology have been in production for
almost 10 years and have proven market acceptance. New technologies, such as FED
and Color Plasma, are in development by a number of potential competitors,  some
of whom have greater financial  resources than Telegen.  Telegen does not own or
lease a  manufacturing  facility  for, and has not begun the process of,  volume
manufacturing  of flat panel displays.  There can be no assurance that Telegen's
flat panel  technology  can compete  successfully  on a cost or display  quality
basis with these other  technologies.  Further,  there can be no assurance  that
Telegen's efforts to obtain patent protection for its flat panel technology will
be successful or, if patent  protection is obtained,  that  Telegen's  patent(s)
will provide adequate protection.

Telegen's Dependence Upon Limited Number of Manufacturing  Sources and Component
Suppliers

         Telegen currently relies upon a limited number of manufacturing sources
for its telecom production capability.  Although Telegen is currently seeking to
qualify  alternative  sources  of supply,  Telegen  has not yet  contracted  for
alternative suppliers to perform such manufacturing  activities. In the event of
an  interruption  of  production or delivery of supplies,  Telegen's  ability to
deliver its products in a timely  fashion would be  compromised,  which would be
materially  adverse to Telegen's results of operations.  Certain components used
in Telegen's telecommunications products, such as microprocessors, are available
from only a limited  number of sources.  Although to date Telegen has  generally
been able to obtain adequate supplies of these components, Telegen obtains these
components on a purchase order basis and does not have long-term  contracts with
any of these suppliers.  In addition, some suppliers require that Telegen either
pre-pay the price of  components  being  purchased or  establish an  irrevocable
letter of credit for the amount of the purchase. Telegen anticipates that, as it
begins  manufacture of other  products,  it will encounter  similar  limitations
regarding the components for those products.  Telegen's  inability in the future
to obtain sufficient  limited-source  components for its  telecommunications and
other products,  or to develop  alternative  sources,  could result in delays in
product  introductions or shipments,  which could have a material adverse effect
on Telegen's results of operations.


Telegen's Need to Develop Marketing Experience

         Telegen has  limited  marketing  experience,  and  expanding  Telegen's
markets will require  significant  expenses,  including  additions to personnel.
There can be no  assurance  that  Telegen  will have all the  capital  resources
necessary  to expand  its  sales and  marketing  operations,  or that  Telegen's
attempts to expand its sales and marketing efforts will be successful.


Intellectual Property

         Telegen  relies on a  combination  of patents,  trade  secret and other
intellectual  property  law,  nondisclosure   agreements  and  other  protective
measures to preserve its rights  pertaining  to its products.  Such  protection,
however,  may not preclude competitors from developing products similar to those
of Telegen.  In addition,  the laws of certain foreign  countries do not protect
Telegen's  intellectual property rights to the same extent as do the laws of the
United States. There can also be 

                                      -18-
<PAGE>

no  assurance  that  third  parties  will  not  assert   intellectual   property
infringement  claims  against  Telegen.  One such matter was recently  dismissed
without prejudice to the Company but there is no assurance that more claims will
not be initiated from  litigants  with more resources than Telegen.  There is no
assurance  that Telegen will prevail in such  litigation  seeking  damages or an
injunction  against the sale of Telegen's  products or that Telegen will be able
to obtain any necessary licenses on reasonable terms or at all.

Listing of the Company's Stock on the OTC Bulletin Board


         The  Company  currently  trades  its  stock  on  the   Over-the-Counter
Electronic  Bulletin  Board  (the  "EBB").  The  EBB is a  real-time  electronic
quotation service for over-the-counter  securities.  The EBB is not an automated
quotation  system and is  characterized  by low volume of  trading.  There is no
assurance  that the EBB can or will provide  sufficient  liquidity to holders of
the  Company's  Common  Stock.  The Company  was trading on the Nasdaq  SmallCap
Market  until  January  22, 1998 and intends to return to it as soon as it meets
the listing and maintenance  requirements.  On February 22, 1998,  Nasdaq raised
such  listing  and  maintenance  requirements.  There can be no  assurance  that
trading on the EBB will provide  investors  with  sufficient  liquidity  for the
purchase  and sale of the Common  Stock or that the Company will be able to meet
the  higher  Nasdaq  SmallCap  Market   ("SmallCap")   listing  and  maintenance
requirements  that have been in effect  since  February  22,  1998,  in the near
future, or if at all, or that if the Company does meet the SmallCap requirements
that a broad trading market will develop in the Common Stock.


ITEM 8.  FINANCIALS & SUPPLEMENTARY DATA

         The  information  required  by this Item is set forth in the  Company's
Financial Statements and Notes thereto beginning at page F-1 of this report.


ITEM 9. TELEGEN CHANGES IN AND DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

         Cordovano & Company,  P.C.,  was the Company's  independent  accountant
when the Company was a dormant public shell. Upon the merger of the Company with
the existing  operating company on October 28, 1996 (the "Merger"),  Cordovano &
Company P.C. was replaced as Telegen's principal  accountant.  Coopers & Lybrand
L.L.P. , has been engaged as the independent  accountant for Telegen as a result
of the  Merger,  and is  rendering  its opinion of Telegen  with  respect to the
financial statements of Telegen  Communications  Corporation for the years ended
December 31, 1997 and 1996. Coopers & Lybrand,  L.L.P. has audited the financial
statements of Telegen Communications Corporation,  the operating company that is
the predecessor to the Registrant, for the past seven fiscal years of operation.
The  decision to change  accountants  was  approved by the Board of Directors of
Telegen on November 11, 1996 to become  effective  upon the filing by Telegen of
its 10-QSB for the period ending September 30, 1996.

         During  1996  Cordovano  &  Company,  P.C.'s  report  on the  financial
statements  of  Telegen  for  that  year did not  contain  an  adverse  opinion,
disclaimer  of opinion,  or was  qualified as to  uncertainty,  audit scope,  or
accounting  principles.  During the three most recent fiscal years prior to

                                      -19-
<PAGE>

such dismissal and any subsequent  interim period preceding such dismissal there
were no disagreements  between  Telegen's  predecessor  dormant public shell and
Cordovano & Company,  P.C.  regarding  any matter of  accounting  principles  or
practice, financial statement disclosure, or auditing scope or procedure.


                                    PART III

         Items 10, 11, 12, 13 to be included by  amendment  to this Form 10-K by
April 30, 1998.


                                     PART IV

Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K

(a)      Financial Statements.

         (1)      Report of Independent Accountants;

         (2)      Consolidated Balance Sheets of December 31, 1997 and 1996;

         (3)      Consolidated  Statement  of  Operations  for the  years  ended
                  December 31, 1997, 1996, and 1995;

         (4)      Consolidated  Statements of Shareholders' Equity (Deficit) for
                  the years ended December 31, 1997, 1996, and 1995;

         (5)      Consolidated  Statements  of Cash  Flows for the  years  ended
                  December 31, 1997, 1996, and 1995;

         (6)      Notes to Consolidated Financial Statements.

         (7)      Unaudited Pro Forma Balance Sheet as of December 31, 1997

         (8)      Unaudited Pro Forma Consolidated Statement of Operations
                  for the year ended December 31, 1997

         (9)      Notes to Unaudited Pro Forma Consolidated Financial Statements


(b)      Reports on Form 8-K.

         To date from the  beginning of the fourth  quarter of fiscal year 1997,
         the Company has filed four (4) Current Reports on Form 8-K as follows:

                  (1)      Current  Report on Form 8-K filed with the Commission
                           on October 15, 1997 to report the Company's  $500,000
                           Common Stock and Warrant financing;

                  (2)      Current  Report on Form 8-K filed with the Commission
                           on January 15, 1998 to report the  Company's  sale of
                           its wholly-owned  subsidiary Morning Star Multimedia,
                           Inc., a New Jersey corporation;

                  (3)      Current  Report on Form 8-K filed with the Commission
                           on March  24,  1998 to  report  potential  materially
                           adverse legal proceedings;

                  (4)      Current  Report on Form 8-K filed with the Commission
                           on April 7,  1998 to  report  the  Company's  sale of
                           substantially  all of the assets of its  wholly-owned
                           subsidiary  Telegen  Communications   Corporation,  a
                           California corporation and the receipt by the Company
                           of certain  funding  commitments;  contained  in this
                           Annual   Report  on  Form  10-K  are  the  pro  forma
                           financial   statements   and   the   asset   purchase
                           agreement,   respectively,   which  the  Company  was
                           required to file in connection with this Form 8-K.


                                      -20-
<PAGE>


(c)      Exhibits.

     2.1*         Stock Purchase Agreement Among Morning Star Acquisition, Inc.,
                  Morning Star Multimedia,  Inc., and Telegen  Corporation dated
                  December 31, 1997

     2.2          Asset Purchase of TCC Agreement by and between Synercom,  Inc.
                  and Telegen Corporation dated April 1, 1997

                  Certain  exhibits  and  schedules to Exhibit 2.2 are listed on
                  page 23 thereto  and the  Registrant  agrees to  furnish  them
                  supplementally to the Securities and Exchange  Commission upon
                  request.

     3.1**        Articles of Incorporation of Telegen  Corporation dated August
                  30, 1996  [formerly  known as Solar Energy  Research  Corp. of
                  California]

     3.2**        Certificate of Amendment to the Articles of  Incorporation  of
                  Telegen  Corporation dated October 28, 1996 [formerly known as
                  Solar Energy Research Corp. of California]

     3.3+         Certificate  of  Determination  with respect to the  Company's
                  outstanding Series A Preferred Stock filed with the California
                  Secretary of State on March 20, 1997

     3.4**        Bylaws of Telegen Corporation

     3.5          Certificate of Amendment of Bylaws effective August 6, 1997

     4.1          Form of Convertible  Promissory  Note issued by the Company in
                  November 1997

     10.1**       Service Agreement between MCI  Telecommunications  Corporation
                  and Telegen Communications Corporation

     10.2**       Agreement among Telegen  Communications  Corporation,  Telegen
                  Display  Laboratories,  Inc., Transtech Electronics Pte, Ltd.,
                  and IPC Corporation, Ltd., dated May 30, 1996

                                      -21-

<PAGE>

     10.3**       Manufacturing  License Agreement among Telegen  Communications
                  Corporation,  Telegen Display  Laboratories,  Inc.,  Transtech
                  Electronics  Pte, Ltd., and IPC  Corporation,  Ltd., dated May
                  30, 1996

     10.4**       Lease Agreement  between  Metropolitan  Life Insurance Company
                  and Telegen  Corporation for premises  located in Foster City,
                  California

     10.5**       Lease Agreement  between  Metropolitan  Life Insurance Company
                  and Telegen  Corporation for premises located in Redwood City,
                  California

     10.6**       Warrant Certificate of Telegen Display  Laboratories,  Inc. by
                  and between Telegen Display Laboratories,  Inc., and W. Edward
                  Naugler,  Jr., to purchase  500,000  shares of Common Stock of
                  Telegen Display Laboratories, Inc.

     10.7**       License and Stock  Purchase  Agreement by and between  Telegen
                  Communications  Corporation and Telegen Display  Laboratories,
                  Inc. effective as of May 2, 1996

     10.8***      Shareholder  Agreement  between  Janmil  Holdings  PTE LTD and
                  Telegen Communications Corporation dated June 4, 1997

     10.9+        Subscription  Agreement For 8% Convertible  Preferred Stock by
                  and between  Telegen  Corporation  and Silenus  Limited  dated
                  March 24, 1997

     10.10++      Amendment  Agreement  to 8%  Convertible  Preferred  Stock  of
                  Telegen Corporation dated July 22, 1997

     10.11        Form of Subscription  Agreement for the Company's Common Stock
                  financing August, 1997

     10.12        Form of Subscription  Agreement for the Company's Common Stock
                  and Warrant Financing October, 1997

     10.13        Form of Subscription  Agreement for the Company's  Convertible
                  Note and Warrant Financing November, 1997


     10.14        Form of $2.25  Warrant  issued to  certain  purchasers  in the
                  Common Stock Financing August, 1997

     10.15        Form of $4.00  Warrant to Purchase  Common Stock issued by the
                  Company to certain  purchasers in the Common Stock and Warrant
                  Financing October, 1997

     10.16        Form of $0.01  Warrant  to  Purchase  Common  Stock  issued to
                  certain  purchasers in the Common Stock and Warrant  Financing
                  October, 1997

                                      -22-
<PAGE>

     10.17        Form of $2.25  Warrant to Purchase  Common Stock issued by the
                  Company  to certain  purchasers  in the  Convertible  Note and
                  Warrant Financing November, 1997

     10.18        Employment Agreement by and between the Company and Jessica L.
                  Stevens dated May 3, 1990

     10.19        Employment  Agreement  by and  between  the Company and Bonnie
                  Crystal dated May 4, 1990.

     10.20        Employment  Agreement by and between the Company and Warren M.
                  Dillard dated November 1, 1993.

     10.21        Employment  Agreement  by and  between the Company and Fred Y.
                  Kashkooli dated October 31, 1997

     10.22        Exchange  Offer  Agreement  by and  between  the  Company  and
                  certain holders of Common Stock dated March 24, 1998

     11.1         Statement Re Computation of Per Share Earnings

     12.1         Statement Re Computation of Ratios

     21.1         Subsidiaries of the Registrant

     24.1+++      Power of Attorney

     27.1         Financial Data Schedule


*    Incorporated  by  reference  herein to the 8-K filed by the  Registrant  on
     January 15, 1998
**   Incorporated  by reference  herein to the 10-K filed by the  Registrant  on
     March 31, 1997 and amended on April 9 and April 30,1997
***  Incorporated by reference herein to the 8-K filed by the Registrant on July
     8, 1997
+    Incorporated  by  reference  herein to the 8-K filed by the  Registrant  on
     March 25, 1997
++   Incorporated  by  reference  herein to the 8-K filed by the  Registrant  on
     August 11, 1997
+++  Incorporated by reference in the signature page herein.


                                      -23-
<PAGE>



                                   SIGNATURES

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

                                             TELEGEN CORPORATION

                                             By: /s/ FRED Y. KASHKOOLI
                                                --------------------------------
                                                Fred Y. Kashkooli,
                                                Chief Executive Officer
  
                                                 Date: April 15, 1998

                                POWER OF ATTORNEY

         Know all persons by these  presents,  that each person whose  signature
appears  below  constitutes  and  appoints  Fred  Y.  Kashkooli,  as  his or her
attorney-in-fact, with full power of substitution, for him or her in any and all
capacities,  to sign any amendments to this Report on Form 10-K, and to file the
same, with exhibits  thereto and other documents in connection  therewith,  with
the Securities and Exchange Commission.

<TABLE>
         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  Report on Form 10-K has been  signed  below by the  following  persons  on
behalf of the Registrant and in the capacities and on the dates indicated:
<CAPTION>

               Signature                                  Title                                   Date
----------------------------------------  --------------------------------------  -----------------------------------
<S>                                       <C>                                     <C>
       /s/ GILBERT F. DECKER              Chairman of the Board                   April 14, 1998
----------------------------------------
           Gilbert F. Decker

                                          Director                                
----------------------------------------
               Greg Bell

      /s/   JAMES R. IVERSON              Director                                April 14, 1998
----------------------------------------
            James R. Iverson

    /s/ FREDERICK T. LEZAK, JR.           Director                                April 14, 1998
----------------------------------------
        Frederick T. Lezak, Jr.

        /s/  LARRY J. WELLS               Director                                April 15, 1998
----------------------------------------
             Larry J. Wells

                                          Director                               
----------------------------------------
           Jessica L. Stevens

                                          Director                               
----------------------------------------
             Bonnie Crystal

       /s/  FRED Y. KASHKOOLI             Chief Executive, Financial              April 15, 1998
----------------------------------------  and Accounting Officer
            Fred Y. Kashkooli



</TABLE>

                                      -24-
<PAGE>



                      TELEGEN CORPORATION AND SUBSIDIARIES
                      ------------------------------------

               REPORT ON AUDITS CONSOLIDATED FINANCIAL STATEMENTS

                        AS OF DECEMBER 31, 1997 AND 1996

            AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995









                                      -F1-

<PAGE>



<TABLE>






                                    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<CAPTION>

                                                                                                             Page
                                                                                                             ----
<S>                                                                                                          <C>
Report of Independent Accountants............................................................................F3


Consolidated Balance Sheets as of December 31, 1997 and 1996.................................................F4


Consolidated Statements of Operations for the years ended
 December 31, 1997, 1996 and 1995............................................................................F6


Consolidated Statements of Shareholders' Equity (Deficit) for the years ended
 December 31, 1997, 1996 and 1995............................................................................F8


Consolidated Statements of Cash Flows for the years ended
 December 31, 1997, 1996 and 1995............................................................................F10


Notes to Consolidated Financial Statements...................................................................F12

</TABLE>

                                      -F2-


<PAGE>





                        REPORT OF INDEPENDENT ACCOUNTANTS



The Shareholders
Telegen Corporation and Subsidiaries
Redwood City, California


We have  audited the  consolidated  balance  sheets of Telegen  Corporation  and
Subsidiaries  as of  December  31,  1997  and  1996,  and  related  consolidated
statements of operations,  shareholders'  equity  (deficit),  and cash flows for
each of the three years ended December 31, 1997, 1996 and 1995.  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  generally   accepted  auditing
standards. 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 financial  statements  referred to above present fairly, in
all  material  respects,  the  financial  position  of Telegen  Corporation  and
Subsidiaries at December 31, 1997 and 1996, and the results of their  operations
and their cash flows for each of the three years ended  December 31, 1997,  1996
and 1995, in conformity with generally accepted accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will  continue as a going  concern.  As discussed in Note 2, the Company
has incurred operating losses, had negative cash flows from operations and has a
deficit  shareholders'  equity.  These factors raise substantial doubt about the
Company's ability to continue as a going concern.  Management's plans in regards
to these matters are also  described in Note 2. The financial  statements do not
include any adjustments that might result from the outcome of this uncertainty.


                                             /S/ COOPERS & LYBRAND L.L.P.


Sacramento, California
April 14, 1998

                                      -F3-

<PAGE>

<TABLE>

                                                TELEGEN CORPORATION AND SUBSIDIARIES
                                                     CONSOLIDATED BALANCE SHEETS
                                                     December 31, 1997 and 1996

                                                             ----------
<CAPTION>

                                                                                                       1997                1996
<S>                                                                                               <C>                  <C>
                                   ASSETS
Current assets:
   Cash and cash equivalents                                                                      $    275,891         $  3,166,657
   Accounts receivable:
      Trade, net of allowance for doubtful accounts of $66,000 in 1997
       and $0 in 1996                                                                                     --                 17,784
      Related parties, net of allowance for doubtful accounts of
        $6,753 in 1997 and $0 in 1996                                                                  213,121              109,544
      Other                                                                                             27,813              139,159
   Inventory                                                                                            75,760              173,841
   Prepaid expenses and other current assets                                                            17,664              387,609
                                                                                                  ------------         ------------

      Total current assets                                                                             610,249            3,994,594

Property and equipment, net                                                                          1,546,183            1,664,374
Other assets                                                                                            75,182               68,354
                                                                                                  ------------         ------------

                                                                                                  $  2,231,614         $  5,727,322
                                                                                                  ------------         ------------

                    LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Convertible note payable                                                                       $     75,000         $     96,117
   Notes payable - shareholder                                                                            --                174,799
   Accounts payable                                                                                  1,571,104              357,366
   Accrued payroll and related taxes                                                                   964,046              554,570
   Accrued expenses                                                                                     99,095              104,694
   Deferred rent                                                                                        46,975                4,987
   Dividend payable                                                                                    145,146                 --
                                                                                                  ------------         ------------

      Total current liabilities                                                                      2,901,366            1,292,533

Capital lease                                                                                             --                 18,549
Convertible notes payable                                                                              500,000                 --
                                                                                                  ------------         ------------

        Total liabilities                                                                            3,401,366            1,311,082
                                                                                                  ------------         ------------

Commitments and contingencies (Notes 13 and 14)

Minority interests                                                                                        --                325,077

<FN>
                    The  accompanying  notes  are  an  integral  part  of  these financial statements.
</FN>
</TABLE>


                                                                 -F4-
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                                               <C>                  <C>

Equity put options on common stock                                                                     300,000                 --
                                                                                                  ------------         ------------
Shareholders' equity (deficit):
    8% cumulative convertible Series A preferred stock, $1,000 liquidation
    preference, authorized 15,000 shares, 0 shares issued and outstanding at
    1997 and 1996, respectively
                                                                                                  ------------         ------------
   Common stock, no par value; authorized 100 million shares, 8,235,016 and
    5,021,460 shares issued and outstanding at 1997 and 1996, respectively                          16,031,336           10,399,318

     Additional paid-in capital                                                                      4,133,640            4,133,640

     Accumulated deficit                                                                           (21,634,728)         (10,441,795)
                                                                                                  ------------         ------------

      Total shareholders' (deficit) equity                                                          (1,469,752)           4,091,163
                                                                                                  ------------         ------------

                                                                                                  $  2,231,614         $  5,727,322
                                                                                                  ------------         ------------
<FN>


                    The  accompanying  notes  are  an  integral  part  of  these financial statements.
</FN>
</TABLE>
                                                                -F5-
<PAGE>

<TABLE>

                                                TELEGEN CORPORATION AND SUBSIDIARIES
                                                CONSOLIDATED STATEMENTS OF OPERATIONS
                                        for the years ended December 31, 1997, 1996 and 1995

                                                             ----------

<CAPTION>

                                                                                1997                  1996                 1995
<S>                                                                        <C>                   <C>                   <C>         
Revenues:
   Sales of products                                                       $    463,486          $     23,700          $    145,795
   Contract services                                                            574,916               517,356                  --
                                                                           ------------          ------------          ------------

                                                                              1,038,402               541,056               145,795
                                                                           ------------          ------------          ------------

Cost of goods sold                                                             (234,292)              (18,083)             (170,421)
Cost of contract services                                                       (93,793)              (68,612)                 --
                                                                           ------------          ------------          ------------

                                                                               (328,085)              (86,695)             (170,421)
                                                                           ------------          ------------          ------------

        Gross profit (loss)                                                     710,317               454,361               (24,626)

Operating expenses:
   Selling and marketing                                                      1,368,767               439,350                89,275
   Research and development                                                   4,400,036             2,386,331               842,026
   General and administrative                                                 5,553,209             3,043,530             1,506,531
                                                                           ------------          ------------          ------------

        Loss from operations                                                (10,611,695)           (5,414,850)           (2,462,458)

Other income (expense):
   Interest income                                                               29,169               194,443                   725
   Interest expense                                                             (89,364)             (146,650)              (81,105)
   Other                                                                       (109,098)                 --                    --
                                                                           ------------          ------------          ------------

        Loss before minority interests and
         extraordinary gain                                                 (10,780,988)           (5,367,057)           (2,542,838)

Minority interests in subsidiary net loss                                       325,077               252,031                  --
                                                                           ------------          ------------          ------------

        Loss before extraordinary gain                                      (10,455,911)           (5,115,026)           (2,542,838)

Extraordinary gain on sale of subsidiary, net of
 tax effect of $0                                                               536,179                  --                    --
                                                                           ------------          ------------          ------------

        Net loss                                                           $ (9,919,732)         $ (5,115,026)         $ (2,542,838)
                                                                           ------------          ------------          ------------

Net loss per common share attributable to common
shareholders:

<FN>
                             The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
                                                                -F6-


<PAGE>
<TABLE>
<CAPTION>
<S>                                                                        <C>                   <C>                   <C>         

   Basic:
      Loss before extraordinary gain                                       $      (2.11)         $      (1.16)         $      (0.88)
      Extraordinary gain                                                           0.10                  --                    --
                                                                           ------------          ------------          ------------

        Net loss                                                           $      (2.01)         $      (1.16)         $      (0.88)
                                                                           ------------          ------------          ------------

   Diluted:
      Loss before extraordinary gain                                       $      (2.11)         $      (1.16)         $      (0.88)
      Extraordinary gain                                                           0.10                  --                    --
                                                                           ------------          ------------          ------------

        Net loss                                                           $      (2.01)         $      (1.16)         $      (0.88)
                                                                           ------------          ------------          ------------

Weighted average common shares outstanding                                    5,547,015             4,418,099             2,882,961
                                                                           ------------          ------------          ------------


<FN>

                             The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
                                                                -F7-
<PAGE>

<TABLE>

                                                TELEGEN CORPORATION AND SUBSIDIARIES
                                      CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)
                                        for the years ended December 31, 1997, 1996 and 1995

                                                             ----------
                                                                                                           
<CAPTION>
                                                                                 Preferred                                          
                                                                                   Stock                        Common Stock        
                                                                        ----------------------------    ------------   ------------ 
                                                                            Shares          Amount        Shares          Amount    
                                                                        ------------    ------------    ------------   ------------ 
<S>                                                                           <C>       <C>                <C>         <C>          
Balance, December 31, 1994                                                    47,500    $    350,704       2,818,552   $  2,111,742 

   Preferred stock issued, net of offering  cost of $80,678                   65,250         571,822            --             --   
   Common stock issued, net of offering cost of $70,933                         --              --            96,285        445,966 
   Issuance of common stock warrants                                            --              --              --          251,995 
   Pooling of interests with Morning Star Multimedia                            --              --           133,333          5,000 
   Net loss                                                                     --              --              --             --   
                                                                        ------------    ------------    ------------   ------------ 

Balance, December 31, 1995                                                   112,750         922,526       3,048,170      2,814,703 

   Conversion of preferred stock into common stock                          (112,750)       (922,526)        185,500        922,526 
   Common stock issued, net of offering  costs of 2,467,763                     --              --         1,787,790      6,461,929 
   Issuance of common stock warrants                                            --              --              --          200,160 
   Additional paid-in capital (Note 1)                                          --              --              --             --   
   Net loss                                                                     --              --              --             --   
                                                                        ------------    ------------    ------------   ------------ 

Balance, December 31, 1996                                                      --              --         5,021,460     10,399,318 

   Preferred stock issued, net of offering cost of $336,000                    4,000       2,854,925            --             --   
   Accretion of preferred stock discount                                        --         1,078,055            --             --   
   Preferred stock dividends                                                    --              --              --             --   
   Conversion of preferred stock into common stock                            (4,000)     (3,932,980)      1,894,779      3,932,980 
   Issuance of common stock:
      September 1997 Private Placement, net of offering costs of $5,422         --              --           220,404        490,487 
      October 1997 Private Placement, net of offering costs of $211,148         --              --           500,000        888,352 
      To employees for services                                                 --              --            15,001         87,766 
      To non-employees for services                                             --              --            43,798        164,407 
      Exercise of employee options                                              --              --            22,743        113,715 
      Exercise of warrants                                                      --              --           473,815         84,375 
      To employees under Stock Purchase Plan                                    --              --            43,016        119,936 
   Exercise of put option and accretion to the put price                        --              --              --         (250,000)
   Net loss                                                                     --              --              --             --   
                                                                        ------------    ------------    ------------   ------------ 
Balance, December 31, 1997                                                      --              --         8,235,016     16,031,336 
                                                                        ------------    ------------    ------------   ------------ 


<FN>

                             The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
                                                                -F8-


<PAGE>
<TABLE>
<CAPTION>
                                                                            Additional                            
                                                                             Paid-in        Accumulated     
                                                                             Capital          Deficit           Total     
                                                                           ------------   ------------    ------------    
<S>                                                                        <C>            <C>             <C>             
Balance, December 31, 1994                                                 $       --     $ (2,783,931)   $   (321,485)   
                                                                                                                          
   Preferred stock issued, net of offering  cost of $80,678                        --             --           571,822    
   Common stock issued, net of offering cost of $70,933                            --             --           445,966    
   Issuance of common stock warrants                                               --             --           251,995    
   Pooling of interests with Morning Star Multimedia                               --             --             5,000    
   Net loss                                                                        --       (2,542,838)     (2,542,838)   
                                                                           ------------   ------------    ------------    
                                                                                                                          
Balance, December 31, 1995                                                         --       (5,326,769)     (1,589,540)   
                                                                                                                          
   Conversion of preferred stock into common stock                                 --             --              --      
   Common stock issued, net of offering  costs of 2,467,763                        --             --         6,461,929    
   Issuance of common stock warrants                                               --             --           200,160    
   Additional paid-in capital (Note 1)                                        4,133,640           --         4,133,640    
   Net loss                                                                        --       (5,115,026)     (5,115,026)   
                                                                           ------------   ------------    ------------    
                                                                                                                          
Balance, December 31, 1996                                                    4,133,640    (10,441,795)      4,091,163    
                                                                                                                          
   Preferred stock issued, net of offering cost of $336,000                        --             --         2,854,925    
   Accretion of preferred stock discount                                           --       (1,078,055)           --      
   Preferred stock dividends                                                       --         (145,146)       (145,146)   
   Conversion of preferred stock into common stock                                 --             --              --      
   Issuance of common stock:                                                                                              
      September 1997 Private Placement, net of offering costs of $5,422            --             --           490,487    
      October 1997 Private Placement, net of offering costs of $211,148            --             --           888,352    
      To employees for services                                                    --             --            87,766    
      To non-employees for services                                                --             --           164,407    
      Exercise of employee options                                                 --             --           113,715    
      Exercise of warrants                                                         --             --            84,375    
      To employees under Stock Purchase Plan                                       --             --           119,936    
   Exercise of put option and accretion to the put price                           --          (50,000)       (300,000)   
   Net loss                                                                        --       (9,919,732)     (9,919,732)   
                                                                           ------------   ------------    ------------    
Balance, December 31, 1997                                                 $  4,133,640   $(21,634,728)   $ (1,469,752)   
                                                                           ------------   ------------    ------------    
                                                                                                                          

<FN>

                             The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
                                                                -F9-

<PAGE>

<TABLE>
                                                TELEGEN CORPORATION AND SUBSIDIARIES
                                                CONSOLIDATED STATEMENTS OF CASH FLOWS
                                        for the years ended December 31, 1997, 1996 and 1995

                                                             ----------

<CAPTION>
                                                                                      1997               1996               1995
<S>                                                                              <C>                <C>                <C>          
Cash flows from operating activities:
   Net loss                                                                      $ (9,919,732)      $ (5,115,026)      $ (2,542,838)
   Adjustments to reconcile net loss to net cash used in
    operating activities:
      Minority interests in subsidiary's net loss                                    (325,077)          (252,031)              --
      Loss on disposal of assets                                                        5,109               --                 --
      Extraordinary gain on sale of subsidiary                                       (536,179)              --                 --
      Depreciation and amortization                                                   437,574            187,444             72,053
      Amortization of deferred financing costs                                         68,000            197,248             22,529
      Accretion of bridge loan discount                                                  --              156,627             17,833
      Allowance for doubtful accounts                                                  72,753               --               14,113
      Provision for inventory write-downs                                                --              217,985             19,381
      Operating expenses paid with issuance of common stock and
       common stock equivalents                                                       252,173            325,045            536,964
      Interest expense added to note payable principal                                   --                 --               20,853
      Changes in operating assets and liabilities:
        Accounts receivable                                                           (47,965)          (255,597)             8,382
        Prepaid expenses                                                              368,212           (386,421)            28,044
        Inventory                                                                      98,081            (14,199)          (251,718)
        Deposits                                                                      (68,975)           (54,857)              --
        Accounts payable                                                            1,397,315           (651,966)           697,783
        Accrued expenses                                                              698,105            145,519            323,275
                                                                                 ------------       ------------       ------------

           Net cash used in operating activities                                   (7,500,606)        (5,500,229)        (1,033,346)
                                                                                 ------------       ------------       ------------

Cash flows used in investing activities:
   Insurance proceeds on fixed assets                                                    --                 --               12,500
   Proceeds on sale of subsidiary                                                     200,000               --                 --
   Purchase of fixed assets                                                          (540,205)        (1,671,271)              --
                                                                                 ------------       ------------       ------------

           Net cash (used in) provided by investing activities                       (340,205)        (1,671,271)            12,500
                                                                                 ------------       ------------       ------------

Cash flows from financing activities:
   Proceeds from borrowings                                                           500,000            275,000            457,640
   Principal payments on notes payable                                               (101,745)          (990,875)           (26,203)
   Issuance of common stock, net of offering costs                                  1,696,865          6,270,694            163,165
   Issuance of preferred stock, net of offering costs                               2,854,925               --              571,822
   Bridge loan offering costs                                                            --                 --              (84,963)
   Issuance of stock by subsidiary, net of offering costs                                --            4,604,998               --
                                                                                 ------------       ------------       ------------


<FN>

                             The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
                                                                -F10-


<PAGE>
<TABLE>
<CAPTION>


<S>                                                                              <C>                <C>                <C>         

           Net cash provided by financing activities                                4,950,045         10,159,817          1,081,461
                                                                                 ------------       ------------       ------------

Net (decrease) increase in cash and cash equivalents                               (2,890,766)         2,988,317             60,615

Cash and cash equivalents at beginning of year                                      3,166,657            178,340            117,725
                                                                                 ------------       ------------       ------------

Cash and cash equivalents at end of year                                         $    275,891       $  3,166,657       $    178,340
                                                                                 ------------       ------------       ------------

Supplemental disclosures:
   Cash paid for interest                                                        $     32,290       $    146,240       $         98
                                                                                 ------------       ------------       ------------

   Cash paid for income taxes                                                    $        800       $      1,750       $        800
                                                                                 ------------       ------------       ------------


<FN>

                             The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
                                                                -F11-
<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   ----------


1.      Summary of Significant Accounting Policies:

                               Nature of Business

        Telegen Corporation (Company) is a diversified,  high technology company
        with  products,  both  developed and in  development,  in the flat panel
        display,  telecommunications,  and Internet hardware markets. Currently,
        the Company is actively developing its flat panel display technology. In
        November 1996,  the Company  merged with a SEC registrant  (Registrant).
        Pursuant  to the merger  agreement,  among other  things,  each share of
        common and preferred  stock of the Company was converted  into shares of
        common stock and preferred stock of the Registrant  (after giving effect
        to a  7.25:1  reverse  split  of the  Registrant's  common  stock).  The
        surviving  company is know as Telegen  Corporation  and the directors of
        the Company are the directors of the surviving company.

        During  1996,   the  Company  formed  a  subsidiary,   Telegen   Display
        Laboratories  (TDL), for the development and  commercialization  of High
        Gain Emissive Display technology.

        As  discussed  in Note 3, the Company  sold its interest in Morning Star
        MultiMedia,  Inc.  (Morning  Star) on December 31, 1997. The Company had
        acquired Morning Star during 1996 through a pooling of interests whereby
        all of the outstanding stock of Morning Star was exchanged for shares of
        the Company.  Morning Star creates and supplies  interactive  CD-ROM and
        Internet-based entertainment and infotainment software.

        As disclosed in Note 14,  subsequent  to December 31, 1997,  the Company
        entered into an agreement to sell  substantially all of the tangible and
        intangible  assets  of its  telecommunications  subsidiary  to a related
        party. The buyer also assumed certain liabilities.


                                  Consolidation

        The consolidated  financial  statements  include the accounts of Telegen
        Corporation and its wholly and majority owned subsidiaries, collectively
        "the Company".  All material intercompany accounts and transactions have
        been eliminated upon consolidation.


                           Sale of Stock by Subsidiary

        During  1996,  TDL  issued  common  stock  to  third  parties   totaling
        approximately  $5,200,000  thereby  changing  the  Company's  percentage
        ownership  in TDL.  The amount 

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

                                      -F12-

<PAGE>


                               TELEGEN CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

        per share of the common stock sold to the third parties was greater than
        the average  carrying  amount per share of the  Company's  investment in
        TDL.  As a  result  of the  Company's  increase  in its  share  of TDL's
        shareholders'  equity,  an increase in  additional  paid-in-capital  was
        recorded upon consolidation.


1.      Summary of Significant Accounting Policies, continued:


                                Use of Estimates

        The  preparation  of financial  statements in conformity  with generally
        accepted  accounting  principles  (GAAP)  requires  management  to  make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities,  and disclosure of contingent assets and liabilities at the
        date of the financial  statements  and the reported  amounts of revenues
        and expenses  during the reported  period.  Actual  results could differ
        from the estimates.


                            Cash and Cash Equivalents

        Cash  equivalents  are defined as highly liquid  investments  which have
        original  maturities of three months or less from the date acquired.  At
        December 31, 1997, the Company's cash deposits included cash in banks of
        $143,622, of which $100,000 is federally insured.


                                    Inventory

        Inventory of telephone  accessory products and component parts is stated
        at the lower of cost (weighted average method) or market value.


                             Property and Equipment

        Property and equipment are stated at cost.  Depreciation of equipment is
        provided using the straight-line  method over the estimated useful lives
        of five years. Amortization of leasehold improvements is provided on the
        straight-line  method over the shorter of the  estimated  useful life of
        the  improvement  or the  term of the  lease.  Furniture  and  equipment
        received in exchange for stock is recorded at the  stockholder's  basis.
        Costs of maintenance  and repairs are expensed while major  improvements
        are  capitalized.  Gains  or  losses  from  disposals  of  property  and
        equipment are reflected in current operations.


                               Revenue Recognition

        The  Company  performs  research  and  development  contracts  for other
        entities.  Revenue on long-term software contracts is generally recorded
        using  the  percentage-of-completion   method  for  financial  reporting
        purposes.  Sales of other  products or services are recorded

                                     -F13-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

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

        as products are shipped or services are rendered.

                                      -F14-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

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


1.      Summary of Significant Accounting Policies, continued:


                         Research and Development Costs

        Expenditures  relating to the development of new products and processes,
        including significant improvements to existing products, are expensed as
        incurred.


                                  Income Taxes

        The  Company  reports  income  taxes in  accordance  with  Statement  of
        Financial  Accounting  Standards  (SFAS) No. 109,  Accounting for Income
        Taxes,  which  requires the liability  method in  accounting  for income
        taxes.  Deferred tax assets and  liabilities  arise from the differences
        between the tax basis of an asset or liability  and its reported  amount
        in the financial statements.

        Deferred tax amounts are  determined by using the tax rates  expected to
        be in effect when the taxes will  actually be paid or refunds  received,
        as provided under currently  enacted tax law.  Valuation  allowances are
        established  when necessary to reduce  deferred tax assets to the amount
        expected to be realized. Income tax expense or credit is the tax payable
        or  refundable,  respectively,  for the period  plus or minus the change
        during the period in deferred tax assets and liabilities.


                            Net Loss Per Common Share

        During 1997, the Financial  Accounting  Standards  Board issued SFAS No.
        128,  Earnings Per Share,  which established new standards for computing
        and presenting earnings per share for entities with publicly-held common
        stock.   The  Company  has   adopted  and   retroactively   applied  the
        requirements of SFAS No. 128 to all periods presented.


                          Concentration of Credit Risk

        Most of the  Company's  revenues  are derived  from sales to a few large
        companies  with  significant  cash  resources.  Therefore,  the  Company
        considers its credit risk related to these transactions to be minimal.

        The  Company  invests its excess cash in  certificates  of deposits  and
        depository   accounts  of  banks  with  strong  credit  ratings.   These
        certificates of deposits and the Company's cash deposits  typically bear
        minimal  risk and the  Company  has not  experienced  any  losses on its
        investments due to institutional failure or bankruptcy.

                                      -F15-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


1.      Summary of Significant Accounting Policies, continued:


                            Stock-Based Compensation

        The Company has elected to follow  Accounting  Principles  Board Opinion
        No. 25,  Accounting  for Stock Issued to Employees (APB 25), and related
        interpretations in accounting for its employee stock options.  Under APB
        25, the  Company  uses the  intrinsic  value  method to account  for its
        stock-based   compensation   plans.   The   Company   has   adopted  the
        disclosure-only   provisions   of  Statement  of  Financial   Accounting
        Standards No. 123, Accounting for Stock-Based Compensation (see Note 8).


                    Recently Issued Accounting Pronouncements

        In 1997, the Financial  Accounting  Standards Board issued SFAS No. 130,
        Reporting  Comprehensive  Income,  and SFAS No. 131,  Disclosures  about
        Segments  of  an  Enterprise  and  Related  Information.  SFAS  No.  130
        establishes   standards  for  reporting   comprehensive  income  and  is
        effective in 1998.  SFAS No. 131  establishes  standards  for annual and
        interim  disclosures  of  operating  segments,  products  and  services,
        geographic areas and major customers, and is also effective in 1998. The
        Company is in the process of evaluating the disclosure  requirements  of
        the new  standards,  the  adoption  of which  will have no impact on the
        Company's results of operations or financial condition.


                                Reclassifications

        Certain amounts in the Company's  consolidated  financial statements for
        the year ended December 31, 1996, have been reclassified to conform with
        the  presentation  of the Company's  financial  statements  for the year
        ended December 31, 1997. These  reclassifications  have no effect on the
        Company's  equity or net loss for the years ended  December  31, 1996 or
        1995.

                                      -F16-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


2.     Basis of Presentation:

        The accompanying  financial  statements have been prepared assuming that
        the Company will  continue as a going  concern  which  contemplates  the
        realization of assets and the  satisfaction of liabilities in the normal
        course of  business.  The Company has  incurred  operating  losses,  had
        negative  cash flows  from  operations  and has a deficit  shareholders'
        equity. The Company is currently experiencing severe cash flow problems.
        The Company has deferred the payment of wages to key  management  and is
        delinquent  in  paying  certain   amounts  in  state  and  federal  wage
        withholding taxes and social security taxes in 1997. These factors raise
        substantial  doubt  about the  Company's  ability to continue as a going
        concern.  The  financial  statements  do  not  include  any  adjustments
        relating  to  the   recoverability  of  assets  and   classification  of
        liabilities that might result from the outcome of this uncertainty.

        As  discussed in Note 14, the Company  entered  into an  agreement  with
        individuals  associated  with  the  Company  for  the  sale  of  Telegen
        Communications Corporation, the Company's telecommunications  subsidiary
        ("TCC"), for $500,000 and royalty streams on certain TCC products for up
        to three years.

        Management  has taken  steps to  reduce  administrative  overhead  which
        includes significant payroll reduction and subletting space.

        In addition,  the Company is currently seeking debt and equity financing
        to support its product development, manufacturing and marketing efforts.

        There can be no assurance  that the Company's  efforts  described  above
        will be successful. In addition, there can be no assurance that the sale
        of TCC or the  Company's  financing  efforts will produce the  necessary
        cash flow required to fund the Company's on-going operations.


3.      Business Combinations:

                          Morning Star MultiMedia, Inc.

        On December 31, 1996,  Morning Star MultiMedia,  Inc. (Morning Star) was
        merged with and into the Company,  and 133,333  shares of the  Company's
        common stock were issued in exchange for all of the  outstanding  common
        stock of Morning  Star.  The merger  was  accounted  for as a pooling of
        interests,  and accordingly,  the Company's financial statements for all
        periods  prior to the merger have been  restated to include the accounts
        and operations of Morning Star.

                                      -F17-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


3.      Business Combinations, continued:

        On December  31,  1997,  the Company  sold all of its stock  holdings in
        Morning Star to a company owned by certain of the Company's stockholders
        for $200,000 plus royalty streams to be paid to the Company for a period
        of two  years  from  December  31, 1997, of 5% to 10% of gross  sales of
        certain  Morning  Star  CD-ROM  products.   As  a  result,  the  Company
        recognized a gain of approximately  $536,000 on the sale of its interest
        in Morning Star, which is recorded as an extraordinary gain.

        Separate  results  of  Telegen  and  Morning  Star for the  years  ended
        December 31, are as follows:

                                  1997           1996            1995
                               -----------    -----------    -----------
       Net sales:
          Telegen              $   463,486    $    23,700    $   145,795
          Morning Star             574,916        517,356           --
                               -----------    -----------    -----------

                               $ 1,038,402    $   541,056    $   145,795
                               -----------    -----------    -----------

       Net loss:
          Telegen              $(9,858,233)   $(4,860,258)   $(2,517,926)
          Morning Star             (61,499)      (254,768)       (24,912)
                               -----------    -----------    -----------

                               $(9,919,732)   $(5,115,026)   $(2,542,838)
                               -----------    -----------    -----------


                                      SERC

        In November 1996, Solar Energy Research Corp.  (SERC), a SEC registrant,
        acquired  all of the  outstanding  common  stock  of  the  Company.  For
        accounting   purposes,   the   acquisition   has  been   treated   as  a
        recapitalization  of the  Company  with  the  Company  as  the  acquirer
        (Reverse  Acquisition).  The historical  financial  statements  prior to
        November  1996 are those of the  Company.  Common stock shares have been
        restated for all periods  presented  prior to the transaction to reflect
        196,910 shares issued to previous SERC stockholders.  Because SERC was a
        public  shell,  no goodwill was recorded as a result of the  transaction
        and pro forma information is not required to be presented. The Company's
        costs of the transaction were approximately $300,000 and were charged to
        expense.

                                      -F18-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


4.      Inventory:

        Inventories consist of the following at December 31:

                                                    1997           1996
                                                  --------       --------
       Raw materials and supplies                 $ 75,760       $ 88,555
       Finished goods                                 --           85,286
                                                  --------       --------

                                                  $ 75,760       $173,841
                                                  --------       --------


5.      Property and Equipment:

        Property and  equipment  are stated at cost and consist of the following
        at December 31:

                                                1997             1996
                                             -----------     -----------
       Machinery and equipment               $ 1,456,268     $ 1,343,906
       Leasehold improvements                    710,567         573,893
       Office furniture and fixtures              86,173          75,542
                                             -----------     -----------

                                               2,253,008       1,993,341

       Less accumulated depreciation
        and amortization                        (706,825)       (328,967)
                                             -----------     -----------

                                             $ 1,546,183     $ 1,664,374
                                             -----------     -----------

                                      -F19-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


6.      Notes Payable:

        Notes payable consist of the following at December 31:

                                                         1997             1996

           Notes  payable  convertible  to  common
             stock,  interest at 6% due quarterly,
             principal  payable  at the  Company's
             discretion  but  no  later  than  May
             1999, without collateral                   500,000            --

           Subordinated notes payable  convertible
             to common  stock at lender's  option,
             interest  payable  on  $50,000 at 10%
             and on $25,000 at 18%,  principal and
             accrued   interest   due  on  demand,
             without       collateral.       Notes
             subordinated  to senior  indebtedness
             as defined in the agreement                 75,000          75,000

           Notes payable to shareholders, interest
             at 10%,  principal  and  interest due
             December 1997, without collateral            --            114,553

           Note payable to  shareholder,  interest
             at 10%,  principal  and  interest due
             March 1997, without collateral               --             60,246

           Other                                          --             21,117
                                                       ---------       ---------
                                                        575,000         270,916

           Less current maturities                      (75,000)       (270,916)
                                                       ---------       ---------

                                                        500,000            --
                                                       ---------       ---------


        During  1997,  a board  member and the  Company's  placement  agent made
        short-term  loans  to the  Company,  totaling  $125,000.  The notes plus
        $2,436 of accrued interest were repaid to the lenders during 1997.

                                      -F20-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


6.      Notes Payable, continued:

                  $75,000 Convertible Subordinated Note Payable

        The  principal  balance of the  $75,000  convertible  subordinated  note
        payable is convertible, at the holder's discretion, into common stock of
        the Company at a rate of $7 per share.


                      $500,000 Convertible Promissory Notes

        The Company  initiated a private offering on a subscription  basis of up
        to 20 units (each,  a "Note Unit") to  accredited  investors  (the "Note
        Unit  Investors")  with a purchase  price per Unit of $50,000 (the "Note
        Unit Offering"). Each Note Unit consists of (i) a convertible promissory
        note  with a face  value  of  $50,000  (each a "Unit  Note")  and (ii) a
        warrant to purchase  10,000 shares of common stock, at a $2.25 per share
        exercise  price (each a "$2.25  Warrant").  Upon closing the offering on
        November 26, 1997, the Company sold ten (10) Note Units.  As part of the
        consideration for placing the Note Units, the Company's  placement agent
        received a warrant to purchase  80,000  shares of Common Stock for every
        $500,000  of Note Units  sold;  such  warrant  has the same terms as the
        $2.25 Warrants.

        Each Note has an  18-month  term from the date of  issuance  and carries
        simple  interest at 6% per annum payable at the Company's  discretion in
        cash or stock,  and is convertible  (after 90 days) into common stock at
        the holder's option at a conversion price of the lesser of (i) $2.75, or
        (ii)  seventy-five  percent (75%) of the lowest NASDAQ  trading price as
        defined  in  the  applicable  agreements  depending  upon  the  date  of
        conversion.  At  maturity,  each Note  automatically  converts to common
        stock according to the above conversion formula.  The discount resulting
        from the below  market  conversion  feature  was  amortized  to interest
        expense using the interest  method over a period of 90 days.  Each $2.25
        Warrant has a four-year term from issuance,  is immediately  exercisable
        and may be  exercised  on a  net-exercise  basis,  at the  option of the
        holder.

                                      -F21-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


7.      Preferred Stock:

              Cumulative Preferred Stock (Series A Preferred Stock)

        In March 1997, the Company partially  completed a private placement with
        a face value of up to $15 million to support the Company's  research and
        development  programs  and for general  working  capital  purposes.  The
        private  placement   agreement  provides  for  8%  Cumulative  Series  A
        Preferred  Stock (Series A Preferred  Stock) issuable at a 20% discount.
        The 20% discount of $800,000  was accrued over the period from  issuance
        to  the  earliest  conversion  date,  using  the  interest  method.  The
        financing was expected to take place in three  tranches,  each amounting
        to $5 million in face value.  During 1997,  the Company had issued 4,000
        shares of Series A Preferred Stock, with a face value of $4,000,000. The
        remaining  funding of the Series A  Preferred  Stock is not  expected to
        occur. In addition,  approximately  204,000  warrants were issued to the
        holders to purchase  common stock in an  aggregate  amount of 20% of the
        value of the Series A Preferred  Stock actually  funded at a fixed price
        per share  (fair  value at the date of  issuance).  In addition to an 8%
        commission,  placement  agents  received  133,440  warrants  to purchase
        common  stock in an  aggregate  amount  of 10% of the face  value of the
        Series A  Preferred  Stock  actually  funded at a fixed  price per share
        (fair value at the date of issuance). The Company has also agreed not to
        sell any new equity series at a discount except in certain circumstances
        as defined in the agreement.

        The Company also  entered  into an  Amendment  Agreement to the Series A
        Preferred  Stock   Subscription   Agreement  dated  July  7,  1997  (the
        "Amendment  Agreement")  which  entitles  the Series A  Preferred  Stock
        holder to  additional  discounts of 3%, 6%, or 9% off of the  Conversion
        Price, as that term is defined in the Amendment Agreement,  based on the
        dates on which the  preferred  stock  holder  converts  the New Series A
        Preferred  Stock  into  common  stock.   The  additional   discounts  of
        approximately  $269,000 were accrued using the applicable discount rate.
        As of  December  31,  1997,  the  Series A  Preferred  Stock  was  fully
        converted to the Company's common stock.

                                      -F22-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


8.     Common Stock:

                       Common Stock Issuances During 1997

        In  August  1997,  the  Company   initiated  a  private  offering  on  a
        subscription  basis of 222,222 shares of its common stock,  no par value
        (the "Common Stock") to accredited  investors (the "Common  Investors"),
        at  a  per-share   price  of  $2.25  (the  "Common   Offering"),   which
        approximated fair market value during the period of the offering.  As of
        September 30, 1997, the Company closed the Common  Offering and had sold
        220,404 shares of Common Stock pursuant thereto.  The Company guaranteed
        a third party's put obligation related to 111,111 shares sold under this
        private  offering at $2.70 per share.  At December 31, 1997, the Company
        recognized  a  $250,000  obligation  related to the equity put option on
        common stock and an additional $50,000 accretion to the put price.

        In connection  with the Common  Offering,  the Company also delivered to
        certain of the Common  Investors  an  aggregate  of 50,000  warrants  to
        purchase  one  share  of  Common  Stock  at a  $0.01  per  share  ("0.01
        Warrants").  The $0.01  Warrants have a four-year  term from the date of
        issuance and are exercisable  immediately upon issuance. The Company has
        the right to force the exercise of the $0.01  Warrants at any time after
        their issuance.

        In  October  1997,  the  Company  initiated  a  private  offering  on  a
        subscription basis of up to 500,000 units (each, a "Unit") to accredited
        investors  (the "Unit  Investors"),  with a  purchase  price per Unit of
        $2.00 (the "Unit Offering"), which approximated fair market value of the
        Company's  common  stock  during the period of the  offering.  Each Unit
        consisted of (i) one share of Common Stock,  (ii) a $0.01  Warrant,  and
        (iii) a warrant to purchase one share of the Company's Common Stock at a
        $4.00 per share  exercise  price  (each,  a "$4.00  Warrant,"  the $0.01
        Warrants and the $4.00 Warrants are collectively the "Warrants").  As of
        October 21, 1997 the Unit Offering was fully subscribed.  As part of the
        consideration  for placing the Units and for fully  subscribing the Unit
        Offering, the Company issued the placement agent for the offering 50,000
        $0.01  Warrants  and  accordingly  $99,500 was  recorded  as  additional
        offering costs.

        Units purchased under the Unit Offering and the $0.01 Warrants issued to
        the placement  agent are subject to lock up  provisions  which limit the
        ability of a holder of common stock to sell common stock  received  upon
        exercise of the Warrants.  The purchased Units are divided into four (4)
        equal groups (each,  a "Group"),  each having a separate  lock-up period
        (the "Lock-Up  Period") for the resale of Common Stock purchased and the
        sale of Common Stock upon exercise of the Warrants.  The Lock-Up  Period
        for each Group expires on January 1, 1998,  April 1, 1998,  July 1, 1998
        and October 1, 1998, respectively.

                                      -F23-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


8.     Common Stock, continued:

        The $4.00  Warrants have a four-year  term from the date of issuance and
        are exercisable  immediately upon issuance. The Company has the right to
        force the  exercise of the $4.00  Warrants  after the  Company's  common
        stock trades for twenty (20) trading days at $6.00 or more.

        In March 1998,  as described  in Note 14, the Company made  available to
        the Common  Investors  and the Unit  Investors  (Investors)  an exchange
        offer  whereby,  for the common stock  purchases  described  above,  the
        Company  offered  convertible   subordinated  promissory  notes  to  the
        Investors in exchange for their common stock.


                       Common Stock Issuances During 1996

        In February 1996, the Company initiated a private offering of its common
        stock at $5.00 per  share.  Through  May  1996,  when the  offering  was
        completed,   the  Company   received  gross  proceeds  of  approximately
        $6,671,950  for the issuance of 1,334,390  shares of common stock,  paid
        approximately  $1,024,000  in  placement  agent fees,  and issued to the
        placement  agent  warrants  to  purchase  133,440  common  shares  at an
        exercise  price of $3.50 per  share.  Offering  costs of  $200,160  were
        recorded to reflect the difference  between the fair value of the common
        stock and the warrants exercise price. In addition,  206,882 shares were
        issued  as  additional  commission  and,  accordingly,   $1,034,410  was
        recorded as additional offering costs.


                             1996 Stock Option Plan

        In November 1996, the Company authorized a stock option plan under which
        options to  purchase  shares of common  stock may be granted to eligible
        employees, officers and directors in the form of incentive stock options
        (ISO's) and non-qualified stock options. The option exercise price shall
        be no less than fair market value on the date of grant (110% in the case
        of  ISO's).  The term of each  option  shall  be  stated  in the  option
        agreement.  The maximum  shares  that may be optioned  under the plan is
        500,000  shares.  This plan replaced the October 29, 1993 employee stock
        option plan.

        In February  1998,  the 1996 Stock  Option Plan was amended to include a
        provision regarding acceleration of vesting in connection with change in
        control  events.  As well,  the  Company  offered to all  employees  the
        opportunity  to  exchange  their  outstanding  options to  purchase  the
        Company's  common  stock  for the same  number  of new  options  with an
        exercise  price  equal to the five day  average of the  closing  trading
        price before the effective date of the exchange. The new options will be
        subject to a restarted  three-year  vesting  schedule with a three-month
        cliff.

                                      -F24-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


8.      Common Stock, continued:

                             1993 Stock Option Plan

        On October 29,  1993,  the Company  authorized a stock option plan under
        which options to purchase  shares of common stock may be granted to full
        time  employees.  The  number of options  granted  is based on  employee
        performance.  The plan  provides that the option price shall not be less
        than the fair market  value of the shares on the date of grant.  Options
        are  exercisable  on the date of the grant,  expire  five years from the
        date of grant  and vest  over  varying  lengths  of time,  up to  twelve
        months.

        In February  1996,  the Board  authorized  the granting of options to an
        employee  to  purchase  17,000  shares of common  stock at $5 per share,
        exercisable  for a period of up to five years. 

        In  addition,  on October 29,  1993,  the  Company's  Board of Directors
        authorized  granting to full time employees who successfully  complete a
        probationary  period a number of shares of common  stock or an option to
        purchase a number of shares of common  stock whose total market value on
        the date of grant is equal  to five  percent  of the  employee's  annual
        salary.  In 1996 and 1995,  respectively,  4,163 shares and 1,582 shares
        were  issued to  employees  and  $20,815  and $7,910 was  recorded as an
        expense.  Options  granted  under  this plan are  included  in the table
        below.

        In February 1998,  the Company  granted an officer of the Company an ISO
        to purchase  280,000 shares of the Company's common stock under the 1996
        Stock  Option  Plan and an  option  to  purchase  440,000  shares of the
        Company's  common  stock at fair market  value of the  Company's  common
        stock  outside  of the 1996 Stock  Option  Plan in  satisfaction  of his
        employment contract with the Company.


                        Board of Director's Compensation

        In February 1996, the Company's Board of Directors  approved granting to
        non-employee members of the Board $1,000 per Board meeting attended. The
        Board  members may elect to receive  their  compensation  in the form of
        common  stock of the  Company  or  options  to  purchase  shares  of the
        Company's  common stock at an exercise  price equal to the fair value of
        the  shares  at the  beginning  of the  calendar  year the  options  are
        granted.  Also, the Board approved  granting to non-employee  members of
        the Board, options to purchase, on an annual basis, 20,000 shares of the
        Company's  common stock. The options will be granted at the beginning of
        each calendar year at fair value and vest ratably over the year,  unless
        the member is discharged from the Board due to a merger, buyout or other
        event not in the ordinary course of business,  in which case the options
        will vest immediately.


                                      -F25-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

8.      Common Stock, continued:

        In February  1996,  the Board  granted  certain  officers of the company
        options to purchase  shares of the Company's  common stock at a price of
        $5.00 per share for a period of five years.  Options to purchase 200,000
        shares  were  granted,  of  which  100,000  vested  immediately  and the
        remaining  options vested in 50,000 share  increments over the remainder
        of 1996.


                          Employee Stock Purchase Plan

        In October 1996,  the  shareholders  approved an Employee Stock Purchase
        Plan (ESPP).  The ESPP allows  eligible  employees the right to purchase
        common  stock on a  semi-annual  basis at the lower of 85% of the market
        price at the beginning or end of each six-month  offering period.  As of
        December 31, 1996,  there were 200,000 shares of common stock  available
        for sale  for the ESPP and  there  had been no  issuances  to date.  The
        offering  periods  commence  on  November  1 and May 1 of each  year.  A
        liability  has been  recorded  for  ESPP  withholdings  not yet  applied
        towards the purchase of common stock.

        The  following   summarizes  the  stock  option   transactions  for  the
        three-year period ended December 31, 1997:

                                                                        Weighted
                                                              Number    Average
                                                                of      Exercise
                                                              Shares     Price
                                                              ------     -----
        Outstanding and exercisable at January 1, 1995        356,561    $ 4.97

           Issued                                              98,352    $ 5.00
           Exercised                                             (150)   $ 5.00
           Forfeited                                           (6,501)   $ 5.00
                                                           ----------

        Outstanding and exercisable at December 31, 1995      448,262    $ 4.98

           Issued                                             649,624    $ 5.00
           Exercised                                           (2,673)   $ 3.50
           Forfeited                                          (10,410)   $ 5.00
                                                           ----------

        Outstanding and exercisable at December 31, 1996    1,084,803    $ 5.00

           Issued                                             366,923    $ 3.64
           Exercised                                          (22,743)   $ 5.00
           Forfeited                                          (43,476)   $ 2.90
                                                           ----------

        Outstanding at December 31, 1997                    1,385,507    $ 4.71
                                                            ---------    ------

                                      -F26-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


        Exercisable at December 31, 1997                    1,265,702    $ 4.90
                                                            ---------    ------


8.      Common Stock, continued:

                            Stock Based Compensation

<TABLE>
        The Company applies the measurement provisions of APB Opinion No. 25 and
        related  interpretations  in  accounting  for the  stock  option  plans.
        Compensation  costs of $16,000,  $21,000 and $8,000, for the years ended
        December 31, 1997, 1996 and 1995, respectively, have been recognized for
        stock option  plans.  Had  compensation  cost for the stock option plans
        been  determined  based on the fair value at the grant  dates for awards
        under the plans,  consistent with the alternative method set forth under
        SFAS 123, the Company's net loss and net loss per share would have been:

<CAPTION>
                                                     1997             1996            1995
<S>                                             <C>              <C>              <C>           
        Net loss:
           As reported                          $  (9,919,732)   $  (5,115,026)   $  (2,542,838)
           Pro Forma                            $ (10,426,293)   $  (5,688,651)   $  (2,571,216)

        Basic and diluted net loss per share:
           As reported                          $       (2.01)   $       (1.16)   $       (0.88)
           Pro Forma                            $       (2.10)   $       (1.29)   $       (0.89)
</TABLE>

<TABLE>
        The fair value of the options issued prior to the Reverse Acquisition is
        estimated  on the date of each grant  using the  Minimum  Value  pricing
        model.  For options issued  subsequent to the Reverse  Acquisition,  the
        fair value of the  options  is  estimated  on the date of grant  using a
        modified  Black-Scholes  option  valuation  formula.  The  following are
        assumptions  of the  weighted-average  information  used to value  stock
        option grants in 1997, 1996 and 1995:

<CAPTION>
                                                                   POST               PRE
                                                                  MERGER             MERGER
                                                  1997              1996              1996               1995
<S>                                             <C>               <C>                <C>               <C>
           Dividend yields                         0                 0                 0                 0
           Expected volatility                  102.34%           93.53%              N/A*              N/A*
           Risk-free-interest rates              6.11%             5.44%             5.63%
           Expected time to exercise            5 years           1 year             1 year            1 year

<FN>
         *  No assumption required for grant dates before the Company's stock was publicly traded
</FN>
</TABLE>

         The  weighted-average  grant date fair  value of  options  for the year
         ended  December  31,  1997,  was $3.55,  $.27 and $2.76 for the periods
         before  and after the  merger in 1996,  respectively,  and $.27 for the
         year ended December 31, 1995.

                                      -F27-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


8.      Common Stock, continued:

                                    Warrants

<TABLE>
        The Company issued and at December 31, 1997, had outstanding warrants to
        purchase common stock as follows:

<CAPTION>
                                         Number of
                                           Common
                                        Shares to be
                                        Issued upon
                                          Warrant                Exercise
             Date of issuance            Conversion               Price                Expiration Date
           ---------------------      -----------------        -------------      ---------------------------
<S>                                       <C>                    <C>                  <C> 
           August 1995                    50,500                 $ 0.01               August 2000
           February 1997                  34,625                   3.50               April 2001
           February 1997                  25,000                   7.00               April 2001
           March 1997                    151,351                   6.94               March 2001
           May 1997                       10,000                   4.38               August 2001
           June 1997                      52,614                   2.85               July 2001
           August 1997                    50,000                   0.01               August 2001
           October 1997                  500,000                   4.00               October 2001
           October 1997                   50,000                   0.01               October 2001
           October 1997                  125,000                   0.01               October 2001
           November 1997                 180,000                   2.25               November 2001
                                      -----------
                                       1,229,090
                                      -----------
</TABLE>

        In August  1995,  a  shareholder  and  officer of the Company was issued
        warrants to purchase  50,500  shares of common  stock for $.01 per share
        for a period of five years.  The  warrants can be exercised at any time.
        Compensation  expense  totaling  $251,995  was  recorded  to reflect the
        difference  between the fair value of the common  stock and the exercise
        price.

        In January  1995 an  employee  was granted an option to purchase 5% of a
        yet-to-be formed  entity.  In May 1996,  the  entity  was formed and the
        employee  received  warrants  to  purchase  500,000  shares in the newly
        formed entity which represented a 5% interest.

        In October  1996,  an employee  was issued  warrants to purchase  25,000
        shares of common stock.  The warrants  were  exercised  immediately  and
        $125,000 was recorded as compensation expense.

        In September  1997, a warrant that was issued during 1996 to a placement
        agent to  purchase  90,065  shares at $3.50 per share was  re-priced  to
        $0.56 per share.  The holder

                                      -F28-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


        exercised  the warrant in  September  1997  resulting  in  approximately
        $164,000 in additional offering costs.

                                      -F29-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


8.      Common Stock, continued:

                               Earnings Per Share

<TABLE>
        A  reconciliation  of the numerators and  denominators  of the basic and
        diluted  earnings  per  share  computations  under  SFAS  No.  128 is as
        follows:

<CAPTION>
                                                         1997            1996            1995
<S>                                                  <C>             <C>             <C>
        Loss attributable to common shareholders:
           Loss before extraordinary gain            $(10,455,911)   $ (5,115,026)   $ (2,542,838)
           Reconciling items:
              Accretion of preferred stock
               discount                                (1,078,055)           --              --
              Preferred stock dividends                  (145,146)           --              --
                                                     ------------    ------------    ------------

           Loss attributable to common
            shareholders before extraordinary
            gain                                      (11,679,112)     (5,115,026)     (2,542,838)
           Extraordinary gain                             536,179            --              --
                                                     ------------    ------------    ------------

                Loss attributable to common
                 shareholders                        $(11,142,933)   $ (5,115,026)   $ (2,542,838)
                                                     ------------    ------------    ------------

        Weighted average common shares outstanding
          for determination of:
           Basic earnings per share                     5,547,015       4,418,099       2,882,961
                                                     ------------    ------------    ------------

           Diluted earnings per share                   5,547,015       4,418,099       2,882,961
                                                     ------------    ------------    ------------
</TABLE>

                                      -F30-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


9.      Income Taxes:

<TABLE>
        The income tax effect of temporary timing differences  between financial
        and income tax reporting that give rise to deferred income tax assets at
        December 31, 1997,  1996 and 1995,  under the provisions of SFAS No. 109
        are as follows:

<CAPTION>
                                               1997            1996           1995
                                            -----------    -----------    -----------
<S>                                         <C>            <C>            <C>        
        Federal net operating loss
         carryforward                       $ 4,827,942    $ 2,637,417    $ 1,658,234
        State operating loss carryforward       754,856        310,257        292,630
                                            -----------    -----------    -----------

                                              5,582,798      2,947,674      1,950,864

        Capitalized research and
         experimentation                      2,412,644        749,162           --
        Other                                  (217,730)        96,261           --
                                            -----------    -----------    -----------

                                              7,777,712      3,793,097      1,950,864

        Less valuation allowance             (7,777,712)    (3,793,097)    (1,950,864)
                                            -----------    -----------    -----------

                                                    --             --            --  
                                            -----------    -----------    -----------
</TABLE>


        Net operating loss (NOL)  carryforwards of $22,738,920  expire from 2005
        to 2012 for federal income tax reporting  purposes and from 1998 to 2002
        for state tax  reporting  purposes.  Under  current  tax law a change in
        ownership of a certain magnitude may limit NOL  carryforwards.  A change
        in ownership  occurred in April 1996  resulting  in a limitation  on the
        utilization of NOL's to a maximum  $1,110,780 per year of NOL's incurred
        prior to April 1996. Any subsequent ownership changes, as defined in the
        income tax law, could result in further limitation on the utilization of
        the NOL's.

        The Company has recorded a valuation  allowance  equal to the full value
        of the  deferred  tax  asset to  reflect  the  uncertain  nature  of the
        ultimate   realization   of  the   deferred  tax  asset  based  on  past
        performance.

                                      -F31-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


10.     Disclosure about the Fair Value of Financial Instruments:

        The  following  methods and  assumptions  were used to estimate the fair
        value of each class of financial instruments for which it is practicable
        to estimate that value:


                            Cash and Cash Equivalents

        The carrying amount approximates fair value due to the short maturity of
        these instruments.


                            Convertible Notes Payable

        The fair value of the Company's  $75,000  convertible  subordinated note
        payable is  estimated by  discounting  the future cash flows using rates
        currently available for debt of similar terms and maturity. The $500,000
        convertible  promissory  notes were  negotiated  in the near  term.  The
        carrying value of these instruments approximates fair value.


11.     Supplemental Disclosure of Non-Cash Investing and Financing Activities:

<TABLE>
        During the years ended  December  31, 1997,  1996 and 1995,  the Company
        received the following services in exchange for shares of common stock:

                                     1997
                                     ----
                                   Services     Shares   Services     Shares   Services     Shares
                                   Received     Issued   Received     Issued   Received     Issued
                                   --------     ------   --------     ------   --------     ------
<S>                                <C>          <C>      <C>          <C>      <C>          <C>   
        Legal Services             $127,074     25,852   $138,690     27,737   $217,000     43,083
        Employee Services            87,766     15,001     20,815      4,163      7,900      1,582
        Deferred Financing Costs       --         --         --         --       49,500      9,899
        Other Services               37,334     17,946    106,449     25,430     66,000     13,788
        Accounts Payable               --         --         --         --        3,300        400
</TABLE>


        During 1996, the Company exchanged  accounts payable to shareholders for
        short-term  notes  payable in the amount of $174,799.  In addition,  the
        Company satisfied  $100,000 of the Bridge Loan with 20,000 shares of the
        Company's common stock at $5 per share.

        During 1996, the Company converted its 112,750 shares of preferred stock
        to 185,500 shares of common stock.

                                      -F32-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


11.     Supplemental  Disclosure of Non-Cash Investing and Financing Activities,
        continued:

        Capital  lease  obligations  incurred  during  1997 and 1996 for various
        machinery and equipment were $0 and $18,549, respectively.

        In 1995,  approximately  $252,000 in employee  services  was received in
        exchange for 50,500 common stock warrants.  Also, approximately $106,000
        in deferred  financing  costs and $34,000 in common stock offering costs
        are included in accounts payable at December 31, 1995.


12.     Commitments:


                                Operating Leases

        The Company leases its facilities under long-term,  noncancelable  lease
        agreements which have been accounted for as operating leases. The leases
        require  that the  Company  pay all  property  taxes,  insurance  costs,
        repairs and common area maintenance expenses associated with its portion
        of the facilities.  The Company's  noncancelable lease agreements expire
        during  2001.   The  Company's   future  minimum  lease  payments  under
        noncancelable leases are as follows:

                            1998                 573,453
                            1999                 593,999
                            2000                 616,700
                            2001                 429,954
                                              ----------

                                               2,214,106
                                              ----------


        Rental  expense  charged  to  operations  for all  operating  leases was
        approximately  $640,000,  $273,000  and  $202,000  for the  years  ended
        December 31 1997, 1996 and 1995, respectively.

        In February  1998,  the Company  entered  into an  agreement to sublease
        office space related to the above  leases,  under which the Company will
        receive minimum future rent of approximately  $94,000 in 1998 and $8,000
        in 1999.


                                    Royalties

        The  Company  has  granted an option to a third  party to purchase up to
        four  manufacturing  licenses for certain  technology under development.
        The options can be exercised  based on certain  restrictions as defined.
        Upon  exercise,  in addition to license  fees,  the Company will receive
        royalties based on gross revenues from product sales. As of December 31,
        1997, the options have not been exercised.

                                      -F33-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


13.     Contingencies:

        The Company and its Telegen Display Laboratories Inc. subsidiary ("TDL")
        are named defendants in a complaint (the  "Complaint")  filed on January
        7, 1998 by IPC Corporation,  Ltd., Transtech Electronics, PTE, LTD., and
        IPC Transtech Display PTE, LTD  (collectively,  the  "Plaintiffs").  The
        Complaint alleges that the Company committed material misrepresentations
        when the Company sold TDL common stock to the  Plaintiffs for $5,000,000
        on May 30, 1996.  Additional  named  defendants  include  certain former
        officers of the Company.  The  Plaintiffs  seek recision of the original
        purchase,  complete  restitution of the $5,000,000,  interest,  punitive
        damages, costs and attorneys' fees. Neither the Company nor TDL has been
        served with the Complaint and no action has been  initiated  against the
        Company  beyond  filing the  Complaint.  The Company  believes  that the
        Complaint is without merit and intends to vigorously defend such matter.

        The Company is also subject to various legal actions and claims  arising
        in the ordinary course of business.  Management  believes the outcome of
        these  matters  will have no material  adverse  effect on the  Company's
        financial position, results of operations and cash flows.


14.     Subsequent Events:


                               Sale of Subsidiary

        On  April  1,  1998,  the  Company  entered  into an  agreement  to sell
        substantially all of the assets of Telegen  Communications  Corporation,
        the Company's telecommunications  subsidiary ("TCC"), to an affiliate of
        the Company for  $500,000  and the rights of royalty  streams on certain
        TCC  products  for  up  to  three  years.   The  buyer  assumed  certain
        liabilities totaling approximately  $223,000. The Company has received a
        deposit of  $350,000 in cash as part of the sale  price.  The  remaining
        $150,000 will be paid in a note with six monthly installments of $25,000
        plus  interest at 6%  commencing  on  September  15,  1998.  The gain of
        $133,000 was calculated  without regard to the $150,000 note  receivable
        and royalty rights and will be recorded in the second quarter of 1998.

                                      -F34-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


14.    Subsequent Events, continued:

                           Convertible Promissory Note

        On March 31, 1998, the Company received  $500,000 in gross proceeds from
        the issuance of a one year  convertible  note in connection  with a Note
        and  Warrant  Purchase  Agreement.  The  principal  balance  and accrued
        interest at a rate of 6% are due March 31, 1999.  The principal  balance
        and accrued  interest of the note payable are convertible  after 60 days
        from signing the  agreements,  at the holder's  discretion,  into common
        stock of the  Company  at a rate of $0.38 per  share,  which is equal to
        half of the fair market value of each share of common stock on March 31,
        1998. In  connection  with the  agreement,  the holder was also issued a
        warrant to purchase  1,315,790  shares of the Company's common stock for
        $0.38  per  share.  Such  warrant  expires  in May 1998.  The  discounts
        resulting from the below market conversion  feature will be amortized to
        interest  expense  using the  interest  method  over 60 days,  until the
        earliest conversion date.


                                 Exchange Offer

       On March 19, 1998, the Company made available to the Common Investors and
       Unit Investors  (Investors) an exchange offer (the "Exchange  Offer") for
       the common stock purchases described in Note 8. Under the Exchange Offer,
       the Investors were offered convertible subordinated promissory notes (the
       "Notes")  for their shares of Common Stock with a face value equal to the
       number of  shares  of common  stock  tendered  under the  Exchange  Offer
       multiplied  by the  five-day  average of the  Company's  closing  trading
       prices on the OTC Bulletin Board prior to March 17, 1998 (the "Conversion
       Price").  The Notes have a one-year  term with a six percent (6%) balloon
       interest  payment  due at the end of the term of the Note.  The Notes are
       subordinated  to all  other  existing  debt  of the  Company,  both as to
       interest  and  principal  and  upon  liquidation.   The  Notes  are  also
       convertible to common stock at any time by a holder thereof,  such number
       of shares of common stock to be determined by dividing the amount of face
       value of the Note  tendered  by the  Conversion  Price.  The  Company may
       prepay the Notes at any time after giving fifteen (15) days prior written
       notice to holders thereof.

       Under the Exchange Offer,  109,293 and 800,000 shares (including warrants
       exercised in 1997) were  exchanged for Notes by the Common  Investors and
       Unit Investors, respectively.

                                      -F35-

<PAGE>


                      TELEGEN CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


14.     Subsequent Events, continued:

        In October 1997, TSC, LLC, a Delaware limited  liability company ("TSC")
        entered into an amended and restated  stock  purchase  agreement  with a
        stockholder  for the purchase of 550,000 shares of the Company's  common
        stock in a private  transaction.  In addition to the Investors described
        above,  the Company also made the Exchange  Offer  available to TSC, who
        converted the 550,000 shares of common stock for the Notes.

        Upon exchange of the 1,459,293 shares for convertible notes, the Company
        will reduce equity and record convertible debt of approximately $724,500
        during the first quarter of 1998.

<TABLE>

15.      Quarterly Results of Operations (unaudited):

         The following is a summary of unaudited quarterly results of operations
for the year ended December 31, 1997 and 1996:

<CAPTION>

                                                                   Quarter ended in 1997
                                              ------------------------------------------------------------
                                                March 31,       June 30,      September 30,   December 31, 
                                              ------------    ------------    ------------    ------------
<S>                                           <C>             <C>             <C>             <C>         
   Net sales                                  $    159,817    $    489,470    $    259,926    $    129,189
   Gross profit (loss)                             117,458         454,156         221,260         (82,557)
   Loss before extraordinary gain               (2,643,896)     (3,194,228)     (2,120,126)     (2,497,661)
   Net  loss                                    (2,643,896)     (3,194,228)     (2,120,126)     (1,961,482)

   Loss per common share attributable
    to common shareholders:
    Loss before extraordinary gain                   (0.57)          (0.72)          (0.49)          (0.35)
    Net  loss                                        (0.57)          (0.72)          (0.49)          (0.27)


                                                                    Quarter ended in 1996
                                              ------------------------------------------------------------
                                                 March 31,       June 30,       September 30,   December 31,
                                              ------------    ------------    ------------    ------------
   Net sales                                  $    113,517    $     82,873    $    199,050    $    145,616
   Gross profit                                     98,261          80,755         195,092          80,253
   Net  loss                                      (469,995)     (1,018,950)     (1,304,138)     (2,321,943)
   Net loss per common share attributable
    to common shareholders                           (0.15)          (0.24)          (0.26)          (0.47)

<FN>

During the quarters  ended June 30, 1997 and  September  30,  1997,  the Company
overstated  and  (understated)  the  accretion  of preferred  stock  discount by
approximately  $305,000 and (720,000),  respectively.  Accordingly,  the average
common share  amounts have been  restated.  Such  restatement  had the effect of
decreasing  the loss per share  amounts by $0.05 for the quarter  ended June 30,
1997,  and  increasing the loss per share amounts by $0.15 for the quarter ended
September 30, 1997.

As discussed  in Note 3, the Company  sold all of its stock  holdings in Morning
Star  effective  December  31,  1997.  As a result,  the Company  recognized  an
extraordinary  gain of approximately  $536,000 during the quarter ended December
31, 1997.
                                                                                             

</FN>
</TABLE>

                                      -F36-

<PAGE>

                      TELEGEN CORPORATION AND SUBSIDIARIES
                      ------------------------------------

              UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

                             AS OF DECEMBER 31, 1997

                    AND FOR THE YEAR ENDED DECEMBER 31, 1997





<PAGE>


<TABLE>
TELEGEN CORPORATION AND SUBSIDIARIES
PRO FORMA BALANCE SHEET

<CAPTION>
                                                                                  Unaudited
                                                                      ------------------------------
                                                                        Pro Forma
                                                                       Adjustments
                                                                      -------------    
                                                                       Less amounts
                                                       December 31,    attributable
                                                         1997, as       to Telegen     Pro forma
                                                        report on     Communications   December 31,
                                                        Form 10-K      Corporation          1997
                                                        ----------    -------------    ------------
<S>                                                     <C>           <C>              <C>
                         ASSETS
Current assets:
 Cash and cash equivalents                              $  275,891    $                $    275,891 
 Accounts receivable:                                   
  Trade                                                 
  Related parties                                          213,121                          213,121
  Other                                                     27,813                           27,813
 Inventory                                                  75,760          (75,760)             --
 Prepaid expenses and other current assets                  17,664                           17,664
                                                        ----------    -------------    ------------
   Total current assets                                    610,249          (75,760)        534,489
                                                        
Property and equipment, net                              1,546,183         (128,204)      1,417,979
Other assets                                                75,182                           75,182
                                                        ----------    -------------    ------------
                                                        $2,231,614    $    (203,964)   $  2,027,650
                                                        ==========    =============    ============
                                                        
            LIABILITIES AND SHAREHOLDERS' EQUITY                    
                                                        
Current liabilities:                                    
 Convertible notes payable                              $   75,000    $                $     75,000
 Accounts payable                                        1,571,104         (122,726)      1,448,378
 Accrued payroll and related taxes                         964,046         (100,000)        864,046
 Accrued expenses                                           99,095                           99,095
 Deferred rent                                              46,975                           46,975
 Dividend payable                                          145,146                          145,146
                                                        ----------    -------------    ------------
   Total current liabilities                             2,901,366         (222,726)      2,678,640
                                                        
 Capital lease                                                  --                               --
 Convertible notes payable                                 500,000                          500,000
                                                        ----------    -------------    ------------
     Total liabilities                                   3,401,366         (222,726)      3,178,640
                                                        ----------    -------------    ------------
Equity put options on common stock                         300,000               --         300,000
                                                        ----------    -------------    ------------
Shareholders' equity (deficit):                         
                                                        
 Common stock                                           16,031,336                       16,031,336
 Additional paid-in capital                              4,133,640                        4,133,640
 Accumulated deficit                                   (21,615,966)          18,762     (21,615,966)
                                                       -----------    -------------    ------------
   Total shareholders' (deficit) equity                 (1,450,990)          18,762      (1,450,990)
                                                       -----------    -------------    ------------
                                                        $2,231,614    $    (203,964)   $  2,027,650
                                                       ===========    =============    ============
                                                        
<FN>
                                             
See accompanying notes to these pro forma financial statements

</FN>
</TABLE>

                                               -37-

<PAGE>
<TABLE>

TELEGEN CORPORATION AND SUBSIDIARIES
PRO FORMA STATEMENTS OF OPERATIONS

<CAPTION>


                                                                                                 Unaudited
                                                                              ----------------------------------------------
                                                                                 Pro Forma Adjustments
                                                                              ------------------------------
                                                              For the year  
                                                                 ended                        Less amounts   
                                                              December 31,    Less amounts    attributable to
                                                                1997, as     attributable to     Telegen        Pro forma
                                                                report on     Morning Star    Communications   December 31,
                                                                Form 10-K      Multimedia       Corporation        1997
                                                              ------------    ------------    ------------    ------------
<S>                                                           <C>             <C>             <C>             <C>
         Revenues:
          Sales of products                                   $    463,486    $               $   (463,486)           --
          Contract services                                        574,916        (574,916)           --
                                                              ------------    ------------    ------------    ------------
                                                                 1,038,402        (574,916)       (463,486)           --
                                                              ------------    ------------    ------------    ------------

         Cost of goods sold                                       (234,292)           --           234,292            --
         Cost of contract services                                 (93,793)         93,793            --
                                                              ------------    ------------    ------------    ------------
                                                                  (328,085)         93,793         234,292            --
                                                              ------------    ------------    ------------    ------------

             Gross profit (loss)                                   710,317        (481,123)       (229,194)           --

         Operating expenses:
          Selling and marketing                                  1,368,767         (95,949)       (323,018)        949,800
          Research and development                               4,400,036      (1,088,337)       (623,859)      2,687,840
          General and administrative                             5,553,209        (814,442)     (1,208,081)      3,530,686
                                                              ------------    ------------    ------------    ------------
             Loss from operations                              (10,611,695)     (1,517,605)     (1,925,764)     (7,168,326)

         Other income (expense):
          Interest income                                           29,169            --              --            29,169
          Interest expense                                         (89,364)           --              --           (89,364)
          Other                                                   (109,098)           --              --          (108,098)
                                                              ------------    ------------    ------------    ------------

             Loss before minority interests and
             extraordinary gain                                (10,780,988)     (1,517,605)     (1,925,764)     (7,337,619)

         Minority interests in subsidiary net loss                 325,077            --              --           325,077
                                                              ------------    ------------    ------------    ------------

             Loss before extraordinary gain                    (10,455,911)     (1,517,605)     (1,925,764)     (7,012,542)

         Extraordinary gain on sale of subsidiary                  536,179            --          (133,000)        669,179
                                                              ------------    ------------    ------------    ------------
             Net loss                                         $ (9,919,732)   $ (1,517,605)   $ (2,058,764)   $ (6,343,363)


         Net loss per common share attributable
         to common shareholders:
           Basic:
            Loss before extraordinary gain                    $      (2.11)   $      (0.27)   $      (0.37)   $      (1.14)
            Extraordinary gain                                $       0.10    $       --      $       --      $       --

             Net loss                                         $      (2.01)   $      (0.27)   $      (0.37)   $      (1.14)
                                                              ============    ============    ============    ============

           Diluted:
            Loss before extraordinary gain                    $      (2.11)   $      (0.27)   $      (0.37)   $      (1.14)
            Extraordinary gain                                $       0.10    $       --      $       --      $       --

             Net loss                                         $      (2.01)   $      (0.27)   $      (0.37)   $      (1.14)
                                                              ============    ============    ============    ============

         Weighted average common shares outstanding              5,547,015       5,547,015       5,547,015       5,547,015
                                                              ============    ============    ============    ============
<FN>

See accompanying notes to these pro forma financial statements
</FN>
</TABLE>
                                      -38-

<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS


1. On December 31, 1997,  the Company  entered into a Stock  Purchase  Agreement
with  Morning  Star  Acquisition  Corporation,  Inc.  (MAC)  to sell  all of the
outstanding stock of its wholly owned subsidiary,  Morning Star Multimedia, Inc.
(MSM) to MAC for $200,000 and for royalty  streams to be paid to the Company for
a period of two (2) years from  December 31, 1997 of Ten Percent  (10%) and Five
Percent (5%) of certain gross sales of MSM.

In  addition,  on April 1, 1998,  the Company  entered  into a agreement to sell
substantially  all of the  assets of  Telegen  Communications  Corporation,  the
Company's  telecommunications  subsidiary  (TCC), to an affiliate of the Company
for $500,000 and the rights of royalty streams on certain TCC products for up to
three (3) years. The buyer assumed certain  liabilities  totaling  approximately
$223,000.  The Company has received a deposit of $350,000 in cash as part of the
sale  price.  The  remaining  $150,000  will be paid in an note with six monthly
installments  of $25,000 plus  interest at 6%  commencing on September 15, 1998.
The  gain of  $133,000  was  calculated  without  regard  to the  $150,000  note
receivable  and royalty  rights and will be  recorded  in the second  quarter of
1998.

In accordance  with Rule 11.02 under  Regulation S-X certain pro forma Financial
information is required to be presented  herein.  The Pro Forma Balance sheet is
as of December 31, 1997,  which is the most recent date for which a consolidated
balance sheet of the Company was filed.  The Pro Forma  Statements of Operations
have been prepared as of December 31, 1997, the most recent fiscal year.

2. The Pro Forma  Statement of Operations  for the year ended  December 31, 1997
reflect the removal  from the  Company's  reports for such period the portion of
sales and  expenses  attributable  to the  operation  of MSM and TCC  previously
consolidated  in the  Company's  financial  statements,  resulting  in pro forma
statements  of  operations  for  such  period  as if MSM and TCC had not  been a
subsidiaries thereof for such period.

3. The Pro Forma Balance Sheet as of December 31, 1997, reflects  adjustments to
the asset, liability,  and equity accounts as previously reported by the Company
by removing  the  applicable  portions of Telegen  Communications  Corporation's
assets, liabilities, and equity positions.


                                      -39-
<PAGE>
<TABLE>


Exhibit Number                          Description                                       Page
--------------    --------------------------------------------------------------      -------------
<S>               <C>                                                                 <C>
     2.1*         Stock Purchase Agreement Among Morning Star Acquisition, Inc.,
                  Morning Star Multimedia,  Inc., and Telegen  Corporation dated
                  December 31, 1997

     2.2          Asset Purchase of TCC Agreement by and between Synercom,  Inc.
                  and Telegen Corporation dated April 1, 1997

                  Certain  exhibits  and  schedules to Exhibit 2.2 are listed on
                  page 23 thereto  and the  Registrant  agrees to  furnish  them
                  supplementally to the Securities and Exchange  Commission upon
                  request.

     3.1**        Articles of Incorporation of Telegen  Corporation dated August
                  30, 1996  [formerly  known as Solar Energy  Research  Corp. of
                  California]

     3.2**        Certificate of Amendment to the Articles of  Incorporation  of
                  Telegen  Corporation dated October 28, 1996 [formerly known as
                  Solar Energy Research Corp. of California]

     3.3+         Certificate  of  Determination  with respect to the  Company's
                  outstanding Series A Preferred Stock filed with the California
                  Secretary of State on March 20, 1997

     3.4**        Bylaws of Telegen Corporation

     3.5          Certificate of Amendment of Bylaws effective August 6, 1997

     4.1          Form of Convertible  Promissory  Note issued by the Company in
                  November 1997

     10.1**       Service Agreement between MCI  Telecommunications  Corporation
                  and Telegen Communications Corporation

     10.2**       Agreement among Telegen  Communications  Corporation,  Telegen
                  Display  Laboratories,  Inc., Transtech Electronics Pte, Ltd.,
                  and IPC Corporation, Ltd., dated May 30, 1996

<PAGE>

Exhibit Number                          Description                                       Page
--------------    --------------------------------------------------------------      -------------
     10.3**       Manufacturing  License Agreement among Telegen  Communications
                  Corporation,  Telegen Display  Laboratories,  Inc.,  Transtech
                  Electronics  Pte, Ltd., and IPC  Corporation,  Ltd., dated May
                  30, 1996

     10.4**       Lease Agreement  between  Metropolitan  Life Insurance Company
                  and Telegen  Corporation for premises  located in Foster City,
                  California

     10.5**       Lease Agreement  between  Metropolitan  Life Insurance Company
                  and Telegen  Corporation for premises located in Redwood City,
                  California

     10.6**       Warrant Certificate of Telegen Display  Laboratories,  Inc. by
                  and between Telegen Display Laboratories,  Inc., and W. Edward
                  Naugler,  Jr., to purchase  500,000  shares of Common Stock of
                  Telegen Display Laboratories, Inc.

     10.7**       License and Stock  Purchase  Agreement by and between  Telegen
                  Communications  Corporation and Telegen Display  Laboratories,
                  Inc. effective as of May 2, 1996

     10.8***      Shareholder  Agreement  between  Janmil  Holdings  PTE LTD and
                  Telegen Communications Corporation dated June 4, 1997

     10.9+        Subscription  Agreement For 8% Convertible  Preferred Stock by
                  and between  Telegen  Corporation  and Silenus  Limited  dated
                  March 24, 1997

     10.10++      Amendment  Agreement  to 8%  Convertible  Preferred  Stock  of
                  Telegen Corporation dated July 22, 1997

     10.11        Form of Subscription  Agreement for the Company's Common Stock
                  financing August, 1997

     10.12        Form of Subscription  Agreement for the Company's Common Stock
                  and Warrant Financing October, 1997

     10.13        Form of Subscription  Agreement for the Company's  Convertible
                  Note and Warrant Financing November, 1997


     10.14        Form of $2.25  Warrant  issued to  certain  purchasers  in the
                  Common Stock Financing August, 1997

     10.15        Form of $4.00  Warrant to Purchase  Common Stock issued by the
                  Company to certain  purchasers in the Common Stock and Warrant
                  Financing October, 1997

     10.16        Form of $0.01  Warrant  to  Purchase  Common  Stock  issued to
                  certain  purchasers in the Common Stock and Warrant  Financing
                  October, 1997

<PAGE>

Exhibit Number                          Description                                       Page
--------------    --------------------------------------------------------------      -------------
     10.17        Form of $2.25  Warrant to Purchase  Common Stock issued by the
                  Company  to certain  purchasers  in the  Convertible  Note and
                  Warrant Financing November, 1997

     10.18        Employment Agreement by and between the Company and Jessica L.
                  Stevens dated May 3, 1990

     10.19        Employment  Agreement  by and  between  the Company and Bonnie
                  Crystal dated May 4, 1990.

     10.20        Employment  Agreement by and between the Company and Warren M.
                  Dillard dated November 1, 1993.

     10.21        Employment  Agreement  by and  between the Company and Fred Y.
                  Kashkooli dated October 31, 1997

     10.22        Exchange  Offer  Agreement  by and  between  the  Company  and
                  certain holders of Common Stock dated March 24, 1998

     11.1         Statement Re Computation of Per Share Earnings

     12.1         Statement Re Computation of Ratios

     21.1         Subsidiaries of the Registrant

     24.1+++      Power of Attorney

     27.1         Financial Data Schedule


<FN>
*    Incorporated  by  reference  herein to the 8-K filed by the  Registrant  on
     January 15, 1998
**   Incorporated  by reference  herein to the 10-K filed by the  Registrant  on
     March 31, 1997 and amended on April 9 and April 30,1997
***  Incorporated by reference herein to the 8-K filed by the Registrant on July
     8, 1997
+    Incorporated  by  reference  herein to the 8-K filed by the  Registrant  on
     March 25, 1997
++   Incorporated  by  reference  herein to the 8-K filed by the  Registrant  on
     August 11, 1997
+++  Incorporated by reference in the signature page herein.

</FN>
</TABLE>