SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-K/A

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
    FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 COMMISSION FILE NUMBER 0-2564

                         TELESOURCE INTERNATIONAL, INC.

             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

--------------------------------------------------------------------------------
           Delaware                          6770                59-3671568
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State or other jurisdiction of   PRIMARY STANDARD INDUSTRIAL   I.R.S. Employer
Incorporation or organization    CLASSIFICATION CODE NUMBER   Identification No.
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               REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
                                 (630) 620-4787

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                     COMMON STOCK, PAR VALUE $.01 PER SHARE
                              (Title of each class)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                      NONE

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K 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 the
Form 10-K. [X]

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2 of the Act).
Yes [_] No [X]

The  aggregate   market  value  of  the   Registrant's   voting  stock  held  by
non-affiliates  of  the  Registrant  on  December  31,  2003  was  approximately
$5,310,250.

Number of shares of $0.01 par value Common Stock  outstanding as of the close of
business on June 11, 2004: 20,500,000 shares.


<PAGE>


                                TABLE OF CONTENTS

                                                                            PAGE
                                     PART I

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

Item 2.   Properties ........................................................ 10

Item 3.   Legal Proceedings ................................................. 11

Item 4.   Submission of Matters to a Vote of Security Holders ............... 11

Item 4A   Executive Offices of the Registrant................................ 12

                                     PART II

Item 5.   Market for the Registrant's Common Equity and Related
              Stockholder Matters............................................ 13

Item 6.   Selected Financial Data ........................................... 15

Item 7.   Management's Discussion and Analysis of Results of Operations
              and Financial Condition ....................................... 15

Item 7A   Quantitative and Qualitative Disclosures About Market Risk......... 34

Item 8.   Financial Statements and Supplementary Data .......................F-1

Item 8A   Equity Compensation Plan Information......... ..................... 40

Item 9.   Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure ...................................... 41

Item 9A   Controls and Procedures............................................ 41

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant................. 42

Item 11.  Executive Compensation ............................................ 43


                                       2
<PAGE>

Item 12.  Security Ownership of Certain Beneficial Owners and Management..... 44

Item 13.  Certain Relationships and Related Transactions .................... 45

Item 14.  Principal Accountant Fees and Services ............................ 46

                                     PART IV

Item 15.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 47

This Amendment No. 1 to Form 10-K for the fiscal year ended December 31, 2003 of
Telesource  International,  Inc. is being filed to include the audited financial
statements for the fiscal year ended December 31, 2003,  and  disclosures  under
Section 8 and 9A which were  previously  excluded  from the Form 10-K  filing on
April 15, 2004.


PART I

ITEM 1. BUSINESS

GENERAL

Telesource  International  is  an  international  engineering  and  construction
company,  constructing  single family  homes,  airports,  and radio towers,  and
engaged in the construction and operation of energy  conversion power plants. In
Tinian,  an island in the Commonwealth of the Northern  Mariana Islands,  a U.S.
Territory,  Telesource  operates a diesel fired electric power  generation plant
for the sale of electricity to the local power grid. Telesource  International's
facility in Lombard, Illinois,  handles the procurement,  export and shipping of
U.S.  fabricated products for use by its subsidiaries or for resale to customers
in the southwest Pacific.

Telesource International conducts its operations through three subsidiaries: (i)
Telesource CNMI,  handles  construction and management of the energy  conversion
facilities in the  Commonwealth  of the Northern  Mariana Islands and operates a
branch office in Guam; (ii) Commsource International,  which is an international
export company that  facilitates  the purchase of equipment in the U.S.  (during
2001, the business activities of Commsource were transferred to Telesource); and
(iii) Telesource Fiji, Limited,  that handles the power generation activities in
Fiji. Telesource's Palau operations are carried out by Telesource International.

Telesource has three main operating segments:  construction services,  brokerage
of goods and services and power generation and construction of power plants. The
power generation activities commenced in March 1999.

Telesource  International,  Inc.  was  formed  in  1994  to  facilitate  various
intra-corporate  activities and, until July 1999, was a wholly owned  subsidiary
of Sayed Hamid  Behbehani & Sons Co.  W.L.L.  ("SHBC"),  a  Kuwait-based  civil,
electrical and mechanical construction company.


                                       3
<PAGE>

Construction Services
---------------------

Telesource  International's  Micronesian  construction  services  are  primarily
carried out through Telesource  International's  Mariana subsidiary,  Telesource
CNMI.

Active Construction Projects and Services
-----------------------------------------

In  January  2003,  Telesource  received  a Notice of Award  for a $5.9  million
contract for  construction  services on the second  phase of the Palau  National
Capitol  Relocation  Project.  Funding for the project has come  through a grant
from the Government of Taiwan. The project is for the supply and installation of
claddings  and  ornamental  trims to the  President's  Building,  the  Executive
Building, the Legislative Building, and the Judiciary Building. The project also
includes the construction of a mechanical and electrical yard, a drainage system
with wastewater  handling and a pumping station.  The contract is valued at $5.9
million and was 14.6% complete at December 31, 2003. This project is expected to
be completed by August 2004.

In January 2003, Telesource agreed to deliver heavy equipment to Guam for use by
the Federal  Emergency  Management Agency and the Guam Power Authority to assist
in typhoon  recovery efforts underway on Guam. The Guam Power Authority issued a
purchase  order  to  lease  equipment  to be  used  in the  cleanup  efforts  in
connection with super typhoon  Pongsona,  which severely  damaged the electrical
distribution  network  on Guam.  Telesource  airlifted  bucket  trucks  owned by
Telesource  from the U.S.  mainland  to Guam.  The  trucks  were used to replace
overhead  electrical lines damaged during the super typhoon.  The contract value
for this  assistance  amounted to $918,933 and was  completed  during the second
quarter of 2003.

In March 2003, Telesource received a Notice of Award for a $5.7 million contract
to expand an existing radio relay broadcast  station located in the Commonwealth
of Northern Mariana Islands for an agency of the U.S.  Government  Department of
State; the Broadcasting Board of Governors  International  Broadcasting  Bureau.
The existing station was constructed by Telesource and began operations in 2000.
The  expansion of this radio relay station is for the addition of two short wave
antennas. This contract was 53.5% complete at December 31, 2003, and is expected
to be completed by mid-2004.

In March 2003,  Telesource was awarded a 20-year,  multi-million  dollar, energy
conversion  agreement  with the Fiji  Electric  Authority  for the operation and
maintenance of three diesel power plants with generation  capacity of 78 MW. The
three power plants are located in Kinoya, Vuda and Labasa, Fiji.  Telesource and
the Fiji Electric  Authority have  completed and executed the Energy  Conversion
Agreement,  which covers the take-over  and  operation of two of the  facilities
with the third facility to be taken over during 2004.

In February 2002, through a competitive bidding process,  Telesource was awarded
a contract to construct a 334-bed  prison in  accordance  with the  requirements
specified by the U.S.  Department  of Justice.  This contract is valued at $17.8
million and was 66.0%  complete as of December 31, 2003.  The prison  project is
expected to be completed in late 2004.

In May 2002,  Telesource  received a contract to design and  construct a 10-year
landfill in the Republic of Palau.  In December 2002, the scope of this contract
was modified to call for the


                                       4
<PAGE>

design and  permiting of a 50-year  landfill and  construction  of a road to the
landfill.  The  contract  is  valued at $1.6  million  and was 51%  complete  at
December 31, 2003. The landfill project is expected to be completed in mid 2004.

Completed Construction Projects and Services
--------------------------------------------

In July 2002,  Telesource received a Notice of Award for a contract to construct
the New Belau National Museum project in the Republic of Palau.  Funding for the
project  has come  through a grant from the  Government  of Taiwan.  The project
consists of the renovation of the small original  Museum building and the design
and construction of a museum building totaling approximately 15,500 square feet.
The  project  also  includes  the  development  of an outdoor  amphitheater  and
terraced seating into the natural grade of the project site. The design phase of
the project began in late July 2002 with physical construction starting in March
2003.  The contract is valued at $2.3 million and was 75.5% complete at December
31, 2003. The museum project is expected to be completed in mid 2004.

In August 2001, through a competitive bidding process,  Telesource International
was awarded a contract to construct a radio broadcast  station in Lebanon.  This
contract is valued at $1.5 million and was completed as of December 31, 2002.

In December 2001, through a competitive bidding process,  Telesource was awarded
a contract  to install an  overhead  transmission  line on the island of Tinian.
This  contract is valued at $1.0  million and was  completed  as of December 31,
2002.

In 2000,  through  a  competitive  bidding  process,  Telesource  was  awarded a
contract to expand two existing power  generation  stations in Fiji. The project
covered the  expansion of the building  housing the power plant and the addition
of two power  generation  engines  at each of the two  sites.  The  total  power
production  capacity to be added for both sites is  approximately  16 Mwh.  This
project was completed as of December 31, 2002.

In 2000,  through a competitive  bidding process,  Telesource  International was
awarded a contract to construct a 7,800 linear foot airport runway on the Island
of Tinian.  This contract is valued at $19.0 million and was completed March 11,
2004.

In 1999,  through a competitive  bidding process,  Telesource  International was
awarded a contract to build 45 housing  units for the Northern  Mariana  Housing
Agency, a government agency. These are government-subsidized, low-income housing
units. This project was completed as of December 31, 2002.  Management  believes
that there may be additional  contracts or phases to this project in the future,
though there can be no assurances that  additional  phases will be contracted or
that  Telesource  International  would be  successful  in being awarded any such
contract.

Specialized Construction Processes
----------------------------------

Building an airport or a broadcasting facility is not like the construction of a
more  conventional  building.  Because  of the high  levels  of radio  frequency
emissions or the generation of electrical


                                       5
<PAGE>


currents,  every part of the structure is integrated into the overall design and
plays a role in making the overall facility safer and more efficient.

The building of these specialized  structures  requires  additional  engineering
skills, the knowledge of specialized  construction  techniques and relationships
with  specialized  subcontractors.  The  situation is made more  difficult  when
building offshore,  where distance from raw materials and subcontractors becomes
a risk factor.

Past and Present Power Generation Construction Projects
-------------------------------------------------------

Telesource International's power generation business involves:

     *    Building the power plants

     *    Operating the power plants for a contracted period of time

     *    Selling wholesale power to the client to be distributed on their power
          grid

     *    The transfer of the  ownership of the  properties to the client at the
          end of the contract.

In 1997,  a  governmental  agency  located in the  Commonwealth  of the Northern
Mariana Islands, awarded Telesource CNMI a contract to design, build and operate
a 10-30 megawatt power plant.

The initial 10 megawatts  are now on-line,  completed  within budget and on time
and the plant has been  operational  since March 1999.  The second  phase of the
project was completed in March 2000,  also within budget and on time.  The third
phase will be  constructed  at  Telesource  CNMI's  discretion as the demand for
power  increases.   Accordingly,  if  power  demand  fails  to  meet  Telesource
International's projections, this phase may never be constructed.

In 2000,  Telesource  International  was contracted to expand two existing power
stations  in  Fiji,  and to add  additional  power  generators  with a  combined
production  capacity of 32 Mwh for a fixed price of approximately $12.1 million.
This project was completed in late 2001 at a cost of $11.1 million.  Performance
for this contract was divided between  Telesource  International  and Telesource
Fiji, Ltd., a subsidiary of Telesource International,  based on the location and
type of service to be performed.  The contract with the customer  reflected this
arrangement.  This contract was a performance  pay contract  (i.e., as specified
milestones were reached,  Telesource  billed the customer and receives  payments
within 30 days).

Power Plant Operation and Maintenance
-------------------------------------

Our agreement with the  governmental  agency in the Commonwealth of the Northern
Mariana  Islands  is an  example  of a power  plant  operation  and  maintenance
project. Under the terms of this agreement,  Telesource  International designed,
financed and built the power plant. Telesource  International obtained financing
for the project through a $25,000,000 line of credit from the Commercial Bank of
Kuwait,  New York branch.  For the construction of the first phase of this power
plant, Telesource  International is paid $180,000 per month for ten years by the


                                       6
<PAGE>

governmental agency. Each monthly payment is secured by a promissory note in the
amount of $180,000 issued by the Commonwealth Utilities Corporation.

Telesource  International  has a  20-year  lease on the land on which  the power
plant is built, plus title to the entire plant and a two-month escrow account of
no less than $360,000 on which Telesource International has a first lien. In the
event of the  governmental  agency is unable to meet its  obligations  either to
make payments of monthly maintenance fees or on the promissory notes, Telesource
International may sell, lease, assign or transfer the power plant or any part of
the plant equipment.

In the first phase of the project,  the governmental agency also pays Telesource
a production fee of $.02 per  kilowatt-hour for each  kilowatt-hour  produced on
its  behalf  for the first  5,140,000-kilowatt  hours per  month.  In the second
phase, which added 10-megawatts of capacity,  the governmental agency has agreed
to pay  Telesource  International  an  additional  production  fee of $.065  per
kilowatt-hour produced over the initial  5,140,000-kilowatt  hours per month. In
addition,  the governmental  agency pays Telesource a service fee of $50,000 per
month for operating and maintaining the power plant.

In May 2001, the governmental  agency and Telesource executed Change Order No. 3
to the Tinian Power Plant Contract.  Change Order No. 3 provides a suspension in
the  Escalator  on the  variable  payments  from January 1, 2001 to December 31,
2005.  This Change Order  extends the term of the contract from an expiration of
10 years following  commissioning of the last constructed phase (currently Phase
II was commissioned in March 2000 and therefore the contract was to have expired
in March 2010) to an new expiration  date of March 31, 2020.  Change Order No. 3
does not  include an  expansion  of the power  generation  capacity of the power
plant.  The  power  plant  will  continue  to  operate  at its  current  maximum
generation capacity of 20 Mwh.  Effectively,  the contract has been extended for
an  additional 10 years.  Power rates agreed to under the original  contract and
Change  Order  No. 1 remain  unchanged.  Change  Order  No. 3 does  provide  the
customer  with an early  termination  option  related to the extended  agreement
beginning on March 31, 2010 and  available  annually  thereafter;  however,  the
customer is required to give a six-month notice and to pay an early  termination
fee of  $6,000,000.  Change Order No. 3 prohibits the customer  from  purchasing
power from any source  other than  Telesource  for the first 30 MW. The expanded
agreement  executed  under Change Order No. 3 only extends the power  generation
contract term and does not require  additional  performance by Telesource,  with
respect to construction activities.

Potential Future Power Plant Construction and Power Supply
----------------------------------------------------------

Based on previous experience, management believes there will be a growing demand
for power around the world; however competition and deregulation could eliminate
the  financial  feasibility  of these  projects and thereby  prevent  Telesource
International  from taking  advantage of the expected  growth in demand.  In the
U.S.,  two-thirds of the country's installed plants are 25 or more years old and
need to be replaced and repowered, principally with new gas combustion turbines.
The world's use of electricity  is projected to increase by two-thirds  over the
forecast  horizon,  from 13  trillion  kilowatt  hours  in  1999 to 22  trillion
kilowatt-hours  in 2020. The strongest  growth rates in electricity  consumption
are projected for the developing  world. The most rapid expansion in electricity
use is expected for developing Asia and Central and South


                                       7
<PAGE>

America, with average annual growth rates exceeding 3.5 percent between 1999 and
2020. In the industrialized world,  electricity  consumption is expected to grow
at a more modest pace.  Slower  population and economic  growth,  along with the
market saturation of certain electronic  appliances (such as washers and dryers)
and efficiency  gains from  electrical  appliances  help to explain the expected
slower growth of electricity use in the industrialized nations, although growing
computer usage and the  introduction  of new  electronic  devices could modulate
that trend in the future.  Telesource  International  also  believes  that those
situations  where the local  governments  lack the up-front funding to build the
additional   power  plants  will   represent  an   opportunity   for  Telesource
International  to  find  alternative   solutions  up  to  and  including  having
Telesource  International  locate  the needed  project  financing.  Without  the
additional  energy,   Telesource   International   believes  that  many  of  the
infrastructure upgrades envisioned by local governments will be unable to occur.
In  Telesource  International's  experience,  in  return  for  securing  project
financing  in a  manner  similar  to  that  obtained  for  the  project  in  the
Commonwealth of the Northern Mariana Islands,  local governments will be willing
to enter into  contracts  which  guarantee  Telesource  International  a minimum
amount of power  consumption,  coupled with long-term  operation and maintenance
contracts.

Telesource  International  anticipates  that these  contracts  will generally be
secured by governmental  guarantees,  promissory notes,  liens and collateral on
the land and in the physical power plants.

Sales and Marketing Strategies
------------------------------

Most of Telesource International's  construction projects are obtained through a
public bid process, and clients are either governments or governmental agencies.
In obtaining contracts:

     * Telesource International performs significant market research. Telesource
International  analyzes potential markets,  looking for future building plans or
plans to expand the capital infrastructure.  Telesource International's research
also includes analyzing numerous government documents and reviewing previous and
current requests for bids.

     * Telesource  International  is actively  involved in public relations with
the governments and agencies that might contract for Telesource  International's
services.  Much of this effort is informational,  learning the specific needs of
each  governmental  agency  while  at the same  time  explaining  what  services
Telesource International has to offer.

     * Telesource  International has created and provides to potential clients a
survey to help governmental agencies evaluate whether Telesource International's
resources and services  might be more  efficient and  cost-effective  than their
current system.

Telesource International maintains three full-time salaried marketing executives
to help sales and marketing  efforts;  one in the Illinois  headquarters and two
offshore.

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

The  independent  power  industry has grown  rapidly over the past twenty years.
There are a large number of suppliers in the  wholesale  market and a surplus of
capacity, which has led to intense


                                       8
<PAGE>

competition in this market.  The principal sources of competition in this market
include traditional  regulated utilities that have excess capacity,  unregulated
subsidiaries of regulated utilities,  energy brokers and traders, energy service
companies in the development and operation of energy-producing  projects and the
marketing  of  electric  energy,   equipment  suppliers  and  other  non-utility
generators  like  Telesource  International.  Competition  in this  industry  is
substantially   based  on  price  with   competitors   discovering   lower  cost
alternatives  for  providing   electricity.   The  electric   industry  is  also
characterized by rapid changes in regulations,  which  Telesource  International
expects could continue to increase  competition.  Telesource  International does
not  believe  the  Tinian  power  plant  would  be  significantly   impacted  by
competition  in the  wholesale  energy  market since its revenues are subject to
contracted rates which are substantially fixed for several years.

Telesource International also competes in the market to develop power generation
facilities.  The primary bases of  competition in this market are the quality of
development  plans,  the ability of the  developer  to finance and  complete the
project and the price.  In some  cases,  competitive  bidding for a  development
opportunity is required. Competition for attractive development opportunities is
expected  to be intense  as there are a number of  competitors  in the  industry
interested  in the  limited  number  of  opportunities.  Many  of the  companies
competing  in this  market  have  substantially  greater  resources.  Telesource
International  believes its project development experience and its experience in
creating  strategic   alignments  with  other  development  firms  with  greater
financial and technical resources could enable Telesource to continue to compete
effectively  in  the  development  market  if  and  when  opportunities   arise.
Presently, Telesource International believes there are a number of opportunities
for project  development  worldwide  for  projects  similar to those  previously
developed  by  Telesource.   However,   Telesource  International  is  currently
evaluating  whether it should  seek  development  opportunities  in other  areas
outside of the South Pacific to diversify its activities.

Presently,  there is significant merger and consolidation  activity occurring in
the electric industry. From time to time, Telesource  International may consider
merger and  acquisition  proposals when they appear to present an opportunity to
enhance  stockholder value.  Telesource  International is not involved in any of
these  discussions  or  negotiations  at this time and there can be no assurance
than any appropriate opportunity will present itself.

Energy Regulation
-----------------

Telesource  International's projects are subject to regulation under federal and
local energy laws and  regulations.  Telesource  International is subject to the
requirements  established by its permitting authorities,  i.e. the Department of
Environmental Quality ("DEQ") and the Environmental Protection Agency ("EPA").

Presently, neither the Customer Choice Act nor proposed legislation dealing with
U.S.  energy  policy  directly  impacts  Telesource  International  because  the
legislation and restructuring plan pertain to the retail market or new contracts
in the wholesale market. However, as discussed above,  Telesource  International
could be impacted in the future by, among other things, increases in competition
as a result of deregulation.  Telesource  International  is actively  monitoring
these  developments  in energy  proceedings  in order to evaluate  the impact on
existing projects and also to evaluate new business opportunities created by the
restructuring of the electric industry.


                                       9
<PAGE>

Environmental Regulation
------------------------

Telesource  International's  projects are subject to regulation  under  federal,
foreign and local  environmental  laws and regulations and must also comply with
the applicable laws pertaining to the protection of the  environment,  primarily
in the areas of water and air  pollution.  These  laws and  regulations  in many
cases  require a lengthy  and  complex  process  of  obtaining  and  maintaining
licenses,  permits and approvals from federal and local agencies. As regulations
are enacted or adopted in any of these jurisdictions,  Telesource  International
cannot  predict the effect of compliance  therewith on its business.  Telesource
International's  failure to comply with all applicable requirements could result
in  delays  in  proceeding  with  any  projects  under  development  or  require
modifications  to  operating  facilities.   During  periods  of  non-compliance,
Telesource  International's operating facilities may be forced to shutdown until
the instances of  non-compliance  are  corrected.  Telesource  International  is
responsible   for  ensuring   compliance  of  its  facilities   with  applicable
requirements and, accordingly,  attempts to minimize these risks by dealing with
reputable  contractors and using  appropriate  technology to measure  compliance
with the applicable standards.

Insurance and Bonding
---------------------

Telesource  International  maintains general and excess liability,  construction
equipment,  and workers' compensation insurance;  all in amounts consistent with
industry practices. Telesource International believes its insurance programs are
adequate.

Telesource  International was required to provide bonding for the airport runway
project on the island of Tinian.  This project has partial funding from the U.S.
Government (the Federal Aviation  Administration  "FAA") and consequently,  U.S.
Treasury  Listed Bonding was required.  During 2002,  Telesource was required to
provide bonding for the prison project on the island of Saipan. This project has
partial  funding from the U.S.  Government and therefore,  U.S.  Treasury Listed
Bonding was  required.  In order to secure the  required  bonding,  Telesource's
largest  shareholder,  SHBC,  provided a letter of credit to the surety equal to
100% of the contract value of $17 million. Telesource International's ability to
obtain  additional  surety  bonding  depends  upon its  capitalization,  working
capital,  past performance,  management  expertise and other factors,  which may
change from time to time. Currently Telesource is required to provide collateral
equal to 100% of the surety bond by Telesource International's surety company.

Employees
---------

Telesource  International  presently  employs  196  people,   consisting  of  17
employees in management,  27 engineers and technical  staff members,  15 support
staff  members  and 137  hourly  employees.  All of  Telesource  International's
employees are nonunion  workers,  although  Telesource  International may employ
union subcontractors from time to time.

Ninety percent of Telesource International's project teams include engineers and
technical  staff,  due to the technical  nature of its  construction  contracts.
Working on a power plant,  broadcasting facility or other technical construction
site  requires a higher  level of  expertise  and a greater  attention to safety
issues.


                                       10
<PAGE>

Telesource  International's  non-engineering level employees are hourly workers,
while its engineering and supervisory staffs are on monthly salaries.


ITEM 2. PROPERTIES

Properties
----------

Telesource  International  maintains  leased  office  space and leases  land for
storage  of   construction   equipment.   Telesource   International's   Mariana
subsidiary's  head office in the Commonwealth of the Northern Mariana Islands is
leased for a term which extends through  December 2004. In Fiji, the Republic of
Palau, and the corporate offices in Illinois, Telesource has office space leased
on a month-to-month basis. Management believes its existing arrangements for its
office facilities are adequate.


ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of its business  Telesource becomes involved from time to
time in legal proceedings and claims asserted by and against  Telesource.  It is
the opinion of management that the ultimate disposition of these routine pending
matters will not have a materially adverse impact on the Company.

The   Commonwealth   Port  Authority  (CPA)  and  Telesource  are  currently  in
negotiations  over the final billing for the West Tinian Airport  Project (WTA).
As of December 31, 2003, Telesource has reflected  approximately $1.8 million of
retentions in accounts  receivable related to the WTA. Telesource claims that in
addition  to the  retentions  recorded  under the  original  contract  terms and
related to work performed  through 2003 that it is also due  additional  amounts
for work performed outside of the original scope of the contract. No revenue for
this  additional  work  has  been  reflected  in the  accompanying  consolidated
financial  statements.  Although CPA has  acknowledged  that work was  performed
outside  of  the  original   contract   scope,   it  has  requested   additional
documentation before it will make a final determination regarding payment on the
additional work and the retentions.  Telesource  believes that the resolution of
this matter will not have a material adverse effect on its financial  condition.
No lawsuits have been filed in connection with this matter.

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

None


                                       11
<PAGE>


ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT

The names, ages and backgrounds of Telesource International's executive officers
are as follows:

 Name and Age; Years                     Principal Occupation for Past
 Served as Director                     Five Years; Other Directorships
----------------------        --------------------------------------------------
Khajadour Semikian            Khajadour Semikian,  President,  joined Telesource
Age 50                        International in September 1996. From January 1986
Director Since 1995           to  December  1996,  Mr.  Semikian  was  Assistant
                              General Manager with Sayed Hamid Behbehani & Sons.
                              Mr.  Semikian  has also  served as a director  for
                              Computhink   Incorporated  since  1994,   Telebond
                              Insurance   Corporation   and  Retsa   Development
                              Incorporated  since  1998,  and  as  President  of
                              Telebond Insurance Corporation since 1998.

Nidal Zayed                   Nidal  Zayed,  Executive  Vice  President,  joined
Age 43                        Telesource  International  in January  1996. He is
Director Since 1998           also engaged in the practice of law. He received a
                              law degree from Loyola University School of Law in
                              1985  and  a  B.A.  in   Accounting   from  Loyola
                              University  of  Chicago  in  1982.  He  serves  as
                              Chairman for Computhink  Incorporated and has been
                              a director for Computhink since 1994.

Bud Curley                    Mr. Curley joined Telesource  International as its
Age 40                        Chief Financial  Officer in September 1999.  Prior
                              to September  1999, Mr. Curley served as the Chief
                              Financial  Officer,  Secretary and Executive  Vice
                              President  for  Surety  Capital   Corporation  and
                              Surety Bank,  N.A. from 1996 to 1999. From 1993 to
                              1996,   Mr.  Curley   served  as  Surety   Capital
                              Corporation and Surety Bank, N.A.'s Controller and
                              Senior  Vice   President.   In  1989,  Mr.  Curley
                              received a B.A.  in Business  Administration  from
                              the  University of Texas.  He has also served as a
                              director for Surety Capital Corporation and Surety
                              Bank, N.A. from 1998 to 1999.

Jeff Karandjeff               Mr. Karandjeff joined Telesource  International as
Age 36                        Secretary  in 1997.  From October 1996 to February
                              1997,   Mr.   Karandjeff  was  an  Associate  with
                              Schoenberg,  Fisher,  Newman & Rosenberg,  LTD. He
                              received  a  law  degree  from  Loyola  University
                              School of Law in 1993 and a Bachelors  Degree from
                              Massachusetts Institute of Technology in 1988.


                                       12
<PAGE>


                                     PART II

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

MARKET INFORMATION. On November 1, 2001, Telesource's common stock began trading
on the  Over-the-Counter  Bulletin Board under the symbol "TSCI".  Prior to that
time, Telesource's common stock was not listed for trading.

The  following  table sets forth high and low sales  prices for the common stock
for the periods  indicated as reported by the  Over-the-Counter  Bulletin  Board
since November 1, 2001:

                                                HIGH       LOW
                                               ------     -----
        2003
        First Quarter......................     1.70       1.25
        Second Quarter.....................     1.50       1.45
        Third Quarter......................     1.50       1.10
        Fourth Quarter.....................     1.10       0.55

        2002
        First Quarter......................     2.45       1.50
        Second Quarter.....................     1.75       0.82
        Third Quarter......................     1.62       1.30
        Fourth Quarter.....................     1.40       1.35

As of June 11, 2004, the latest stock quote for Telesource was $1.15 per share.

UNREGISTERED SALES OF SECURITIES.

We issued unregistered  securities in the following transactions during 2003 and
for the five months ended May 31, 2004:

     o    On December  29, 2003 we issued  2,000,000  shares of our common stock
          pursuant to an exemption under  Regulation S of the Securities Act for
          $2,000,000.

     o    On January 27,  2004 we issued  1,000,000  shares of our common  stock
          pursuant to an exemption under  Regulation S of the Securities Act for
          $1,000,000

     o    On April 20,  2004 we issued  1,000,000  shares  of our  common  stock
          pursuant to an exemption under  Regulation S of the Securities Act for
          $1,000,000

     o    On April 28,  2004 we issued  1,000,000  shares  of our  common  stock
          pursuant to an exemption under  Regulation S of the Securities Act for
          $1,000,000

     o    On May 10, 2004 we issued  500,000 shares of our common stock pursuant
          to an exemption under Regulation S of the Securities Act for $500,000


                                       13
<PAGE>


HOLDERS. As of May 31, 2004, there were 192 shareholders of record.

DIVIDENDS.  Telesource began paying dividends during 2003 on the preferred stock
which was issued on the following dates:

            Date Preferred Stock      Number of Shares of
                 Was Issued         Preferred Stock Issued
           -----------------------  ----------------------

           December 16, 2002                     2,000,000
           March 6, 2003                         2,000,000
           March 20, 2003                          666,666
           July 18, 2003                           466,666
           August 15, 2003                       1,666,667
           August 19, 2003                         333,333
           October 6, 2003                         666,667
           November 18, 2003                     1,333,333
           December 8, 2003                        333,333
           December 15, 2003                       333,334
           Total                                 9,799,999

Holders of Series A Preferred  Stock are entitled to receive  dividends when and
as declared by the Board of Directors. Telesource is precluded from declaring or
paying dividends on common stock unless all required dividends have been paid in
full on Series A  Preferred  Stock.  As of December  31,  2003,  Telesource  has
declared  $569,475 of  dividends  on the Series A  Preferred  Stock and has paid
$365,117.

No dividends  were paid on  Telesource's  common stock during 2003 or 2002,  and
Telesource does not anticipate that it will pay dividends on its common stock in
the foreseeable future.


                                       14
<PAGE>


ITEM 6. SELECTED FINANCIAL DATA
        (IN THOUSANDS, EXCEPT PER SHARE DATA)

The following selected financial data as of and for the years ended December 31,
2003, 2002, 2001, 2000, and 1999, has been derived from the audited consolidated
financial  statements of Telesource  International,  Inc. and subsidiaries.  The
consolidated financial statements as of December 31, 2003 and 2002, and for each
of the years in the  three-year  period ended  December  31, 2003,  are included
elsewhere  in this Form 10-K.  This  selected  financial  data should be read in
conjunction  with the  consolidated  financial  statements and the notes thereto
included elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                                                                       Twelve Months Ended
                                                                                           December 31,
                                                                 -----------------------------------------------------------------
                                                                    2003          2002          2001          2000          1999
                                                                 ---------     ---------     ---------     ---------     ---------
<S>                                                              <C>           <C>           <C>           <C>           <C>
Income Statement Data:  ($ in 000's)
   Construction revenues                                         $  14,381     $  16,566     $  11,824     $   7,810     $   1,079
   Construction revenues - related party                                --           838            --           852         2,181
   Construction revenues on power plants                                --            --         4,053           536            --
   Service fees - power generation plant                             2,968         1,130           858           692           305
   Sales, net                                                           44           307           131           872           161
   Sales, net - related party                                           --            90            --           198           181
   Other revenues                                                    2,633         1,390         1,420         1,545         1,366
   Other revenues - related party                                       --            --            --            84           815
                                                                 ---------     ---------     ---------     ---------     ---------
            Gross revenues                                          20,026        20,321        18,286        12,590         6,088

   Construction costs                                               15,871        15,913        12,382         7,145         2,932
   Construction costs on power plants                                   --            --         3,504           496            --
   Operations & maintenance costs - power generation plant           2,589         1,224         1,159           991           638
   Other cost                                                          697
                                                                 ---------     ---------     ---------     ---------     ---------
            Gross profit (loss)                                        869         3,184         1,241         3,958         2,518

   Salaries and employee benefits                                    1,646         1,702         1,849         1,580           693
   Occupancy and equipment                                             381           342           561           535           246
   General and administrative expenses                               3,983         4,258         3,735         3,359         1,480
   Impairment of long-lived asset                                       76            --            --            --            --
                                                                 ---------     ---------     ---------     ---------     ---------
            Operating (loss) income                                 (5,217)       (3,118)       (4,904)       (1,516)           99
   Other income (expense):
       Interest income                                                  --             3            33           125           251
       Interest expense                                             (1,416)       (1,791)       (2,399)       (2,427)       (1,132)
       Other income, net                                                72            20            44            80            14
                                                                 ---------     ---------     ---------     ---------     ---------
             Total other expense                                    (1,344)       (1,768)       (2,322)       (2,222)         (867)
   Loss before taxes                                                (6,561)       (3,118)       (7,226)       (3,738)         (768)
   Income tax expense                                                   68            --            19             4            --
                                                                 ---------     ---------     ---------     ---------     ---------
   Net loss                                                      $  (6,629)    $  (4,886)    $  (7,245)    $  (3,742)    $    (768)
                                                                 =========     =========     =========     =========     =========

Preferred dividends                                                    570            --            --            --            --
                                                                 ---------     ---------     ---------     ---------     ---------
Net loss applicable to common stockholders                       $  (7,199)       (4,886)    $  (7,245)    $  (3,742)    $    (768)
                                                                 =========     =========     =========     =========     =========

Common Share Data:
   Net loss per share                                                (0.48)        (0.33)        (0.52)        (0.36)        (0.08)
   Weighted average common shares outstanding (in 000's)            15,016        15,000        13,849        10,356        10,000
   Period end shares outstanding (in 000's)                         17,000        15,000        15,000        13,000        10,000

Balance Sheet Data:
   Total assets                                                     24,783        25,160        24,022        30,496        22,886
   Working capital deficit                                          (5,558)      (20,370)      (14,332)       (3,400)       (3,400)
   Short-term debt                                                   9,242        20,700        15,500         7,127           500
   Long-term obligations                                            20,310        17,000        20,000        27,021        28,000
   Shareholders' deficit                                           (13,967)      (23,601)      (18,566)      (13,534)      (12,610)

Performance Data:
   Loss on total assets                                              (26.8)%       (19.4)%       (30.2)%       (12.3)%        (3.4)%
Capital Ratio:
   Quick ratio                                                        69.9%         35.9%         36.6%         80.0%         54.6%
</TABLE>


                                       15
<PAGE>

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

HIGHLIGHTS

Revenues for the year ended  December 31, 2003 were $20.0  million,  compared to
$20.3 million and $18.3 million for the years ended  December 31, 2002 and 2001,
respectively.  Net loss was $6.6 million for 2003,  an increase of $1.7 million,
or 35.7%,  from the loss of $4.9 million for 2002.  For 2001,  net loss was $7.2
million.  Basic  and  diluted  net loss per  share was $0.48 per share for 2003,
compared to $0.33 per share for 2002 and $0.52 per share for 2001.

Liquidity and Going Concern

As of December 31, 2003, the Company's current liabilities  exceeded its current
assets by $5.6 million.  The Company relies heavily on bank financing to support
is operations and its ability to refinance its existing bank debt is critical to
provide  funding to satisfy the  Company's  obligations  as they  mature.  As of
December 31, 2003 the Company had total outstanding debt of $29,552,417 of which
$9,242,195  is  due  in  2004.  As of  December  31,  2003  the  Company  had an
accumulated   deficit  of  $36,630,897  and  total   stockholders'   deficit  of
$13,966,515.

The Company incurred  operating losses of $5,217,223,  $3,118,300 and $4,903,676
for the years ended December 31, 2003, 2002 and 2001, respectively.  The Company
incurred net losses of $6,629,441, $4,886,397 and $7,245,774 for the years ended
December 31, 2003, 2002 and 2001, respectively.

Cash used in operating activities was $6,283,959,  $2,031,793 and $4,382,413 for
the years ended December 31, 2003, 2002 and 2001,  respectively.  Funds provided
by net  borrowings  and stock  sales  amounted  to  $8,187,300,  $2,200,000  and
$3,351,882 for the years ended December 31, 2003, 2002 and 2001, respectively.

The Company's  net working  capital  deficiency,  total  stockholders'  deficit,
recurring losses and negative cash flows from operations raise substantial doubt
about  the  Company's  ability  to  continue  as a going  concern.  During  2003
management  worked to address the going  concern issue and will continue to work
to address these  uncertainties  by continuing its efforts to increase  revenues
and control costs with the goal of achieving  profitability.  Management  raised
$11.7 million  through the issuance of preferred  stock during 2003 and also was
able to raise $2.0 million  through the sale of common stock during 2003.  As of
the May 31,  2004,  the Company  generated  an  additional  $3.5 million in cash
through the sale of common stock and expects to sell an additional  $1.7 million
worth of stock in June  2004.  In each case  such  sales  were made in  private,
unregistered  sales of the Company's  securities.  The additional  equity raised
during 2004 will be used to pay down debt. Most of the debt  obligations  coming
due during 2004 are project  financing  based and the Company expects to repay a
protion of these  obligations  with cash  generated  through the  collection  of
project  receivables and billings.  These collections on the projects along with
the expected  additional  equity are believed by  management to be sufficient to
cover Telesource's 2004 obligations. Management expects the increase in revenues
to be achieved by securing additional power generation operation and maintenance
contracts  during 2004 and through  increasing  revenues from existing long term
power plant operation and


                                       16
<PAGE>

maintenance  agreements  as a result of  continued  expansion  on the  island of
Tinian and within Fiji.  However,  no assurance can be given that such increased
revenues will be achieved. Although management believes that the Company will be
cash flow positive in 2004 including debt payments,  the Company has and expects
to  continue to seek  support  from its  principal  stockholder,  SHBC,  for its
operations, for working capital needs, debt repayment, and business expansion as
may be required.  SHBC has continued its support of the Company. SHBC has agreed
to guarantee or provide letters of credit covering  $27,214,000 of the Company's
total debt of $29,552,417.


OPERATING SEGMENTS

Telesource's  business  consists  of the  following  operating  segments:  power
generation and construction of power plants, trading, and construction services.
Revenue  of the  power  generation  and  construction  of power  plants  segment
includes sales-type lease revenues.  The power generation activities occurred in
the  Commonwealth of Northern Mariana Islands,  a U.S.  territory,  ("CNMI") and
construction of power plants occurred in Fiji. Construction services occurred in
the CNMI and the  Republic of Palau  while  trading  activities  occurred in the
United  States  and  the  CNMI.   Telesource  is  committed  to  completing  the
construction  projects  currently  under  contract;  however,  Telesource is not
actively bidding on additional  construction  contracts and is concentrating its
efforts on expanding its power generation services in the Pacific region.

OVERVIEW

During 2003, our cost of  construction  projects as a percentage of construction
revenues  increased  to 110.4%  from 91.4% in 2003 and 2002,  respectively.  The
increase in costs as a percentage  of  construction  revenues was due to project
delays and additional unforeseen costs incurred on the projects. We have focused
our attention on securing  additional  projects in the power generation  segment
and are working to complete the current construction projects we have on hand.


                                       17
<PAGE>

The following information is based on, and should be read with, our consolidated
financial  statements and the related notes thereto  included  elsewhere in this
Form 10-K/A.  Our  consolidated  gross profit decreased to $869,332 in 2003 from
$3.2 million in 2002.  Our  consolidated  net loss  increased to $6.6 million in
2003 from $4.9 million in 2002,  primarily due to the lower margin recognized on
our construction segment.


RESULTS OF OPERATIONS

REVENUES

Overview

Telesource  International  is  an  international  engineering  and  construction
company,   which  has  among  its  operations  power  generation  and  specialty
construction  services in the  Commonwealth of the Northern  Mariana Islands and
the Republic of Palau. Telesource International operates a diesel fired electric
power  generation  plant for the sale of  electricity to the local power grid in
CNMI.  Telesource signed an agreement to take over the operation and maintenance
of three diesel fired electric power generation plants in Fiji beginning in 2003
for a period  of 20  years.  Telesource  International's  facility  in  Lombard,
Illinois  handles  the  procurement,  export  and  shipping  of U.S.  fabricated
products for use by  Telesource  International's  subsidiaries  or for resale to
customers outside of the mainland.

Telesource   International   was   formed   in   1994  to   facilitate   various
intra-corporate  activities and, until July 1999, was a wholly owned  subsidiary
of SHBC, a Kuwait-based civil,  electrical and mechanical  construction company.
Operations   are   conducted   primarily   through   subsidiaries.    Telesource
International  currently has three  subsidiaries.  Telesource CNMI, Inc. handles
construction  and management for the power facilities in the Commonwealth of the
Northern  Mariana  Islands.  Telesource  CNMI,  Inc. has branch offices in Guam,
Telesource  Pacifica  and Pacifica  Power  Resources.  Commsource  International
located  in  Chicago,   Illinois,   is  an  international  export  company  that
facilitates  the  purchase of  equipment  fabricated  in the U.S.  The  business
activities of Commsource have been  transferred to Telesource.  Telesource Fiji,
Ltd. was  established to oversee  Telesource  International,  Inc.'s power plant
construction  activities within Fiji, which currently  involves the installation
of additional power  generators for existing power plants in Fiji.  Construction
activities in the Republic of Palau are carried out by Telesource International.

Telesource  International  has  three  main  operating  segments:   construction
services,  trading  activities,  and power  generation and construction of power
plants.

Revenue from  construction  and construction of power plants is recognized using
the percentage-of-completion  method of accounting based upon costs incurred and
projected costs. Construction revenue includes revenues recognized by Telesource
International,  Inc.'s power plant construction  segment and from other projects
ranging from housing  development to the  construction  of airports and prisons.
The construction of power generation  plants is considered by management to be a
part of Telesource International, Inc.'s power generation and


                                       18
<PAGE>

construction of power plants segment.  Cost of revenue  consists of direct costs
on contracts,  including labor and materials, amounts payable to subcontractors,
direct overhead costs,  equipment expense (primarily  depreciation,  maintenance
and  repairs),  interest  associated  with  construction  projects and insurance
costs.  Depreciation is provided using  straight-line  methods for  construction
equipment.  Contracts  frequently extend over a period of more than one year and
revisions in cost and profit estimates during  construction are reflected in the
accounting  period in which the facts that  require the revision  become  known.
Losses on  contracts,  if any, are provided when  determined,  regardless of the
degree of  project  completion.  Claims  for  additional  contract  revenue  are
recognized  in the period  when it is  probable  that the claim  will  result in
additional  revenue and the amount can be reliably  estimated.  The foregoing as
well as the stage of  completion  and mix of contracts at different  margins may
cause fluctuations in gross profit between periods.

Construction    revenues   on   power   plants   are   recognized    using   the
percentage-of-completion  method of  accounting,  based upon costs  incurred and
projected  costs.  This  revenue is  separated  on the face of the  consolidated
financial statements due to its origin within Telesource  International's  power
generation and construction of power plants segment. Cost of revenue consists of
direct costs on contracts,  including  labor and materials,  amounts  payable to
subcontractors,    direct   overhead   costs,   equipment   expense   (primarily
depreciation,  maintenance and repairs),  interest  associated with construction
projects and  insurance  costs.  Depreciation  is provided  using  straight-line
methods for construction equipment. Contracts frequently extend over a period of
more  than  one  year  and  revisions  in  cost  and  profit   estimates  during
construction  are  reflected  in the  accounting  period in which the facts that
require the revision become known. Losses on contracts,  if any, are provided in
total when determined,  regardless of the degree of project  completion.  Claims
for additional contract revenue are recognized in the period when it is probable
that the claim will result in additional  revenue and the amount can be reliably
estimated. The foregoing as well as the stage of completion and mix of contracts
at different margins may cause fluctuations in gross profit between periods.

Telesource   accounts  for  its  leasing   activities  in  accordance  with  the
requirements of Statement of Financial  Accounting  Standards No. 13, Accounting
for  Leases.  Revenue  associated  with  the  sale  of the  Tinian  power  plant
constructed and sold under a sales-type lease,  measured as the present value of
non-cancelable  rents,  was recognized in connection  with recording the loss on
sale in 1997 and  1998.  Telesource  recognizes  finance  lease  revenue  on the
resulting  sales-type  lease  receivable  at a constant  rate using the interest
method.  Service  revenues  received from operating and  maintaining  the Tinian
power plant for the  duration  of the lease are  recognized  as earned  based on
actual  kilowatt  hours of  electricity  produced and  delivered to the lessee's
customers.  To the extent that  variable  payments  based on  kilowatt-hours  of
production exceed the fair value of operation and maintenance services provided,
Telesource  recognizes  such  contingent  payments as  additional  finance lease
revenue as they are earned.

Sales  revenues  are  derived  from  brokering  of  U.S.  fabricated  goods  and
management   of  various   projects   outside  of   Telesource   International's
construction  and  power  generation  segments.  Sales  of  goods  exported  are
recognized at the time of shipment.  When an order is received,  the  customer's
product  specifications  are sent to the  manufacturer  and upon  completion the
goods are shipped from the manufacturer directly to the customer. In most cases,
the risk of loss during  shipping  is either  borne by the  manufacturer  or the
customer.   Telesource   International   is  responsible   for  payment  to  the
manufacturer; however, Telesource normally collects payment


                                       19
<PAGE>

from the  customer  before the  manufacturer  is paid.  The sales  revenues  are
recognized  net of cost of goods  sold.  In  1999,  Telesource  entered  into an
agreement with its primary  customer,  SHBC, to charge a flat fee of 7.5% of the
invoice amount for all orders executed by Telesource on behalf of SHBC.

Service  revenues are  recognized  in the period in which the work is performed.
Service revenues consist of amounts billed to SHBC for project management of the
radio relay station and for other types of services  provided to local customers
for small projects.  The cost of services provided was not recorded  separately,
and therefore was included in the general and administrative expenses.

Rental income  consists of fees collected on rental of equipment to SHBC for use
in  construction of the radio relay station as well as to local  customers.  The
rental fees are billed on a monthly basis for equipment  used during the billing
period.  Telesource  recognizes  rental revenue on the accrual basis pursuant to
contractual arrangements between Telesource and its customers.

Finance lease revenues are recognized on the  amortization  of the minimum lease
payments  for the  power  plant  located  on the  Island  of  Tinian  that  were
discounted upon execution of the contract in June of 1997 at an interest rate of
6.74%.  The amortization of the minimum lease payments began in March 1999 at an
effective interest rate of 9.40% and will fully amortize in March 2010.

Construction  costs are comprised of both variable and  semi-variable  expenses,
including  labor  and  materials,  amounts  payable  to  subcontractors,  direct
overhead  costs,  equipment  expense  (primarily  depreciation,  maintenance and
repairs),  interest  associated with construction  projects and insurance costs.
Depreciation is provided using straight-line methods for construction equipment.

Construction   costs  on  power  plants  are  comprised  of  both  variable  and
semi-variable  expenses,  including  labor and  materials,  amounts  payable  to
subcontractors,    direct   overhead   costs,   equipment   expense   (primarily
depreciation,  maintenance and repairs),  interest  associated with construction
projects and  insurance  costs.  Depreciation  is provided  using  straight-line
methods for construction  equipment.  These costs are disclosed  separately from
construction costs due to their origin within the power generation segment.

Operations  and  maintenance  costs - power  generation  plant consist of labor,
direct overhead costs,  equipment expense  (primarily  maintenance and repairs),
and insurance costs. These costs are recognized as incurred.

Salaries and employee  benefits consist of all wages and benefits for management
and staff wages and benefits that are not directly  associated with a particular
project,  that  is,  idle  costs  for  employees  are  charged  to  general  and
administrative  expense.  Telesource's principal market, the Commonwealth of the
Northern Mariana Islands, allows employers to import guest employees.  The local
labor laws require  employers  importing guest  employees,  principally from the
Philippines,  to execute a one-year employment contract with the guest employee.
Since  Telesource has a few large  contracts,  this can lead to short periods of
inactivity for some  employees.  As Telesource  continues to grow, this issue is
expected  to be  minimized;  however,  it  can  have  a  significant  impact  on
Telesource's operating results.


                                       20
<PAGE>

Occupancy and equipment expense consist of rent,  utilities and office equipment
for Telesource International's offices in Illinois, CNMI, Guam and Fiji.

General and administrative expenses consist primarily of depreciation, telephone
expense, insurance, travel, financial and legal expenses and a gross revenue tax
incurred on Telesource  International's  operations in the  Commonwealth  of the
Northern Mariana Islands.

Telesource International, Inc., Commsource International, Inc., Telesource CNMI,
Inc. and  Telesource  Fiji,  Ltd.  file separate  corporate  income tax returns.
Telesource  International,  Inc.  and  Commsource  International,  Inc. are U.S.
corporations  that file separate U.S.  corporate tax returns.  Telesource  CNMI,
Inc. is a Commonwealth  of the Northern  Mariana Island  corporation and files a
corporation tax return for this commonwealth.  Telesource Fiji, Ltd. is a Fijian
corporation and files a Fijian corporation tax return.

Deferred  income taxes are accounted  for under the asset and liability  method.
Deferred tax assets and liabilities are recognized for the estimated  future tax
consequences   attributable  to  differences  between  the  financial  statement
carrying amounts of existing assets and liabilities and their respective  income
tax bases.  Deferred tax assets and  liabilities  are measured using enacted tax
rates expected to apply to taxable income in the years in which those  temporary
differences are expected to be recovered or settled.  The effect on deferred tax
assets and  liabilities  of a change in tax rates is recognized in income in the
period that includes the enactment date.

TINIAN POWER PLANT

Phase I

In June 1997, Telesource  International entered into a contract to construct and
operate  a power  plant  on the  island  of  Tinian.  The  June  1997  agreement
(hereafter  referred  to as Phase I)  called  for  Telesource  International  to
construct a 10Mwh power  generation plant with the capacity to add an additional
20Mwh of power at later dates, and to operate the power plant for a period of 10
years from the date of  commissioning.  Phase I was  commissioned in March 1999.
The terms  for Phase I call for fixed  payments  of  $180,000  per month  plus a
production  fee of $0.02 per Kwh produced for the first  5,140,000  Kwh produced
each month (hereafter referred to as the Base Load). The agreement also provides
that Telesource  International will receive a monthly service fee of $50,000 for
a period of 10 years from the date of commissioning. Following the conclusion of
that 10-year period, the only payments Telesource International will receive for
the Base Load is a  production  fee of $0.03 per Kwh  produced,  as adjusted for
inflation per the agreement.

Phase II

In November 1998, Telesource  International  received a change order instructing
Telesource to add an additional  10Mwh of power generation  capacity  (hereafter
referred  to  as  Phase  II).   This  change  order   provided  for   Telesource
International to receive only variable  payments in the form of a production fee
of $0.065 per Kwh produced in excess of the Base Load (hereafter  referred to as
the  Expansion  Rate) and for these  payments  to occur over a  ten-year  period
commencing  upon the  commissioning  of Phase II.  After the  completion  of the
ten-year period, the production fee changes from $0.065 per Kwh to $0.03 per Kwh
for all power produced. Phase II was


                                       21
<PAGE>

commissioned  in March 2000 and increased  the power  plant's  total  generation
capacity to its maximum current level of 20Mwh.

Expanded Agreement

In May 2001,  Telesource  International  received a third change order extending
the term of the  agreement  for an  additional  ten years or to March  31,  2020
(hereafter referred to as the Expanded Agreement). The Expanded Agreement leaves
the option to expand the power plant by adding an additional 10Mwh of generation
capacity unchanged. The power generation plant currently has 20Mwh of production
capacity,  which can be increased to 30Mwh by installing the  appropriate  power
generators. The production rates for the Base Load and the Expansion Rate do not
change from the amounts  originally  agreed upon.  In summary,  Telesource  will
receive $0.03 (adjusted for inflation) per Kwh produced after March 31, 2010 for
all power produced.

Accounting for the Construction of the Power Plant

Telesource   accounts  for  its  leasing   activities  in  accordance  with  the
requirements of Statement of Financial  Accounting  Standards No. 13, Accounting
for  Leases.  Revenue  associated  with  the  sale  of the  Tinian  power  plant
constructed and sold under a sales-type lease,  measured as the present value of
non-cancelable  rents,  was recognized in connection  with recording the loss on
sale in 1997 and  1998.  Telesource  recognizes  finance  lease  revenue  on the
resulting  sales-type  lease  receivable  at a constant  rate using the interest
method.  Service  revenues  received from operating and  maintaining  the Tinian
power plant for the  duration  of the lease are  recognized  as earned  based on
actual  kilowatt  hours of  electricity  produced and  delivered to the lessee's
customers.  To the extent that  variable  payments  based on  kilowatt-hours  of
production exceed the fair value of operation and maintenance services provided,
Telesource  recognizes  such  contingent  payments as  additional  finance lease
revenue as they are earned.

The original net investment in sales-type lease was recognized in June 1997, the
date  the  contract  was  executed.  The  components  of the net  investment  in
sales-type lease at December 31, 2003, 2002 and 2001 are as follows:

<TABLE>
<CAPTION>
                                                                  December 31
                                                  ------------------------------------------   ------------
                                                      2003           2002           2001         Inception
                                                  ------------   ------------   ------------   ------------
<S>                                               <C>              <C>            <C>            <C>
Total minimum lease payments to be received       $ 11,160,000     13,320,000     15,480,000     21,600,000
Add:  Operation and maintenance fee                  3,100,000      3,700,000      4,300,000      6,000,000
                                                  ------------   ------------   ------------   ------------
     Minimum lease payments receivable              14,260,000     17,020,000     19,780,000     27,600,000

Less: unearned income                                2,998,429      4,140,589      5,427,360      9,750,000
                                                  ------------   ------------   ------------   ------------

     Net investment in sales-type lease           $ 11,261,571     12,879,411     14,352,640     17,850,000
                                                  ============   ============   ============   ============
</TABLE>

When  Telesource  recognized  the net  investment  in  sales-type  lease  at the
inception of the agreement in June 1997,  Telesource  also  recognized a loss on
the sale of Phase I in the amount of $1,748,713.  In 1998, Telesource recognized
a loss on the sale of Phase II in the amount of $12,521,457 (equal to the entire
amount of the  construction  costs for  Phase  II, as there  were no  additional
minimum lease payments  related to this phase).  The loss recognized on the sale
of Phase II was  recognized  when the  contract  for  Phase II was  executed  in
November 1998.


                                       22
<PAGE>

Phase I of the  power  plant  was  commissioned  in March of 1999.  Phase II was
commissioned in March of 2000.  Telesource  recognized power generation revenues
from  billings at the rate of $0.02 per Kwh produced of  $1,131,144,  $1,130,172
and $858,336 for the years ended December 31, 2003, 2002 and 2001, respectively.
No power generation income was recognized during 1998.

Revenues for this contract consist of the present value of the total contractual
minimum lease payments,  which were recognized at lease  inception.  The minimum
lease payments were  discounted  using an interest rate of 6.74% and the minimum
lease  payments  are  comprised of a guaranteed  monthly  payment  along with an
operation and  maintenance  fee.  Interest earned on the minimum lease payments,
which is  recognized  over the lease term so as to yield a  constant  percentage
return on the net  investment in the lease  beginning in March 1999, is included
in finance lease revenues in the consolidated statements of operations.

Telesource  also receives  variable  monthly  payments as  compensation  for its
production  of power.  The  variable  payments are  recognized  based upon power
produced and billed to the customer as earned during each accounting period.

The total construction costs for the power plant were $32,120,170. A substantial
portion (approximately $14,270,000) of the repayment to Telesource International
for these  construction  costs is expected to come from the variable  production
fees that will be recognized as revenue when power is produced and billed to the
customer.  Due to the fact that the  agreement  does not provide for any minimum
production  fees,  there is no  guarantee  that  Telesource  International  will
recover all of the  construction  costs  incurred to construct  the power plant;
however,  the agreement  does require the customer to purchase 100% of its power
from Telesource  International  until the maximum power generation  capacity has
been reached each month.  The future  minimum lease  payments to be collected by
Telesource are $2,760,000 each year through 2008 and $460,000 in 2009.

Future revenue related to the construction and operation of the power plant will
be recorded as service fees until the amount exceeds the estimated fair value of
the  services  performed.  Amounts in excess of the fair  value of the  services
performed will be accounted for as additional finance lease revenue.

Results of Operations

The following  table sets forth results of operations  expressed as a percentage
of total revenues:


                                       23
<PAGE>

<TABLE>
<CAPTION>
                                                       ----------------------------------
                                                              Twelve Months Ended
                                                                  December 31,
                                                       ----------------------------------
                                                         2003         2002         2001
                                                       --------     --------     --------
<S>                                                        <C>          <C>          <C>
     Revenues:
        Construction revenues                              71.8%        81.5%        64.7%
        Construction revenues - related party                --          4.1           --
        Construction revenues on power plants                --           --         22.1
        Service fees - power generation plant              14.8          5.6          4.7
        Sales, net                                          0.2          1.5          0.7
        Sales, net - related party                           --          0.4           --
        Rental income                                       4.6          0.3           --
        Rental income - related party                        --           --           --
        Management fees - related party                      --          0.3           --
        Service fees                                        2.9           --           --
        Finance lease revenues                              5.7          6.3          7.8
                                                       --------     --------     --------
              Gross revenues                              100.0        100.0        100.0
     Costs and expenses:
        Construction costs                                 79.3         78.2         67.8
        Construction costs on power plants                   --           --         19.1
        Operations & maintenance costs -
          power generation plant                           12.9          6.0          6.3
        Rental costs                                        2.7           --           --
        Cost of Service                                     0.8           --           --
                                                       --------     --------     --------
              Gross profit                                  4.3         15.8          6.8
     Operating expenses:
        Salaries and employee benefits                      8.2          8.4         10.1
        Occupancy and equipment                             1.9          1.7          3.1
        General, administrative and other                  20.3         20.9         20.4
                                                       --------     --------     --------
              Total operating expenses                     30.4         31.0         33.6

              Operating loss                              (26.1)       (15.3)       (26.8)
     Other income (expense):
        Interest income                                      --           --          0.2
        Interest expense                                   (7.1)        (8.8)       (13.1)
        Other income, net                                   0.4          0.1          0.2
                                                       --------     --------     --------
              Total other expense                          (6.7)        (8.7)       (12.7)
              Loss before income taxes                    (32.8)       (24.0)       (39.5)
        Income tax expense                                 (0.3)          --         (0.1)
                                                       --------     --------     --------
              Net loss                                    (33.1)       (24.0)       (39.6)
                                                       ========     ========     ========
</TABLE>

Backlog

The following schedule shows a reconciliation of backlog representing the amount
of revenue Telesource International expects to realize from work to be performed
on uncompleted contracts accounted for using the percentage-of-completion method
of accounting in progress at December 31, 2003:

     Balance as of December 31, 2002                              $17,472,516

     New contracts, change orders and claims added during 2003     12,006,997
                                                                  -----------
                                                                   29,479,513

     Less: Construction contract revenue recognized for 2003       14,381,282
                                                                  -----------

     Balance at December 31, 2003                                 $15,098,231
                                                                  ===========

The  backlog  balance  represents  work  under  contract  which  remains  to  be
completed. The decrease in the amount of the backlog from $17.5 million to $15.1
million at December  31,  2002 and 2003,  respectively,  is due to  management's
efforts  to  concentrate  future  growth to occur  within  the power  generation
segment. Telesource is not actively bidding on additional construction projects.
The decision by Telesource to stop bidding on additional  construction  projects
is due to the low margins and losses  Telesource  has realized its  construction
activities.


                                       24
<PAGE>

Comparison of the twelve months ended December 31, 2003 and 2002

Construction Revenues. Construction revenues, including related party, decreased
17.4% to $14.4  million in 2003 from  $17.4  million in 2002.  The  decrease  in
construction  revenues is attributed to the completion of the airport  expansion
project and the lower  revenues from the prison  project.  The backlog was $15.1
million at  December  31,  2003 and was $17.5  million  at  December  31,  2002.
Telesource is commited to completing the construction  projects  currently under
contract; however, Telesource is not actively bidding on additional construction
contracts. Construction revenues are expected to decrease in future periods.

Service Fees - Power  Generation  Plant.  Service fees - power  generation plant
increased  162.6%  to $3.0  million  in 2003  from  $1.1  million  in 2002.  The
significant  increase in service fees - power  generation plant is attributed to
the $2.0 million revenues from the operation and maintenance of two diesel power
plants in Fiji which was  awarded  to the  Company  by Fiji  Electric  Authority
during  2003 and covers a period of 20 years.  The energy  conversion  agreement
covered the take-over and operation of the two  facilities in Kinoya,  and Vuda,
Fiji.  Telesource  is  concentrating  its  efforts  on  growing  revenues  power
generation and expects to see additional growth in future periods.

Sales  Revenues,  Net.  Sales  revenues  decreased  89% to  $43,636 in 2003 from
$397,376 in 2002.  Sales to SHBC decreased to none in 2003 from $89,998 in 2002.
Sales to SHBC are not expected to increase in future periods.

Rental Income. Rental income increased to $919,063 in 2003 from $68,209 in 2002.
The increase in rental income was a result of short term lease agreement  signed
in 2003 with the Guam Power  Authority  to assist the local  utility in clean up
efforts from a super typhoon, Pongsona, which struck Guam in December 2002.

Service Fees.  Service fees  increased to $571,776 in 2003 from $34,640 in 2002.
The increase is a result of Telesource  providing project management services to
third parties.

Finance Lease Revenues.  Finance lease revenues decreased 11% to $1.1 million in
2003 from $1.3 million in 2002. Finance lease revenue for the Tinian power plant
will  decrease  each year  until the  investment  in sales  type  lease is fully
amortized in March 2010.

Expenses

Construction  Costs.  Total construction costs (includes related party and third
party) were flat at $15.9  million for 2003 and 2002.  While  construction  cost
remained flat during 2003 as compared to 2002,  construction  revenues decreased
17.4%  or  from  $17.4   million  down  to  $14.4  million  in  2002  and  2003,
respectively.  Construction  cost  increased as a  percentage  of revenue due to
unforeseen delays encountered on the projects.  The increase in cost resulted in
lower margins and losses realized on construction projects.

Operation  and  Maintenance  Costs  -  Power  Generation  Plant.  Operation  and
maintenance  costs - power generation plant increased 112% to $2,588,752 in 2003
from $1,224,202 in 2002. The increase in operation and maintenance costs was due
to $1.4 million in additional costs from Fiji's operation and maintenance of two
power plants during 2003.


                                       25
<PAGE>

Salaries and Employee  Benefits.  Salaries and employee benefits decreased 3% to
$1.65  million in 2003 from $1.7  million in 2002.  The decrease in salaries and
employee  benefits is attributed to  management's  continuing  efforts to reduce
costs during 2003.

Occupancy  and  Equipment.  Occupancy and  equipment  expenses  increased 11% to
$380,576 in 2003 from $342,189 in 2002.  The increase in occupancy and equipment
expense is attributed to additional  occupancy  expense incurred in Palau in the
amount of $82,813 and $34,092 in Fiji during 2003.

General  and  Administrative  Expenses.   General  and  administrative  expenses
decreased 7% to $4.0 million in 2003 from $4.3 million in 2002.  The decrease is
attributed to lower bank service charges and decreased taxes and licenses.

Other  Expense,  Net.  Other expense  decreased 24% to $1.3 million in 2003 from
$1.8 million in 2002. The decrease is a result of lower interest  expense due to
a reduction in borrowings.

Income  Tax  Expense.  Telesource  recognized  income tax  expense  on  revenues
recognized  in Fiji  for  2003 in the  amount  of  $68,446.  Telesource  had net
operating  loss  carryforwards  for  U.S.  purposes  at  December  31,  2003  of
approximately $32,000,000.


Comparison of the twelve months ended December 31, 2002 and 2001

Revenues

Construction Revenues. Construction revenues, including related party, increased
47.2% to $17.4  million  in 2002  from  $11.8  million  in 2001.  The  growth in
construction  revenues is  attributed  to the $19.0  million  airport  expansion
project during 2002 along with the progress on the $17.6 million prison project.
The airport  expansion  project is expected  to be  completed  during the second
quarter of 2003 and the prison  project is  expected  to be  completed  in early
2004.  The growth in  construction  revenues  is  expected to continue in future
periods but not at the pace  experienced  in 2002. The backlog was $17.5 million
at December 31, 2002 and was $9.7  million at December 31, 2001.  The backlog at
December 31, 2002 does not include two contracts  awarded to  Telesource  during
the first  quarter of 2003 with a total  contract  value for both  contracts  of
$11.6 million.

Construction  Revenues on Power Plants.  There was no  construction  revenues on
power  plants for 2002 as compared to $4.1  million in 2001.  These  revenues in
2001 were recognized on a contract  Telesource  International  had to expand two
existing  power  stations in Fiji by expanding  the  facilities  and  installing
additional  power generators with a combined output of 32 Mwh. This contract was
accounted for under the  percentage-of-completion  method of accounting  and was
completed during 2001. Construction revenues on power plants are not expected in
the immediate future until Telesource is successful in being awarded  additional
contracts.

Service Fees - Power  Generation  Plant.  Service fees - power  generation plant
increased  31.7% to $1.1  million in 2002 from  $858,336 in 2001.  The growth in
service  fees - power  generation  plant is  attributed  to an increase in power
demand by the radio  relay  broadcast  station in Tinian  during 2002 as well as
completion  of an  expansion  to the  local  power  distribution  network  which
connected additional customers during 2002.


                                       26
<PAGE>

Sales Revenues,  Net. Sales revenues  increased  203.5% to $397,376 in 2002 from
$130,930 in 2001.  The growth in sales during 2002 is  attributed to an increase
in sales to third party customers in Guam. Sales to SHBC increased to $89,998 in
2002 from $256 in 2001.  Sales to SHBC are not  expected  to  increase in future
periods.

Rental Income. Rental income increased to $68,209 in 2002 from none in 2001. The
increase  in  rental  income  is a result  of  leasing  equipment  not in use by
Telesource  to  third  party  customers  in  the  CNMI.   Telesource  expects  a
significant  growth in rental income to third parties during 2003 due to a short
term lease agreement  signed in 2003 with the Guam Power Authority to assist the
local utility in clean up efforts from a super typhoon,  Pongsona,  which struck
Guam in December 2002.

Service Fees.  Service fees  increased to $34,640 in 2002 from none in 2001. The
increase is a result of  Telesource  providing  project  management  services to
third parties. Service fees are not expected to generate a significant source of
revenues in future periods.

Finance Lease Revenues. Finance lease revenues decreased 9.3% to $1.3 million in
2002 from $1.4 million in 2001. Finance lease revenue for the Tinian power plant
will  decrease  each year  until the  investment  in sales  type  lease is fully
amortized in March 2010.

Expenses

Construction  Costs.  Total construction costs (includes related party and third
party)  increased  28.5% to $15.9  million from $12.4 million for 2002 and 2001,
respectively. The growth in construction costs is a direct result of an increase
in construction activities,  primarily due to the airport expansion project, the
prison  project and the museum  project.  Construction  costs as a percentage of
construction revenues were 91.4% and 104.7% for 2002 and 2001, respectively. The
effective  gross  margin  of  8.6% on  construction  activities  during  2002 is
attributed  primarily  to the airport  project.  Telesource  recognized  a gross
margin for construction activities on the airport project of 1.5% on revenues of
$9.0 million,  which was 51.4% of Telesource's  construction  revenues for 2002.
The  airport's  gross margin was affected by costs  incurred on certain tasks at
the  airport  project  which are  outside  of the scope of the  contract  for an
estimated cost of approximately  $700,000.  Management expects a change order to
be  executed in early 2003 which will cover  these  costs.  In addition to these
costs,  Telesource incurred significant weather delays during the fourth quarter
of 2002.  Out of a total of 92 work days for the  fourth  quarter  there were 84
days of  work  stoppage.  The  negative  gross  margin  in 2001 on  construction
revenues is primarily  attributed to a cost over run on the Kobblerville housing
project  due  to  delays   encountered   as  a  result  of  inclement   weather.
Additionally,  there were delays in the processing of Telesource International's
invoices  by the Federal  Housing  Authority,  which  resulted in a delay in the
collection of payments for the Kobblerville  project.  This ultimately led to an
increase in interest  expense  incurred  directly  on this  project,  as well as
increased costs for supplies. The weather delays and the delay in the processing
of  Telesource's  invoices  occurred  during the first  quarter of 2001 and were
identified in connection with management's quarterly project review process. The
cost estimates for the  Kobblerville  project were revised to $6,153,417  during
2001 from an estimated total costs of $4,830,000.  The estimated  profit for the
Kobblerville  project was reduced from  $1,480,000  to  $136,583.  The change in
estimate decreased profit on third party construction revenues by $1,343,417 and
was reflected in 2001


                                       27
<PAGE>

operating results.  This increase in estimated costs is attributed to the delays
encountered in completing the project. The Kobblerville project was completed in
December 2001.

Construction  Costs on Power Plants.  Construction costs on power plants were $0
in 2002 and $3.5 million in 2001.  The decrease in  construction  costs on power
generation   plants  is  a  result  of  Telesource   completing  a  power  plant
construction  contract  for  Fiji.  The  net  margin  realized  in  2001  on the
construction of power generation plants was 13.5%.

Operation  and  Maintenance  Costs  -  Power  Generation  Plant.  Operation  and
maintenance  costs - power generation plant increased 5.6% to $1,224,202 in 2002
from $1,159,132 in 2001. The increase in operation and maintenance costs for the
Tinian  power plant is  attributed  to growth in power  production  during 2002.
During 2002,  Telesource  realized increased revenue on power produced of 32.7%,
which  resulted  in  additional  operation  and  maintenance  cost of  5.6%  for
servicing costs.  Telesource recognized a loss on power generation activities of
$94,030 and  $300,796 for the twelve  months  ended  December 31, 2002 and 2001,
respectively,  which is attributed to management and staffing  costs  associated
with the power plant exceeding the power production revenues. Telesource expects
the Tinian power plant to become profitable in 2003.

Salaries and Employee Benefits. Salaries and employee benefits decreased 7.9% to
$1.7  million in 2002 from $1.9  million in 2001.  The  decrease in salaries and
employee  benefits is attributed to management's  efforts to reduce costs during
2002 by reducing staffing levels.

Occupancy and Equipment.  Occupancy and equipment  expenses  decreased  39.0% to
$342,189 in 2002 from $560,476 in 2001.  The decrease in occupancy and equipment
expense is attributed to cost cutting efforts of management  which were achieved
by closing  the office on Tinian and  reducing  the amount of cost  incurred  to
store equipment.

General  and  Administrative  Expenses.   General  and  administrative  expenses
increased  14.0% to $4.3 million in 2002 from $3.7 million in 2001. The increase
is attributed to increased  professional fees,  telephone expense,  bank service
charges,  insurance, travel and entertainment and gross revenue taxes associated
with the growth and development of the business.

Other Expense,  Net. Other expense  decreased 23.9% to $1.8 million in 2002 from
$2.3 million in 2001. The decrease is a result of reduced borrowing costs due to
declining interest rates for obtained by Telesource.

Income Tax  Expense.  There was no income tax  expense  for 2002 as  compared to
income  tax  expense  in 2001 of  $19,440.  Telesource  had net  operating  loss
carryforwards  at  December  31,  2002 of  approximately  $27,024,000;  however,
Telesource International's subsidiary in Fiji had taxable income during 2001 and
incurred an estimated tax liability of $19,440.

Liquidity and Capital

Since 1994, Telesource  International's  primary sources of operating funds have
been bank  borrowings,  contributions  of equity capital and profits realized on
projects  completed.  On December  31,  2003,  17,000,000  shares of  Telesource
International's  common  stock  were  issued  and  outstanding.  Telesource  had
15,000,000  shares issued and  outstanding on December 31, 2002. On December 29,
2003,  when  Telesource  International  sold 2 million shares of common stock at
$1.00 per share in a private placement to Al Amal Investments.


                                       28
<PAGE>

Cash used in operating  activities  during the twelve months ended  December 31,
2003 and 2002 was $6.3 million and $2.0 million,  respectively. The cash used in
operating  activities  was  principally  due to  the  net  loss  for  the  year.
Collections on the net investment in the sales-type  lease provided cash to make
significant payments on accounts payable and accrued expenses in 2003.

Cash used in  investing  activities  was  $660,784  for the twelve  months ended
December 31, 2003 as compared to net cash  provided by investing  activities  of
$128,236  for the  twelve  months  ended  December  31,  2002.  The cash used in
investing  activities during 2003 is attributed to capital purchases during 2003
of $795,784  related to the  purchase of seven  bucket  trucks used on the super
typhoon cleanup efforts on Guam during 2003.

Cash  provided by  financing  activities  generated  $8.2 million for the twelve
months  ended  December 31, 2003 as compared to $2.2 million for the same period
in 2002. The cash generated by financing  activities came from the proceeds from
the sale of $11.7  million  worth of  preferred  stock during 2003 along with $2
million  from  the sale of  common  stock.  Debt  repayments  resulted  in a net
reduction in amount of debt held by $5.1 million.

Telesource  International  had a working  capital  deficit  of $5.6  million  at
December 31, 2003 and $20.4  million at December  31, 2002.  The decrease in the
deficit is a result of a restructuring  of certain  short-term  loans which were
refinanced as long-term  loans.  The Company  extended the terms of  $13,000,000
loan from the  Commercial  Bank of Kuwait into monthly  payments of $180,000 per
month plus interest and a $2.0 million  balloon payment due at maturity on March
4, 2009. The first payment of $180,000 was due on February 4, 2004.


Telesource  is  substantially  dependent  upon  SHBC to  provide  resources  for
operating,  working  capital,  and  business  expansion.  To address the working
capital  deficit and reduce its dependence on debt  financing  obtained with the
support of SHBC,  Telesource  plans on making some  reductions on existing lines
and renewing the credit lines.  The amount of the  reductions is dependent  upon
the amounts of capital raised by Telesource International within the next twelve
months.

Telesource  International  currently  expects that its existing  cash  balances,
along with credit lines established in 2003,  additional  borrowings  secured in
the first five months of 2004, the sale of additional common stock in the amount
of $3.5 million  subsequent to year end,  together with funds available  through
SHBC will be sufficient to meet anticipated  cash  requirements for at least the
next 12 months.

Telesource has forecasted  cash inflows for the next twelve months from projects
of $26  million,  $6.3  million  from the sale of common  stock in the first six
months  of  2004,  and  $2.0  million  in  additional  borrowings.  Telesource's
forecasted  cash  outflows  consist of $9.1  million in  principal  and interest
payments on credit  lines and $24.2  million  for project  costs and general and
administrative  expenses along with forecasted reduction in accounts payable and
accrued  expenses  of $1.9  million.  Telesource  had  cash on hand  balance  at
December  31,  2003 of $1.5  million  and  forecasted  cash on hand after  these
collections and payments of $600,000 in December of 2004.


                                       29
<PAGE>

Telesource  International's present capital and financing will not be sufficient
to finance future operations. Therefore, Telesource International plans to raise
additional  capital in 2004  through  the sale of equity to reduce the  existing
credit line  borrowings as well as to provide  capital needed for growth.  There
can no  assurance  that  Telesource  will  be  successful  in such  efforts.  If
Telesource International sells additional shares of common stock to raise funds,
the terms and  conditions of the  issuances and any dilutive  effect may have an
adverse  impact on the existing  stockholders.  If additional  financing  beyond
current levels becomes  necessary,  there can be no assurance that the financing
can be  obtained on  satisfactory  terms,  if at all. In this event,  Telesource
International could be required to restrict its operations.

CRITICAL ACCOUNTING POLICIES

Telesource believes its most critical accounting policies are related to revenue
recognition on long-term contracts and the recoverability of long-lived assets.

Revenue Recognition on Long-Term Contracts

Telesource uses the percentage-of-completion method of accounting. Percentage of
completion  accounting  is the  preferred  method of  accounting  for  long-term
contracts under accounting principles generally accepted in the United States of
America,  and  accordingly,  is the method used for revenue  recognition  within
Telesource's industry.  Percentage-of-completion  is measured principally by the
ratio of costs  incurred to date for each contract to the estimated  total costs
for each contract at completion.  Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined.

Application of percentage-of-completion accounting results in the recognition of
costs and  estimated  earnings in excess of billings  on  uncompleted  contracts
within the consolidated  balance sheets.  Costs and estimated earnings in excess
of billings on  uncompleted  contracts  reflected  on the  consolidated  balance
sheets arise when revenues have been recognized but the amounts cannot be billed
under the terms of the contracts.  Such amounts are  recoverable  from customers
upon  achievement of various measures of performance,  including  achievement of
certain milestones, completion of specified units or completion of the contract.
Costs and estimated earnings in excess of billings on uncompleted contracts also
includes amounts Telesource seeks to collect from customers or others for errors
or changes in contract  specifications  or design,  contract  change orders once
approved  as to both  scope  and  price,  or other  customer-related  causes  of
unanticipated  additional contract costs. Such amounts are recorded at estimated
net realizable  value when the scope and price have been agreed to by the client
and Telesource.

Due   to   uncertainties   inherent   within   estimates   employed   to   apply
percentage-of-completion  accounting,  it is  possible  that  estimates  will be
revised as project work  progresses.  Application  of  percentage  of completion
accounting  requires that the impact of those  revised  estimates be reported in
the consolidated financial statements prospectively.


Impairment of Long-Lived Assets


                                       30
<PAGE>

The investment in sales-type lease along with our property,  plant and equipment
are  considered  to be a  long-lived  assets.  When we  undergo  changes  in our
business,  including  the  closure  or  relocation  of  facilities,  we may have
equipment and other assets that are no longer needed in our business.  When this
occurs,  we estimate how much we believe we are likely to receive upon  disposal
of the assets and we record an impairment charge if this amount is less than the
net  carrying  value.  If actual  market  conditions  for these  assets are less
favorable than those projected by management,  additional impairment charges may
be required.  During 2003,  Telesource  recognized an asset impairment charge of
$76,186  related to certain  equipment  held by  Telesource.  Telesource did not
incur any  impairment of long-lived  assets for equipment or other assets during
2002 or 2001.


NEW ACCOUNTING PRONOUNCEMENTS

In December 2003, the FASB issued FASB  Interpretation  No. 46 (revised December
2003),  Consolidation  of Variable  Interest  Entities,  which  addresses  how a
business  enterprise  should  evaluate  whether it has a  controlling  financial
interest in an entity  through  means other than voting  rights and  accordingly
should  consolidate  the entity.  FIN 46R replaces FASB  Interpretation  No. 46,
Consolidation of Variable Interest  Entities,  which was issued in January 2003.
The Company  will be required  to apply FIN 46R to  variable  interests  in VIEs
created after December 31, 2003.  For variable  interests in VIEs created before
January 1, 2004,  the  Interpretation  will be applied  beginning  on January 1,
2005.  For any VIEs that must be  consolidated  under FIN 46R that were  created
before January 1, 2004, the assets,  liabilities and noncontrolling interests of
the VIE  initially  would  be  measured  at  their  carrying  amounts  with  any
difference  between the net amount added to the balance sheet and any previously
recognized  interest being recognized as the cumulative  effect of an accounting
change.  If determining the carrying amounts is not  practicable,  fair value at
the date FIN 46R first  applies may be used to measure  the assets,  liabilities
and  noncontrolling  interest of the VIE. We do not believe the  adoption of FIN
46R  will  have  a  material  effect  on  our  financial  position,  results  of
operations, or cash flows.

FASB  Statement  No. 150,  Accounting  for Certain  Financial  Instruments  with
Characteristics  of both  Liabilities  and Equity,  was issued in May 2003. This
Statement  establishes  standards  for the  classification  and  measurement  of
certain  financial  instruments  with  characteristics  of both  liabilities and
equity.   The  Statement  also  includes  required   disclosures  for  financial
instruments  within its scope. For the Company,  the Statement was effective for
instruments  entered into or modified  after May 31, 2003 and otherwise  will be
effective as of January 1, 2004,  except for  mandatorily  redeemable  financial
instruments.  For certain  mandatorily  redeemable  financial  instruments,  the
Statement  will be effective  for the Company on January 1, 2005.  The effective
date has been  deferred  indefinitely  for certain  other  types of  mandatorily
redeemable  financial  instruments.  The  Company  currently  does  not have any
financial instruments that are within the scope of this Statement.

In  June  2001,  FASB  Statement  No.  143,   Accounting  for  Asset  Retirement
Obligations,  was issued.  Statement 143 requires the Company to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation  associated with the retirement of tangible long-lived
assets that  result  from the  acquisition,  construction,  development,  and/or
normal use of the assets.  The Company also would record a  corresponding  asset
that is  depreciated  over  the life of the  asset.  Subsequent  to the  initial
measurement of the asset retirement obligation, the obligation would be adjusted
at the end of each  period to reflect  the  passage  of time and  changes in the
estimated future cash flows underlying the obligation.  The Company was required
to adopt  Statement 143 on January 1, 2003. The adoption of Statement 143 had no
effect on the Company's financial statements.


                                       31
<PAGE>

In April 2002,  FASB Statement No. 145,  Rescission of FASB Statements No. 4, 44
and 64,  Amendment of FASB  Statement  No. 13, and  Technical  Corrections,  was
issued.  Statement 145 amends existing guidance on reporting gains and losses on
the extinguishment of debt to prohibit the classification of the gain or loss as
extraordinary,  as the use of such  extinguishments have become part of the risk
management  strategy  of many  companies.  Statement  No. 145 also  amends  FASB
Statement No. 13,  Accounting for Leases, to require  sale-leaseback  accounting
for  certain  lease   modifications   that  have  economic  effects  similar  to
sale-leaseback  transactions.  The  provisions  of Statement  145 related to the
rescission  of  FASB   Statement  No.  4,   Reporting   Gains  and  Losses  from
Extinguishment  of Debt,  were applied in fiscal years  beginning  after May 15,
2002. The provisions of Statement 145 related to Statement 13 were effective for
transactions  occurring after May 15, 2002. The adoption of Statement 145 had no
effect on the Company's financial statements.

In June 2002, FASB Statement No. 146,  Accounting for Costs Associated with Exit
or Disposal Activities, was issued. Statement 146 addresses financial accounting
and  reporting  for  costs  associated  with  exit or  disposal  activities  and
nullifies  EITF Issue No.  94-3,  "Liability  Recognition  for Certain  Employee
Termination  Benefits and Other Costs to Exit an  Activity".  The  provisions of
Statement 146 were  effective for exit or disposal  activities  initiated  after
December 31, 2002, with early application encouraged.  The adoption of Statement
146 had no effect on the Company's financial statements.

In  November  2002,  FASB  Interpretation  No. 45,  Guarantor's  Accounting  and
Disclosure  Requirements  for  Guarantees,   Including  Indirect  Guarantees  of
Indebtedness to Others,  an  interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB  Interpretation No. 34, was issued. This Interpretation
enhances  the  disclosures  to be made by a guarantor  in its interim and annual
financial   statements  about  its  obligations  under  guarantees  issued.  The
Interpretation  also  clarifies  that a guarantor is required to  recognize,  at
inception  of a  guarantee,  a  liability  for the fair value of the  obligation
undertaken.   The  initial   recognition  and  measurement   provisions  of  the
Interpretation  were applicable to guarantees  issued or modified after December
31,  2002,  and  the  disclosure   requirements  were  effective  for  financial
statements  of interim or annual  periods  ending after  December 15, 2002.  The
adoption  of  Interpretation  45  had  no  effect  on  the  Company's  financial
statements.

In  December  2002,   FASB  Statement  No.  148,   Accounting  for   Stock-Based
Compensation  - Transition  and  Disclosure,  an amendment of FASB Statement No.
123, was issued.  This Statement  amends FASB Statement No. 123,  Accounting for
Stock-Based  Compensation,  to provide  alternative  methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation.  In addition,  Statement 148 amends the disclosure requirements of
Statement  123 to require  prominent  disclosures  in both  annual  and  interim
financial statements.  Disclosures required by this standard are included in the
notes to these consolidated financial statements.

In December 2003, FASB Statement No. 132 (revised), Employers' Disclosures about
Pensions and Other Postretirement  Benefits, was issued. Statement 132 (revised)
prescribes  employers'  disclosures about pension plans and other postretirement
benefit plans; it does not change the measurement or recognition of those plans.
The Statement retains and adds to the disclosure  requirements  contained in the
original  Statement  132.  It also  requires  additional  disclosures  about the
assets,  obligations,  cash  flows,  and net  periodic  benefit  cost of defined
benefit  pension plans and other  postretirement  benefit  plans.  The Statement
generally is effective  for fiscal  years  ending after  December 15, 2003.  The
adoption of Statement 132 had no effect on the Company's financial statements.


SUBSEQUENT EVENTS

On December  31,  2003,  17,000,000  shares of the  Company's  common stock were
issued and  outstanding.  Subsequent  to year end,  Telesource  sold  additional
shares of common stock. The Company sold


                                       32
<PAGE>

1,000,000 shares of common stock to an investor, Al Amal Investments, on January
27, 2004 at $1 per share.  The Company sold 1,000,000  shares of common stock to
Ernil  Continental  SA on April 8, 2004 at $1 per share.  On April 20, 2004, the
Company sold 1,000,000 shares of common stock to Halbarad Group,  Ltd. at $1 per
share.  On May 10, 2004, the Company sold an additional  500,000 shares to Ernil
Continental SA at $1 per share.

The Company has borrowed an  additional  $1.5 million from Bent  Marketing at an
interest rate of 7%.  Interest  payments are due quarterly with principal due at
maturity on July 31, 2005. The Company borrowed  $500,000 from Solas Investments
at an interest rate of 7% with quarterly  interest payments and principal due on
December 31, 2005.  The Company  renewed its credit line with the Bank of Hawaii
for an additional  twelve months  through June 3, 2005.  The Company  repaid its
debt to the Kuwait Real Estate Bank on April 11, 2004.

QUARTERLY RESULTS

The following table sets forth selected unaudited financial  information for the
eight quarters in the period ended December 31, 2003. This  information has been
prepared  on the same  basis as the  annual  financial  statements  and,  in the
opinion  of  management,   contains  all   adjustments   necessary  for  a  fair
presentation thereof.

<TABLE>
<CAPTION>
                                                 QUARTERLY FINANCIAL DATA
                                  (UNAUDITED -- IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

                                                                    2003 QUARTERS ENDED
                                              MARCH 31            JUNE 30           SEPT. 30            DEC. 31
                                           --------------     --------------     --------------     --------------
<S>                                        <C>                    <C>                <C>                <C>
     Revenue                               $    6,268,276          3,442,496          6,421,898          3,893,504
     Gross profit (loss)                   $    1,760,102           (228,328)           117,308           (779,750)
         As a percent of revenue                     28.1%               6.6%               1.8%              20.0%
     Net loss                              $     (192,421)        (2,247,678)        (1,964,634)        (2,224,708)
         As a percent of revenue                     (3.1%)            (65.3%)            (30.6%)            (57.1%)
     Basic and diluted net loss per        $        (0.01)             (0.15)             (0.13)             (0.19)
     share
     Market price:
        High                               $         1.70               1.50               1.50               1.10
        Low                                $         1.25               1.45               1.10               0.55

<CAPTION>
                                                                    2002 QUARTERS ENDED
                                              MARCH 31            JUNE 30           SEPT. 30            DEC. 31
                                           --------------     --------------     --------------     --------------
<S>                                        <C>                    <C>                <C>                <C>
     Revenue                               $    5,700,781          4,911,686          5,660,659          4,048,069
     Gross profit                          $    1,446,661          1,239,889          1,536,650         (1,038,840)
         As a percent of revenue                     25.4%              25.2%              27.1%              25.7%
     Net loss                              $     (713,598)          (831,803)          (251,821)        (3,089,175)
         As a percent of revenue                    (12.5%)            (16.9%)             (4.5%)            (76.3%)
     Basic and diluted net loss per        $        (0.05)             (0.06)             (0.02)             (0.20)
     share
     Market price:
        High                               $         2.45               1.75               1.62               1.40
        Low                                $         1.50               0.82               1.30               1.35
</TABLE>

Net income  per share  calculations  are based on the  weighted  average  common
shares outstanding for each period presented.


                                       33
<PAGE>


ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Telesource  is  exposed  to  market  risk for  changes  in  interest  rates  for
borrowings under some of its credit facilities,  which bear interest at variable
rates. Because these facilities bear interest at variable reates, the fair value
of the borrowings are not  significantly  affected by changes in market interest
rates.

Amounts invested in Telesource's foreign operations  (Telesource Fiji, Ltd.) are
translated  into U.S.  dollars at the exchange rates in effect at year-end.  The
resulting   translation   adjustments   are   recorded  as   accumulated   other
comprehensive  loss, a component of  stockholders'  equity,  in the consolidated
balance sheets.

An  increase  in interest  rates of 1.0% at  December  31,  2003 would  increase
Telesource's  interest expense on variable rate loans by approximately  $175,000
per year.  A  decrease  in  interest  rates of  approximately  the same  amount,
$175,000.

                                   * * * * * *

THIS ANNUAL  REPORT ON FORM 10-K  CONTAINS  CERTAIN  FORWARD-LOOKING  STATEMENTS
WITHIN THE  MEANING OF THE  PRIVATE  SECURITIES  LITIGATION  REFORM ACT OF 1995,
PARTICULARLY  STATEMENTS  REGARDING MARKET  OPPORTUNITIES,  MARKET SHARE GROWTH,
COMPETITIVE  GROWTH,  GROSS  PROFIT,  AND  SELLING,  GENERAL AND  ADMINISTRATIVE
EXPENSES AND THE INVESTMENT  CONSIDERATIONS  LISTED BELOW. THESE FORWARD-LOOKING
STATEMENTS INVOLVE RISKS AND  UNCERTAINTIES,  THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE IN ANY SUCH FORWARD-LOOKING  STATEMENTS. SUCH RISKS
AND  UNCERTAINTIES  INCLUDE,  BUT ARE NOT LIMITED TO ADVERSE  CHANGES IN GENERAL
ECONOMIC CONDITIONS,  INCLUDING CHANGES IN THE SPECIFIC MARKETS FOR TELESOURCE'S
SERVICES,  ADVERSE  BUSINESS  CONDITIONS,  DECREASED  OR LACK OF  GROWTH  IN THE
MECHANICAL  AND ELECTRICAL  CONSTRUCTION  AND  FACILITIES  SERVICES  INDUSTRIES,
INCREASED  COMPETITION,  PRICING  PRESSURES  AND RISK  ASSOCIATED  WITH  FOREIGN
OPERATIONS AND OTHER FACTORS.

Investment Considerations

Telesource  International has risk related to its ability to continue as a going
concern.

As of December 31, 2003, the Company's current liabilities  exceeded its current
assets by $5,557,843. The Company relies heavily on bank financing to support is
operations  and its ability to refinance  its existing  bank debt is critical to
provide  funding to satisfy the  Company's  obligations  as they  mature.  As of
December 31, 2003 the Company had total outstanding debt of


                                       34
<PAGE>

$29,552,417  of which  $9,242,195  is due in 2004.  As of December  31, 2003 the
Company  had an  accumulated  deficit  of  $36,630,897  and total  stockholders'
deficit of $13,966,515.

The Company incurred operating losses of $5,127,223,  $3,118,300, and $4,903,676
for the years ended December 31, 2003, 2002, and 2001, respectively. The Company
incurred net losses of  $6,629,441,  $4,886,397,  and  $7,245,774  for the years
ended December 31, 2003, 2002, and 2001, respectively.

The Company's  net working  capital  deficiency,  total  stockholders'  deficit,
recurring  losses,  and negative cash flows from  operations  raise  substantial
doubt about the  Company's  ability to continue as a going  concern.  Management
intends to work to address  these  uncertainties  by  continuing  its efforts to
raise additional capital,  increase revenues, and control costs with the goal of
achieving profitability. Subsequent to the year-end, the Company completed three
private  placements  of the  Company's  common  stock with net  proceeds of $3.5
million in additional capital. Management expects the increase in revenues to be
achieved by securing  additional  substantial  projects  during 2004 and through
increasing   revenues  from  existing   long-term   power  plant  operation  and
maintenance  agreements  as a result of  continued  expansion  on the  island of
Tinian and in the country of Fiji.  However, no assurance can be given that such
increased  revenues  will be achieved.  Although  management  believes  that the
Company will be cash flow positive in 2004 including debt payments,  the Company
has and expects to  continue to seek  support  from its  principal  stockholder,
SHBC, for its  operations,  and for working capital needs,  debt repayment,  and
business  expansion as may be required.  SHBC has  continued  its support of the
Company.  SHBC has agreed to  guarantee  or provide  letters of credit  covering
$27,214,000 of the Company's total debt of $29,552,417.


Telesource International - Risks related to construction activities
--------------------------------------------------------------------

Telesource  International  will likely  experience  significant  fluctuation  in
quarterly  results,  which makes it difficult  for  investors  to make  reliable
period-to-period comparisons of its business.

Telesource  International's  quarterly operating results will depend on revenues
from contracts for major projects. Telesource International can only undertake a
specific  number  of  projects  at any one  time.  If  Telesource  International
finishes one large  project and does not have another large project to start on,
revenues and results of  operations  within the quarter and possibly  subsequent
periods could  suffer.  Customers  may also cancel or defer  existing  contracts
resulting in reduced revenues for the quarter. Though management intends to take
steps to adjust  spending in a timely  manner to compensate  for any  unexpected
revenue  shortfalls,  it may not be successful.  For example staffing reductions
cannot be  implemented  quickly  due to local labor and  employment  laws in the
Commonwealth  of Northern  Mariana  Islands,  which limit our ability to release
employees  at will,  and losses  could  result.  Accordingly,  any such  revenue
shortfalls could result in continued operating losses.

Telesource   International's   revenues  are  derived  mainly  from  fixed-price
contracts  that may lead to  variations  in profits  due to a failure to control
costs.


                                       35
<PAGE>

All  of  Telesource  International's  construction  revenues  are  derived  from
fixed-price  contracts.  Because  Telesource  International  assumes the risk of
performing such contracts at the stipulated price, any change in the estimate of
ultimate  costs to be incurred  under the  contract or to control  costs  during
contract  performance  could result in losses or reduced  profits for particular
fixed-price  contracts,  which,  in turn,  could  result in periods of operating
losses.

Telesource  International's  principal  market  is  highly  competitive,  and if
Telesource  International is unable to compete  successfully in this market,  it
may be unable to increase its operations or become profitable.

The market for construction services is highly competitive and rapidly changing.
Telesource  International  competes  directly  with  other  firms  that focus on
providing   general   construction   services  as  well  as  services  for  more
sophisticated  structures,  including power plants and broadcasting  facilities.
Many of Telesource International's competitors have well-established reputations
for building  residential  and technical  structures  and have longer  operating
histories and significantly greater financial,  technical,  marketing, personnel
and other resources than Telesource  International has. Telesource International
is subject to  competition  that is  expected  to  increase  in the  future.  If
Telesource International does not successfully compete in its market, its growth
opportunities  will be limited and its  business  will not grow and its revenues
may be reduced.

Telesource International relies on third parties for important raw materials and
technical  expertise.  Telesource  International's  ability  to  enter  into new
engagements or to conduct the business in a profitable  manner will be harmed if
its access to these important resources is limited or becomes too costly.

Telesource  International relies on third-party suppliers for raw materials like
wood,  steel and concrete;  for  fabrication of technical  equipment  subsystems
including  diesel  generations,  antennas,  towers  and  transmitters:  and  for
providing  technical  expertise.  Telesource  International's  ability to obtain
cost-effective raw materials,  fabrication  services and technical assistance is
subject  to a number of  external  factors  which are  outside  of its  control,
including:

     o    Third parties may increase the price of the raw materials, fabrication
          services or technical assistance they provide.

     o    Third-party raw material suppliers, fabricators or technical expertise
          providers  may  decide not to provide  Telesource  International  with
          materials or services.

     o    Telesource  International has no long-term  contracts with third-party
          suppliers  of  raw  materials,   fabrication   services  or  technical
          expertise providers.

     o    Telesource  International's  third-party  contracts  are usually short
          term in duration and are cancelable by such third party.

If Telesource  International fails to obtain what it needs from these providers,
it may not be able to  successfully  compete  for new  business  or to  complete
existing engagements profitably.


                                       36
<PAGE>

Telesource  International is subject to substantial claims for warranty coverage
which, if such claims arise, could harm its financial condition.

Telesource  International  offers  warranties on its  construction  services and
power generating plants. Telesource International does not maintain any material
warranty reserves because these warranties are usually backed by warranties from
its vendors.  Should  Telesource  International be required to cover the cost of
repairs not covered by the warranties of Telesource  International's  vendors or
should one of Telesource International's major vendors be unable to cover future
warranty  claims,   Telesource   International   could  be  required  to  outlay
substantial funds, which could harm its financial condition.

Telesource International - Risks related to power generation activities
------------------------------------------------------------------------

Telesource   International's   power-generating  facility  could  be  shut  down
unexpectedly, making it difficult to sustain revenues and cash flow.

Telesource International owns a diesel fired electric generating facility with a
maximum power generation capacity of 20 mega-watts (Mw) located on the island of
Tinian, in the Commonwealth of the Northern Mariana Islands, a U.S.  possession.
This facility from time to time may experience  both  scheduled and  unscheduled
shutdowns. Periodically, the facility will incur scheduled shutdowns in order to
perform  maintenance  procedures to equipment that cannot be performed while the
equipment is operating. The facility may also incur unscheduled shutdowns or may
be required to operate at reduced  capacity  levels  following  the detection of
equipment  malfunctions,  or following minimum generation orders received by the
utility.  During  periods  when the facility is shutdown or operating at reduced
capacity levels,  Telesource  International  may incur losses due to the loss of
its operating  revenues and/or due to additional  costs which may be required to
complete any  maintenance  procedures.  It is not possible for it to predict the
frequency  of  future  unscheduled   shutdowns  or  to  predict  the  extent  of
maintenance  that  may  be  required  during  shutdowns   related  to  equipment
maintenance.

Telesource International depends on two customers for power-generation revenues.
The loss of eithers  single  customer  could  cause  Telesource  International's
revenues to decline.

Since  March  1999,  Telesource  International  began  deriving a portion of its
revenues  from the sale of  electric  power.  Under  Telesource  International's
agreement  with  a  governmental  agency,  the  electrical  power  generated  at
Telesource   International's   power   generation   facility  is  owned  by  the
governmental  agency.  Telesource  International  is paid a fee to  produce  the
electric power. The governmental  agency in turn sells the electric power to the
various users throughout the Island of Tinian. If the end-user customer defaults
or  increases  in  power  use  do not  materialize  as  anticipated,  Telesource
International's revenue base may not grow to support other operations.

During 2003, Telesource added the operation of two additional power plants for a
period of 20 years within Fiji for one customer,  the Fiji  Electric  Authority.
Telesource  is to  operate  the two  power  plants  in Fiji by  converting  fuel
provided by the customer into electricity for which  Telesource  receives a fee.
The Fiji Electric Authority in turn sells the power produced to various


                                       37
<PAGE>

users in Fiji.  If the end-user  customer  defaults or increases in power use do
not materialize as anticipated,  Telesource International's revenue base may not
grow to support other operations.


Telesource  International's  insurance or reserves may be  insufficient to cover
future claims on Telesource International's power generation activities.

Telesource International's power generation activities involve significant risks
of  environmental  damage,  equipment  damage and failures,  personal injury and
fines and costs imposed by regulatory  agencies.  Though management believes its
insurance programs are adequate,  if a liability claim is made against it, or if
there is an  extended  outage or  equipment  failure  or  damage  at  Telesource
International's power plant for which it is inadequately insured or subject to a
coverage  exclusion,  and Telesource  International  is unable to defend against
these claims  successfully  or obtain  indemnification  or warranty  recoveries,
Telesource International may be required to pay substantial amounts, which could
have a materially adverse effect on its financial condition.

Telesource International - Other risks
---------------------------------------

Telesource  International  is subject to several  inherent  risks of  conducting
business internationally.

Telesource International's  international operations are subject to the inherent
risks  of  doing  business  abroad.  The  loss  of  any  or  all  of  Telesource
International's  international  suppliers  and customers  could harm  Telesource
International's  ability  to  deliver  Telesource  International's  construction
services and power services on time and cause Telesource  International's  sales
to decline.  Telesource International's financial performance could be harmed by
many events and circumstances relating to international operations, including:

     * Shipping delays and cancellations;
     * Increases in import duties and tariffs;
     * Foreign exchange rate fluctuations;
     * Changes in foreign laws and regulations; and
     * Political and economic instability.

Telesource International is subject to government regulation.  Both the costs of
compliance  and  the  penalties  imposed  for  a  failure  to  comply  could  be
substantial.

Although management does not believe that compliance with applicable  regulatory
requirements  has  harmed  Telesource  International's  operations  in the  past
relative to its  competitors,  government  regulations  can change,  which could
increase Telesource International's costs of compliance with these requirements.
In addition,  Telesource  International's  power generation  operations  require
operating  permits granted by governmental  agencies.  Telesource  International
believes that tighter  regulations  for the  protection of the  environment  and
other  factors  will make it  increasingly  difficult  to obtain new permits and
renewal of existing permits may be subject to more  restrictive  conditions than
currently exist.  Failure to comply with these laws and


                                       38
<PAGE>

regulations  could result in fines,  additional  licensing  requirements  or the
revocation   of   Telesource   International's   licenses   in  the   particular
jurisdiction.  The costs of compliance could effect adversely operating results.
If a substantial  fine or other penalty is imposed,  Telesource  International's
business and financial condition could be harmed.

If Telesource  International does not manage its growth effectively,  its future
business prospects could be harmed.

Telesource  International  will need to expand in anticipation of a growing user
base and larger demand for  Telesource  International's  services.  The focus on
development  of new  business  could cause  disruptions  of existing  operations
adversely affecting Telesource International's business.  Expansion will require
Telesource   International  to  make  significant  up  front   expenditures  for
increasing  Telesource  International's  sales and marketing efforts and to hire
and train additional  project  managers,  engineers and facilities  operators as
well as incur costs in connection with constructing  power plants to be owned by
Telesource.  Telesource  may not be successful  in expanding  its  operations or
maintaining adequate management, financial and operating systems and controls of
its larger business base.

Telesource   International's   largest   stockholder   and  its  affiliates  own
approximately 66.7% of the common stock, and their interests may not be the same
as  the  minority  stockholders  who  will  have  little  or no  influence  over
Telesource International's activities.

The  largest  stockholder,  SHBC,  is able to control the outcome of all matters
submitted to a vote of the holders of common  stock,  including  the election of
directors,  amendments to Telesource's certificate of incorporation and approval
of significant corporate transactions.  SHBC owns beneficially  approximately of
66.7% of the common stock.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                                       39
<PAGE>



                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                        Consolidated Financial Statements

                           December 31, 2003 and 2002

                   (With Independent Auditors' Report Thereon)


<PAGE>


                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES


                                Table of Contents



                                                                           Page

Independent Auditors' Report                                                F-1

Consolidated Balance Sheets                                                 F-2

Consolidated Statements of Operations                                       F-3

Consolidated Statements of Stockholders' Deficit and Comprehensive Loss     F-4

Consolidated Statements of Cash Flows                                       F-5

Notes to Consolidated Financial Statements                                  F-6


<PAGE>


                          Independent Auditors' Report


The Board of Directors
Telesource International, Inc.:


We have  audited the  accompanying  consolidated  balance  sheets of  Telesource
International,  Inc. and subsidiaries  (the Company) as of December 31, 2003 and
2002,  and  the  related  consolidated  statements  of  operations,  changes  in
stockholders'  deficit and  comprehensive  loss,  and cash flows for each of the
years in the  three-year  period ended  December 31,  2003.  These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in  all  material  respects,   the  financial  position  of  Telesource
International,  Inc. and  subsidiaries as of December 31, 2003 and 2002, and the
results  of their  operations  and their cash flows for each of the years in the
three-year  period  ended  December  31,  2003  in  conformity  with  accounting
principles generally accepted in the United States of America.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated  financial statements,  the Company's recurring losses and negative
cash flows from  operations,  dependency on its major  shareholder for financial
support and its net working capital deficiency raise substantial doubt about its
ability to continue as a going  concern.  Management's  plans in regard to these
matters are also described in Note 1. The consolidated  financial  statements do
not  include  any  adjustments  that  might  result  from the  outcome  of these
uncertainties.


Chicago, Illinois                       /s/ KPMG LLP
June 11, 2004


                                      F-1
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                           Consolidated Balance Sheets

                           December 31, 2003 and 2002

<TABLE>
<CAPTION>
                                     Assets                                        2003            2002
                                                                               ------------    ------------
<S>                                                                            <C>               <C>
Current assets:
     Cash and cash equivalents                                                 $  1,487,280         244,723
     Accounts receivable less allowance for doubful accounts of
        $38,972 at December 31, 2003 and $0 and December 31, 2002                 5,685,485       3,818,268
     Current portion of net investment in sales-type lease                        1,776,646       1,617,840
     Costs and estimated earnings in excess of billings                           3,560,452       5,448,663
     Prepaid expenses and other current assets                                      372,029         261,379
                                                                               ------------    ------------
                 Total current assets                                            12,881,892      11,390,873

Net investment in sales-type lease - long term                                    9,484,925      11,261,571
Property, plant, and equipment, net                                               2,288,562       2,317,617
Other assets                                                                        128,063         190,274
                                                                               ------------    ------------
                 Total assets                                                  $ 24,783,442      25,160,335
                                                                               ============    ============

                      Liabilities and Stockholders' Deficit

Current liabilities:
     Current portion of long-term debt                                         $  9,242,195      20,700,000
     Accounts payable                                                             6,236,223       3,879,364
     Accounts payable - related party                                               657,618       3,736,283
     Accrued expenses                                                             1,895,889       3,320,338
     Billings in excess of costs and estimated earnings                             246,559              --
     Income tax payable                                                              74,947              --
     Other current liabilities                                                       86,304         125,000
                                                                               ------------    ------------
                 Total current liabilities                                       18,439,735      31,760,984

Long-term debt                                                                   20,310,222      14,000,000
Redeemable convertible preferred stock (note 9)                                          --       3,000,000
                                                                               ------------    ------------
                 Total liabilities                                               38,749,957      48,760,984
                                                                               ------------    ------------

Stockholders' deficit:
     Convertible preferred stock. $0.01 par value, authorized 10,000,000
        shares, issued and outstanding 9,799,999 at December 31, 2003            14,700,000              --
     Common stock, $0.01 par value. Authorized 50,000,000 shares,
        issued and outstanding 17,000,000 and 15,000,000 shares
        at December 31, 2003 and 2002, respectively                                 170,000         150,000
     Additional paid-in capital                                                   7,777,225       5,797,225
     Accumulated deficit                                                        (36,630,897)    (29,431,981)
     Accumulated comprehensive income (loss)                                         17,157        (115,893)
                                                                               ------------    ------------
                 Total stockholders' deficit                                    (13,966,515)    (23,600,649)

Commitments and contingencies (note 16)
                                                                               ------------    ------------
                 Total liabilities and stockholders' deficit                   $ 24,783,442      25,160,335
                                                                               ============    ============
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-2
<PAGE>


                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Operations

                  Years ended December 31, 2003, 2002, and 2001

<TABLE>
<CAPTION>
                                                           2003            2002            2001
                                                       ------------    ------------    ------------
<S>                                                    <C>               <C>             <C>
Revenues:
     Construction revenues                             $ 14,381,282      16,565,696      11,823,772
     Construction revenues - related party                       --         838,331              --
     Construction revenues on power plants                       --              --       4,052,600
     Service fees - power generation plant                2,968,257       1,130,172         858,336
     Sales, net                                              43,636         307,378         130,674
     Sales, net - related party                                  --          89,998             256
     Rental income                                          919,063          68,209           1,675
     Service fees                                           571,776          34,640              --
     Finance lease revenue                                1,142,160       1,286,771       1,418,456
                                                       ------------    ------------    ------------
                 Gross revenues                          20,026,174      20,321,195      18,285,769

Costs and expenses:
     Construction costs                                  15,871,145      15,912,633      12,381,495
     Construction costs on power plants                          --              --       3,504,258
     Operation and maintenance costs -
        power generation plant                            2,588,752       1,224,202       1,159,132
     Rental costs                                           541,043              --              --
     Costs of service                                       155,902              --              --
                                                       ------------    ------------    ------------
                 Gross profit                               869,332       3,184,360       1,240,884
                                                       ------------    ------------    ------------

Operating expenses:
     Salaries and employee benefits                       1,646,392       1,702,139       1,848,905
     Occupancy and equipment                                380,576         342,189         560,476
     General and administrative                           3,983,401       4,258,332       3,735,179
     Impairment of long-lived asset                          76,186              --              --
                                                       ------------    ------------    ------------
                 Total operating expenses                 6,086,555       6,302,660       6,144,560
                                                       ------------    ------------    ------------
                 Operating loss                          (5,217,223)     (3,118,300)     (4,903,676)
                                                       ------------    ------------    ------------

Other income (expense):
     Interest income                                             --           2,768          32,829
     Interest expense, net                               (1,415,701)     (1,791,328)     (2,399,145)
     Other income, net                                       71,929          20,463          43,658
                                                       ------------    ------------    ------------
                 Total other expense                     (1,343,772)     (1,768,097)     (2,322,658)
                                                       ------------    ------------    ------------
                 Loss before income taxes                (6,560,995)     (4,886,397)     (7,226,334)

Income tax expense                                           68,446              --          19,440
                                                       ------------    ------------    ------------
                 Net loss                              $ (6,629,441)     (4,886,397)     (7,245,774)
                                                       ============    ============    ============

Basic and diluted net loss per share (note 11)         $      (0.48)          (0.33)          (0.52)

Weighted average shares outstanding                      15,016,438      15,000,000      13,849,315
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-3
<PAGE>


                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

     Consolidated Statements of Stockholders' Deficit and Comprehensive Loss

                  Years ended December 31, 2003, 2002, and 2001

<TABLE>
<CAPTION>
                                                 Preferred stock                 Common stock
                                           ----------------------------   ---------------------------    Additional
                                                                                              Par         paid-in       Accumulated
                                              Shares           Value         Shares          value        capital         deficit
                                           ------------    ------------   ------------   ------------   ------------   ------------
<S>                                           <C>          <C>              <C>          <C>            <C>            <C>
Balance at December 31, 2000                         --    $         --     13,000,000   $    130,000   $  3,817,225   $(17,299,810)
Exercise of 2,000,000 warrants
     for common stock at
     $1 per share                                    --              --      2,000,000         20,000      1,980,000             --
Net loss                                             --              --             --             --             --     (7,245,774)
Foreign currency translation
     adjustment                                      --              --             --             --             --             --

Comprehensive income (loss)
                                           ------------    ------------   ------------   ------------   ------------   ------------
Balance at December 31, 2001                         --              --     15,000,000        150,000      5,797,225    (24,545,584)
Net loss                                             --              --             --             --             --     (4,886,397)
Foreign currency translation
     adjustment                                      --              --             --             --             --             --

Comprehensive income (loss)
                                           ------------    ------------   ------------   ------------   ------------   ------------
Balance at December 31, 2002                         --              --     15,000,000        150,000      5,797,225    (29,431,981)
Reclassification of convertible preferred
     stock, 2,000,000 shares (note 9)         2,000,000       3,000,000             --             --             --             --
Sale of convertible preferred stock -
     7,799,999 shares at $1.50 per share      7,799,999      11,700,000             --             --             --             --
Sale of common stock -
     2,000,000 shares at $1.00 per share             --              --      2,000,000         20,000      1,980,000             --
Dividend                                             --              --             --             --             --       (569,475)
Net loss                                             --              --             --             --             --     (6,629,441)
Foreign currency translation
     adjustment                                      --              --             --             --             --             --

Comprehensive loss
                                           ------------    ------------   ------------   ------------   ------------   ------------
Balance at December 31, 2003                  9,799,999    $ 14,700,000     17,000,000   $    170,000   $  7,777,225   $(36,630,897)
                                           ============    ============   ============   ============   ============   ============


<CAPTION>
                                                            Accumulated       Total
                                           Comprehensive   comprehensive   stockholders'
                                               loss        income (loss)     deficit
                                           ------------    ------------    ------------
<S>                                        <C>             <C>             <C>
Balance at December 31, 2000               $         --    $   (181,057)   $(13,533,642)
Exercise of 2,000,000 warrants
     for common stock at
     $1 per share                                    --              --       2,000,000
Net loss                                     (7,245,774)             --      (7,245,774)
Foreign currency translation
     adjustment                                 213,147         213,147         213,147
                                           ------------
Comprehensive income (loss)                  (7,032,627)
                                           ============    ------------    ------------
Balance at December 31, 2001                     32,090     (18,566,269)
Net loss                                     (4,886,397)             --      (4,886,397)
Foreign currency translation
     adjustment                                (147,983)       (147,983)       (147,983)
                                           ------------
Comprehensive income (loss)                  (5,034,380)
                                           ============    ------------    ------------
Balance at December 31, 2002                   (115,893)    (23,600,649)
Reclassification of convertible preferred
     stock, 2,000,000 shares (note 9)                --              --       3,000,000
Sale of convertible preferred stock -
     7,799,999 shares at $1.50 per share             --              --      11,700,000
Sale of common stock -
     2,000,000 shares at $1.00 per share             --              --       2,000,000
Dividend                                             --              --        (569,475)
Net loss                                     (6,629,441)             --      (6,629,441)
Foreign currency translation
     adjustment                                 133,050         133,050         133,050
                                           ------------
Comprehensive loss                         $ (6,496,391)
                                           ============    ------------    ------------
Balance at December 31, 2003                               $     17,157    $(13,966,515)
                                                           ============    ============
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>


                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                  Years ended December 31, 2003, 2002, and 2001

<TABLE>
<CAPTION>
                                                                           2003            2002            2001
                                                                       ------------    ------------    ------------
<S>                                                                    <C>               <C>             <C>
Cash flows from operating activities:
     Net loss                                                          $ (6,629,441)     (4,886,397)     (7,245,774)
     Adjustments to reconcile net loss to net
        cash used in operating activities:
           Depreciation                                                     553,845         501,554         411,425
           Loss on sale of fixed assets                                      59,808              --              --
           Impairment of long-lived assets                                   76,186              --              --
           Changes in assets and liabilities:
              Receivables                                                (1,867,217)       (667,651)      5,357,495
              Prepaid expenses and other current assets                    (110,650)        126,750         140,328
              Costs and estimated earnings in excess of billings          2,134,770      (2,742,707)     (3,114,724)
              Net investment in sales-type lease                          1,617,840       1,473,229       1,341,544
              Other assets                                                   62,211           4,573          40,621
              Accounts payable                                             (721,805)      4,172,519      (2,884,056)
              Accrued expenses                                           (1,553,860)        197,264       1,521,035
              Income taxes payable                                               --         (19,440)         14,694
              Other liabilities                                              94,354        (191,487)         34,999
                                                                       ------------    ------------    ------------
                 Net cash used in operating activities                   (6,283,959)     (2,031,793)     (4,382,413)
                                                                       ------------    ------------    ------------
Cash flows from investing activities:
     Proceeds from maturity of certificate of deposit                            --              --       1,000,000
     Proceeds from sale of equipment                                        135,000          13,922          30,267
     Capital expenditures                                                  (795,784)       (142,158)       (833,959)
                                                                       ------------    ------------    ------------
                 Net cash provided by (used in)
                    investing activities                                   (660,784)       (128,236)        196,308
                                                                       ------------    ------------    ------------
Cash flows from financing activities:
     Proceeds from long-term debt                                        14,932,483      11,400,000       6,500,000
     Payments of long-term debt                                         (20,080,066)    (12,200,000)     (5,148,118)
     Proceeds from sale of preferred stock                               11,700,000       3,000,000              --
     Proceeds from sale of common stock                                   2,000,000              --              --
     Dividends paid                                                        (365,117)             --              --
     Proceeds from exercise of stock warrants                                    --              --       2,000,000
                                                                       ------------    ------------    ------------
                 Net cash provided by financing activities                8,187,300       2,200,000       3,351,882
                                                                       ------------    ------------    ------------
     Effect of exchange rate changes on cash                                     --              --              --

                 Net increase (decrease) in cash
                    and cash equivalents                                  1,242,557          39,971        (834,223)

Cash and cash equivalents at beginning of year                              244,723         204,752       1,038,975
                                                                       ------------    ------------    ------------
Cash and cash equivalents at end of year                               $  1,487,280         244,723         204,752
                                                                       ============    ============    ============
Supplemental disclosure:
     Cash paid during the year for interest                            $  1,968,767       2,112,655       2,879,739
     Cash paid during the year for income taxes                                  --          19,440              --

Noncash transactions:
     Reclassification of preferred stock                               $  3,000,000              --              --
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-5
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


(1)  Background

     Telesource International, Inc. (Telesource or the Company) was incorporated
     in Delaware in 1994.  Telesource  was formed in 1994 to facilitate  various
     intra-corporate  activities  and,  until  July  1999,  was a  wholly  owned
     subsidiary  of  Sayed  Hamid  Behbehani  &  Sons  Co.  W.L.L.   (SHBC),   a
     Kuwait-based civil, electrical, and mechanical engineering and construction
     company.  Telesource  is  an  international  engineering  and  construction
     company,  engaged in constructing  single-family homes, airports, and radio
     towers,  and in the construction  and operation of energy  conversion power
     plants.  In Tinian,  an island in the  Commonwealth of the Northern Mariana
     Islands  (U.S.  Territory),  the Company  operates a diesel fired  electric
     power generation plant for the sale of electricity to the local power grid.
     In Fiji, the Company  operates two diesel fired  electric power  generation
     plants for the sale of  electricity  to the local power grid. The Company's
     facility  in  Lombard,  Illinois,  handles  the  procurement,  export,  and
     shipping of U.S. fabricated products for use by the Company's  subsidiaries
     or for resale to customers outside of the mainland.

     The  Company  conducts  its  operations  through  three  subsidiaries.  The
     Company's Mariana subsidiary,  Telesource CNMI, Inc., handles  construction
     and  management  of  the  Company's  energy  conversion  facilities  in the
     Commonwealth  of the Northern  Mariana Islands and operates a branch office
     in Guam. The Company's second subsidiary,  Commsource International,  Inc.,
     is an  international  export  company  that  facilitates  the  purchase  of
     equipment in the U.S. The  Company's  third  subsidiary,  Telesource  Fiji,
     Ltd.,  handles the  Company's  power  generation  activities  in Fiji.  The
     Company's Palau operations are handled directly by the Company.

     Telesource  has  three  main  operating  segments:  construction  services,
     brokerage of goods and services,  and power  generation and construction of
     power plants. The power generation activities commenced in March 1999.

     During 1999,  Telesource  entered into an agreement for a merger with Sixth
     Business  Service  Group,  a  registered  company with the  Securities  and
     Exchange Commission (SEC) located in Tampa,  Florida.  Telesource completed
     the merger with and into Sixth Business Service Group on September 7, 2001,
     pursuant to which the  stockholders of Telesource  received shares of Sixth
     Business  Service Group in exchange for their shares of  Telesource  stock.
     Sixth Business  Service Group is the surviving  corporation,  and after the
     merger was  completed,  Sixth  Business  Service  Group changed its name to
     Telesource  International,  Inc. Upon completion of the merger,  Telesource
     made application for listing its common stock with the NASD, and Telesource
     was  approved  for listing on the NASD Over The Counter  Bulletin  Board in
     October 2001.

(2)  Summary of Significant Accounting Policies

     (a)  Principles of Consolidation

          The  consolidated  financial  statements  include the  accounts of the
          Company  and its  wholly  owned  subsidiaries:  Telesource  CNMI Inc.,
          Commsource   International,   Inc.,  and  Telesource  Fiji,  Ltd.  All
          significant   intercompany   transactions   and  accounts   have  been
          eliminated.


                                      F-6
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


     (b)  Liquidity and Going Concern

          As of December 31, 2003, the Company's  current  liabilities  exceeded
          its current assets by  $5,557,843.  The Company relies heavily on bank
          financing to support its  operations  and its ability to refinance its
          existing  bank debt is  critical  to provide  funding  to satisfy  the
          Company's  obligations  as they  mature.  As of December  31, 2003 the
          Company had total  outstanding debt of $29,552,417 of which $9,242,195
          is due in 2004. As of December 31, 2003 the Company had an accumulated
          deficit of $36,061,422 and total stockholders' deficit of $13,966,515.

          The Company incurred operating losses of $5,217,223,  $3,118,300,  and
          $4,903,676  for the years ended  December  31, 2003,  2002,  and 2001,
          respectively.   The  Company   incurred  net  losses  of   $6,629,441,
          $4,886,397,  and  $7,245,774  for the years ended  December  31, 2003,
          2002, and 2001, respectively.

          Cash used in operating  activities  was  $6,283,959,  $2,031,793,  and
          $4,382,413  for the years ended  December  31, 2003,  2002,  and 2001,
          respectively.  Funds  provided  by  net  borrowings  and  stock  sales
          amounted to $8,187,300, $2,200,000, and $3,351,882 for the years ended
          December 31, 2003, 2002, and 2001, respectively.

          The  Company's net working  capital  deficiency,  total  stockholders'
          deficit,  recurring  losses,  and negative cash flows from  operations
          raise  substantial  doubt about the Company's ability to continue as a
          going   concern.   Management   intends  to  work  to  address   these
          uncertainties by continuing its efforts to raise  additional  capital,
          increase  revenues,  and  control  costs  with the  goal of  achieving
          profitability. Subsequent to the year-end, the Company completed three
          private  placements of the Company's common stock with net proceeds of
          $3.5  million in  additional  capital.  Management  expects to achieve
          increased revenue by securing additional  substantial  projects during
          2004, and through  increased  revenues from existing  long-term  power
          plant  operation and  maintenance  agreements as a result of continued
          expansion on the island of Tinian and in the country of Fiji. However,
          no  assurance  can be  given  that  such  increased  revenues  will be
          achieved.  Although  management believes that the Company will be cash
          flow positive in 2004  including  debt  payments,  the Company has and
          expects to continue to seek  support from its  principal  stockholder,
          SHBC,  for  its  operations,  and  for  working  capital  needs,  debt
          repayment,  and  business  expansion  as may  be  required.  SHBC  has
          continued its support of the Company.  SHBC has agreed to guarantee or
          provide letters of credit covering  $27,214,000 of the Company's total
          debt of $29,552,417.

     (c)  Cash Equivalents

          Telesource  records as cash  equivalents all highly liquid  short-term
          investments with original maturities of three months or less.

     (d)  Foreign Currency

          All assets and  liabilities  denominated  in  foreign  currencies  are
          translated at the exchange  rate on the balance sheet date.  Revenues,
          costs,  and  expenses  are  translated  at average  rates of  exchange
          prevailing during the period.  Translation adjustments are deferred as
          a  separate  component  of  stockholders'  equity.  Gains  and  losses
          resulting  from  foreign  currency  transactions  are  included in the
          consolidated statements of operations.


                                      F-7
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


     (e)  Deposits in Excess of Federal Deposit Insurance Corporation Insurance

          The  Company  maintains  cash in  accounts  in excess  of the  Federal
          Deposit Insurance Corporation's insured limit of $100,000.

     (f)  Revenue Recognition

          Revenue from construction contracts and construction revenues on power
          plants,  with the exception of the power plant  constructed  on Tinian
          which is accounted for using the sales-type lease method of accounting
          as discussed below, is recognized  using the  percentage-of-completion
          method of accounting,  based upon costs  incurred and estimated  total
          projected  costs.   Cost  of  revenue  consists  of  direct  costs  on
          contracts,   including   labor  and  materials,   amounts  payable  to
          subcontractors,  direct overhead costs,  equipment expense  (primarily
          depreciation,  maintenance,  and repairs),  interest  associated  with
          construction  projects,  and  insurance  costs.  Contracts  frequently
          extend over a period of more than one year and  revisions  in cost and
          profit estimates during  construction are recognized in the accounting
          period in which the facts that  require  the  revision  become  known.
          Losses on  contracts,  if any, are provided in total when  determined,
          regardless of the degree of project completion.  Claims for additional
          contract revenue are recognized in the period when it is probable that
          the claim  will  result in  additional  revenue  and the amount can be
          reasonably estimated.

          The Company accounts for its leasing activities in accordance with the
          requirements  of Statement of Financial  Accounting  Standards No. 13,
          Accounting for Leases.  Revenue associated with the sale of the Tinian
          power plant constructed and sold under a sales-type lease, measured as
          the present value of noncancelable rents, was recognized in connection
          with  recording  the  loss  on  sale in 1997  and  1998.  The  Company
          recognizes  finance lease revenue on the  resulting  sales-type  lease
          receivable  at a constant  rate  using the  interest  method.  Service
          revenues  received  from  operating and  maintaining  the Tinian power
          plant for the duration of the lease are  recognized as earned based on
          actual  kilowatt  hours of  electricity  produced and delivered to the
          lessee's  customers.  To the extent that  variable  payments  based on
          kilowatt-hours  of  production  exceed the fair value of operation and
          maintenance services provided,  the Company recognizes such contingent
          payments as additional finance lease revenue as they are earned.

          The Company also receives  variable  monthly  payments as compensation
          for its  production  of power.  The variable  payments are  recognized
          based upon power  produced and billed to the customer as earned during
          each accounting period.

          Revenue  from the  Company's  brokering  of U.S.  fabricated  goods is
          recognized  at the  time of  shipment.  The  sales  revenues  for U.S.
          fabricated  goods  are  recognized  net of costs of goods  sold due to
          title  transferring  from the  manufacturer  directly to the Company's
          customer,  with the risk of loss borne by the  customer at the time of
          transfer.  The Company  recognizes  management  fees and energy  sales
          revenue in the period in which the  commodity  is  delivered or at the
          time the work is performed.  Telesource  recognizes  rental revenue on
          the accrual basis  pursuant to  contractual  arrangements  between the
          Company and its customers.


                                      F-8
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


     (g)  Property, Plant, and Equipment

          Property,  plant,  and equipment  are stated at cost less  accumulated
          depreciation.  Depreciation is computed using the straight-line method
          at rates sufficient to depreciate the cost over the estimated economic
          lives of the assets.  Depreciable  lives used for financial  reporting
          purposes are as follows:

                                                                 Estimated
                        Asset description                       useful life
          --------------------------------------------        ---------------
                                                              Lesser of lease
          Leasehold improvements                              term or 7 years
          Automobiles                                             5 years
          Construction machinery and equipment                    10 years
          Office furniture and fixtures                           5 years
          Computer and communication equipment                    5 years

          Cost and  accumulated  depreciation  are eliminated  from the accounts
          when  assets are sold or  retired  and any  resulting  gain or loss is
          reflected in operations in the year of disposition.

     (h)  Impairment of Long-lived Assets

          The Company  accounts for  long-lived  assets in  accordance  with the
          provisions  of Statement of Financial  Accounting  Standards  No. 144,
          Accounting  for the  Impairment of Long-Lived  Assets.  This statement
          requires that long-lived assets and certain  identifiable  intangibles
          be reviewed for impairment whenever events or changes in circumstances
          indicate that the carrying  amount of an asset may not be recoverable.
          Recoverability  of  assets  to be  held  and  used  is  measured  by a
          comparison of the carrying amount of an asset to future net cash flows
          expected to be generated by the asset.  If such assets are  considered
          to be impaired,  the  impairment  to be  recognized is measured by the
          amount by which the  carrying  amount of the  assets  exceed  the fair
          value of the  assets.  Assets to be  disposed  of are  reported at the
          lower of the  carrying  amount or fair value  less costs to sell.  The
          Company  recognized  an asset  impairment  charge of  $76,186 in 2003,
          related to certain  bucket  trucks owned by the  Company.  See further
          discussion of this charge in note 6.

     (i)  Income Taxes

          Telesource  International,   Inc.,  Commsource  International,   Inc.,
          Telesource  CNMI,  Inc.,  and  Telesource  Fiji,  Ltd.  file  separate
          corporation  income tax returns.  Telesource  International,  Inc. and
          Commsource  International,   Inc.  are  U.S.  corporations  that  file
          separate U.S. corporate income tax returns. Telesource CNMI, Inc. is a
          Commonwealth  of  Northern  Mariana  Islands  corporation  and files a
          corporation tax return for this commonwealth. Telesource Fiji, Ltd. is
          a Fijian corporation and files a Fijian corporation tax return.  There
          is no corporate income tax in Palau.

          Deferred  income taxes are accounted for under the asset and liability
          method.  Deferred tax assets and  liabilities  are  recognized for the
          estimated future tax consequences  attributable to differences between
          the  financial  statement  carrying  amounts  of  existing  assets and
          liabilities and their respective income tax bases. Deferred tax assets
          and liabilities are measured using enacted tax rates expected to apply
          to taxable  income in the years in which those  temporary  differences
          are expected


                                      F-9
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


          to be  recovered  or settled.  The effect on  deferred  tax assets and
          liabilities  of a change in tax rates is  recognized  in income in the
          period that includes the enactment date.

          The Company's  subsidiary,  Telesource CNMI, Inc., in the Commonwealth
          of the Northern  Mariana Islands (CNMI) prepares its corporate  income
          tax returns based on the local tax code. The tax code used is outlined
          in the "Covenant to Establish a Commonwealth  of the Northern  Mariana
          Islands in Political  Union with the United States," which adopted the
          Internal  Revenue  Code as the local  territorial  income tax  regime.
          Beginning  January  1,  1985,  95% of any  income  tax due on the CNMI
          source income is rebated to the extent that it exceeds local  business
          gross receipts taxes (GRT).  In 1995, the rebate percent was decreased
          and currently  ranges from 90%  decreasing  to 50% depending  upon the
          amount of taxable income.  The amounts paid for the gross receipts tax
          amounted to  $400,509,  $1,037,861,  and $567,301 in 2003,  2002,  and
          2001,  respectively,  and are  included in general and  administrative
          expenses on the accompanying consolidated statements of operations.

     (j)  Use of Estimates

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

     (k)  Fair Value of Financial Instruments

          The Company's financial instruments include cash and cash equivalents,
          certificates  of  deposit,  receivables,   short-term  debt,  accounts
          payable,  and long-term  debt. The gross carrying  amount of the notes
          receivable  related to the sales-type lease approximates fair value as
          the notes have been discounted at a rate  approximating  the Company's
          borrowing rate. The carrying amount of the long-term debt approximates
          fair value due to the variable interest rates. The carrying amounts of
          other financial assets and liabilities  approximate fair value because
          of the short maturities of those instruments.

     (l)  Stock Based Compensation

          The Company has stock  incentive  plans that  provide for  stock-based
          employee  compensation,  including  the  granting of stock  options to
          certain key  employees.  The plan is more fully  described in note 12.
          The Company  accounts for the stock incentive plans in accordance with
          the  recognition  and  measurement  principles  of APB Opinion No. 25,
          Accounting for Stock Issued to Employees, and related Interpretations.
          Under this  method,  compensation  expense is  recorded on the date of
          grant only if the current market price of the underlying stock exceeds
          the exercise price.  Under the Company s stock  incentive plan,  stock
          options are granted at exercise  prices that equal the market value of
          the  underlying  common  stock on the  date of  grant.  Therefore,  no
          compensation  expense  related  to stock  options is  recorded  in the
          Consolidated Statements of Operations.

          Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
          for Stock-Based  Compensation (SFAS 123),  established  accounting and
          disclosure  requirements using a fair-value based method of accounting
          for stock-based  employee  compensation plans. As allowed by SFAS


                                      F-10
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


          123,  the  Company  has  elected to  continue  to apply the  intrinsic
          value-based method of accounting described above, and has adopted only
          the  disclosure   requirements   of  SFAS  123.  The  following  table
          illustrates  the  effect  on net loss  and loss per  share if the fair
          value-based recognition provisions of SFAS 123 had been applied to all
          outstanding and unvested awards in each period:

<TABLE>
<CAPTION>
                                                               Years ended December 31,
                                                      -----------------------------------------
                                                         2003            2002           2001
                                                      -----------    -----------    -----------
<S>                                                   <C>             <C>            <C>
          Net loss as reported                        $(6,629,441)    (4,886,397)    (7,245,774)
               Less stock-based compensation
                  expense determined under fair
                  value method for all awards              41,183         42,810         89,858
                                                      -----------    -----------    -----------
                           Pro forma net loss         $(6,670,624)    (4,929,207)    (7,335,632)
                                                      ===========    ===========    ===========
          Basic and diluted loss per share:
               As reported                            $     (0.48)         (0.33)         (0.52)
               Pro forma                              $     (0.48)         (0.33)         (0.53)
</TABLE>

(3)  Customer Concentrations

     The Company has a concentration  of risk with four  significant  customers.
     The Company was contracted by the Commonwealth  Utilities Corporation (CUC)
     to construct and operate a power  generation  facility.  In March 1999, the
     power generation plant became  operational.  Power revenues from this plant
     began in March 1999 and are  earned  under the terms of a  long-term  power
     energy conversion agreement with this customer.  Revenues from the CUC were
     $2.3 million,  $2.4  million,  and $2.3 million for 2003,  2002,  and 2001,
     respectively.  Another  significant  customer  is  the  Commonwealth  Ports
     Authority  (CPA).  In 2001,  the Company was  contracted  to  construct  an
     airport  expansion  project on the island of Tinian by the CPA. The Company
     recognized revenues of $1.8 million,  $10.8 million,  and $7.9 million from
     the CPA for 2003,  2002,  and  2001,  respectively.  The third  significant
     customer is the  Department  of Public Works (DPW) in the  Commonwealth  of
     Northern Mariana Islands.  In 2002, the Company was contracted to construct
     a prison  for the DPW on the  island  of  Saipan.  The  Company  recognized
     revenues of $6.5  million and $5.3  million for 2003 and 2002 from the DPW.
     The fourth  significant  customer is the Fiji Electric Authority (FEA). The
     Company signed a 20-year operations and maintenance  agreement with the FEA
     in April 2003 and recognized revenues under the contract of $1.8 million in
     2003.

     Upon commissioning of the Company's power plant on the island of Tinian for
     Phase I in March 1999, the Company  received 120  promissory  notes each in
     the amount of $180,000  representing  the  guaranteed  payment due from CUC
     over the term of the agreement.  The par value balance of promissory  notes
     outstanding was $11.2 million and $13.3 million as of December 31, 2003 and
     2002,  respectively.  The discounted value of the promissory notes was $8.8
     million  and $10.1  million at December  31,  2003 and 2002,  respectively.
     Under the  agreement  the Company  also  receives a monthly  operation  and
     maintenance  fee of $50,000 for 120  months.  The  discounted  value of the
     operation and maintenance fee was $2.5 million and $2.8 million at December
     31, 2003 and 2002, respectively. The promissory notes have been included in
     the original net  investment  in  sales-type  lease as discussed in note 7.
     Revenues from the


                                      F-11
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


     Tinian power plant were 11.3% and 10.9% of the Company's  revenues for 2003
     and 2002, respectively.  Gross receivables for the investment in sales-type
     lease were  $14,260,000  and  $17,020,000  at  December  31, 2003 and 2002,
     respectively.

(4)  Accounts Receivable

     Accounts receivable consist of the following at December 31, 2003 and 2002:

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                     ---------------------------
                                                                         2003           2002
                                                                     ------------   ------------
<S>                                                                  <C>               <C>
     Construction contracts completed and in progress                $  2,518,583      1,714,204
     Retainages                                                         3,175,037      1,842,015
     Other                                                                 30,837        262,049
                                                                     ------------   ------------
                                                                        5,724,457      3,818,268
     Less provision for doubtful accounts                                  38,972             --
                                                                     ------------   ------------
                      Net accounts receivable                        $  5,685,485      3,818,268
                                                                     ============   ============
</TABLE>

     Retainages  are all due within the next 12 months.  Provisions for doubtful
     accounts  and  write-offs  during  2003  and  2002  were  $38,972  and  $0,
     respectively.

(5)  Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts

     Long-term  construction  contracts  in  progress  accounted  for  using the
     percentage-of-completion method consisted of:

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                     ---------------------------
                                                                         2003           2002
                                                                     ------------   ------------
<S>                                                                  <C>              <C>
     Costs incurred on uncompleted contracts                         $ 34,720,687     15,912,633
     Estimated earnings (loss)                                          2,657,203      1,491,394
                                                                     ------------   ------------
                                                                       37,377,890     17,404,027
     Less billings to date                                             34,063,997     11,955,364
                                                                     ------------   ------------
                                                                     $  3,313,893      5,448,663
                                                                     ============   ============
     Included in the accompanying consolidated balance
          sheet under the following captions:
             Costs and estimated earnings in excess of billings      $  3,560,452      5,448,663
             Billings in excess of costs and estimated earnings           246,559             --
</TABLE>

     See note 3 for a description of customer concentrations.


                                      F-12
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


(6)  Property, Plant, and Equipment

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                     ---------------------------
                                                                         2003           2002
                                                                     ------------   ------------
<S>                                                                  <C>               <C>
     Leasehold improvements                                          $    191,892        189,128
     Transportation equipment                                             701,182        276,482
     Construction machinery and equipment                               3,677,753      3,670,277
     Office furniture and equipment                                       702,191        668,510
     Computer and communication equipment                                 176,543        158,687
                                                                     ------------   ------------
                                                                        5,449,561      4,963,084
     Less accumulated depreciation and amortization                     3,160,999      2,645,467
                                                                     ------------   ------------
                      Net property, plant, and equipment             $  2,288,562      2,317,617
                                                                     ============   ============
</TABLE>

     Total depreciation  expense was $553,845,  $501,554,  and $411,425 in 2003,
     2002, and 2001,  respectively.  Depreciation for construction machinery and
     equipment is recognized as a project expense when appropriate.

     The Company  recognized an asset  impairment  charge of $76,186 during 2003
     attributable to bucket trucks owned by the Company. As a result of the sale
     of three of the  bucket  trucks to a third  party for less than  their book
     value,  the Company  evaluated the  recoverability  of the  remaining  four
     trucks owned by the Company.  Based on this analysis,  the Company  reduced
     the carrying  value of the remaining  four trucks to their  estimated  fair
     value and recognized  the  impairment  charge because the carrying value of
     the bucket trucks exceeded the projected future undiscounted cash flows.

(7)  Investment in Sales-type Lease

     The Company's  contract with Commonwealth  Utilities  Corporation (CUC) for
     the  construction and operation of a power plant on the island of Tinian is
     accounted for as a sales-type  lease.  The minimum lease payments due under
     the  agreement  began upon  commissioning  of the first  phase of the power
     plant and are comprised of a guaranteed monthly payment of $180,000 for one
     hundred and twenty (120) months,  and an operation and  maintenance  fee of
     $50,000 due monthly for one hundred and twenty (120) months.  These minimum
     lease payments were discounted at an interest rate of 6.74%,  which was the
     ten-year  U.S.  Treasury  note  rate in June  1997,  the  time of  contract
     execution.  Amortization  of the minimum lease payments began in March 1999
     when the plant was commissioned  and the Company began collecting  payments
     on the  promissory  notes and service  fees for  operating  the plant.  The
     Company also receives variable monthly production fee payments of $0.02 per
     Kwh produced for the first  5,140,000  Kwh produced  each month (Base Load)
     plus  $0.065  per Kwh for any  amount  produced  beyond  the Base Load each
     month.  The variable  payments are recognized based upon power produced and
     delivered to the customer as earned during each accounting period.  Service
     fees  earned in 2003,  2002,  and 2001 were not in excess of the  estimated
     fair value of the services performed.


                                      F-13
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


     The original net  investment  in  sales-type  lease was  recognized in June
     1997,  the  date the  contract  was  executed.  The  components  of the net
     investment in sales-type lease are as follows:

<TABLE>
<CAPTION>
                                                           December 31
                                                   ---------------------------   June 20, 1997
                                                       2003           2002         inception
                                                   ------------   ------------   ------------
<S>                                                <C>              <C>            <C>
     Guaranteed monthly payment                    $ 11,160,000     13,320,000     21,600,000
     Minimum operation and maintenance fee            3,100,000      3,700,000      6,000,000
                                                   ------------   ------------   ------------
                Total minimum lease
                   payments receivable               14,260,000     17,020,000     27,600,000

     Less unearned income                             2,998,429      4,140,589      9,750,000
                                                   ------------   ------------   ------------
                Net investment in sales-type
                   lease                           $ 11,261,571     12,879,411     17,850,000
                                                   ============   ============   ============
</TABLE>

     The future  minimum  lease  payments  to be  collected  by the  Company are
     $2,760,000 each year through 2008 and $460,000 in 2009.

     When the Company  recognized the net investment in sales-type  lease at the
     inception of the agreement in June 1997, the Company also recognized a loss
     on the sale of Phase I in the amount of $1,748,713.  The Company recognized
     a loss on the sale of Phase II for the  entire  amount of the  construction
     costs for Phase II, as there  were no  additional  minimum  lease  payments
     related to this phase. The loss recognized on the sale of Phase II occurred
     when the contract for Phase II was executed in November  1998, and amounted
     to $12,521,457.

     Phase I of the power plant was  commissioned in March of 1999. Phase II was
     commissioned  in March of 2000.  The Company  recognized  power  generation
     revenues  from  billings on the Tinian power plant at the rate of $0.02 per
     Kwh produced of  $1,131,144,  $1,130,172,  and $858,336 for the years ended
     December 31, 2003, 2002, and 2001, respectively.


                                      F-14
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


(8)  Long-term Debt and Credit Arrangements

     Long-term debt consists of the following at December 31, 2003 and 2002:

<TABLE>
<CAPTION>
                                                                                December 31,
                                                                         ---------------------------
                                                                             2003           2002
                                                                         ------------   ------------
<S>                                                                      <C>            <C>
     The Hongkong and Shanghai Banking Corporation, Limited,
        advances on $7,500,000 credit line, due and paid in
        full on March 31, 2003, including interest of 0.5%
        above the bank's base lending rate, secured by an
        irrevocable standby letter of credit for $7,500,000
        issued by Alahli Bank of Kuwait, and guaranteed by
        SHBC, along with three (3) Commonwealth Utilities
        Corporation negotiable promissory notes valued at
        $540,000 and a corporate guarantee of Telesource
        International, Inc.                                              $         --      7,500,000

     Bent Marketing Limited loan, bearing interest of 7.0% per
        annum, unsecured and maturing on December 31, 2005                  1,680,000      1,100,000

     Bank of Hawaii loan, due in lump sum on June 3, 2004,
        interest payable monthly at 0.5% above the Bank's
        base rate (4.00 % at December 31, 2003), secured by
        an irrevocable standby letter of credit for
        $2,000,000 issued by Al Ahli Bank of Kuwait,
        guaranteed by SHBC                                                  1,662,500      1,900,000

     Bank of Hawaii loan, advances on credit line, due in
        full on June 3, 2004, including interest of 1.5%
        above bank's base rate (4.00% at December 31, 2003),
        secured by twenty-one (21) Commonwealth Utilities
        Corporation negotiable promissory notes valued at
        $3,780,000 and a corporate guarantee of Telesource
        International, Inc.                                                   525,017        600,000

     Citytrust Bank loan, borrowings on $1,000,000 revolving
        line of credit which expires on December 11, 2004
        Payment due 90 days from date of drawdown including
        interest of 9.5% at December 11, 2004 secured by
        assignment of specific invoice from billing on the
        West Tinian Airport Airside improvement project,
        guaranteed by Telesource International Inc., and one
        of its officers                                                       430,375        600,000
</TABLE>


                                      F-15
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


<TABLE>
<CAPTION>
                                                                                December 31,
                                                                         ---------------------------
                                                                             2003           2002
                                                                         ------------   ------------
<S>                                                                      <C>            <C>
     Kuwait Real Estate Bank loan advances on $3,000,000
        credit line, due in installments of $1,000,000 on
        June 11, 2003, $1,000,000 on December 11, 2003 and
        $1,000,000 on April 11, 2004, including interest of
        3.9517%. The loan is guaranteed by SHBC                          $  1,000,000      3,000,000

     Commercial Bank of Kuwait loan, restructured during
        2003, due in monthly installments of $180,000 plus
        interest, from February 4, 2004 through January 4,
        2009, with a final payment of $2.2 million on
        February 4, 2009. The current portion scheduled for
        repayment during 2004 is $2.0 million. The note
        bears interest at LIBOR plus 3%. The loan is
        guaranteed by SHBC. In the event the Company
        defaults on one installment payment, the entire loan
        and accrued interest become due and payable                        13,000,000     20,000,000

     Commercial Bank of Kuwait loan, due in full on March
        31, 2005. Interest payments made quarterly at an
        interest rate of 3.35%                                              7,500,000             --

     Al Ahli Bank loan due on September 4, 2004 with
        variable payment of interest of 4.75% (1.5% over
        Central Bank of Kuwait's Discount Rate)                             3,526,812             --

     ANZ loan due on October 1, 2004 with interest of 7.75%
        payable monthly                                                       117,491             --

     ANZ loan due on July 17, 2007 with interest of 8%
        payable monthly                                                       110,222             --
                                                                         ------------   ------------
                 Notes payable to banks                                    29,552,417     34,700,000
     Less current portion                                                   9,242,195     20,700,000
                                                                         ------------   ------------
                                                                         $ 20,310,222     14,000,000
                                                                         ============   ============
</TABLE>


                                      F-16
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


     The Company's debt agreements contain various covenants. The Company was in
     violation of a debt covenant with Al Ahli Bank of Kuwait and the Commercial
     Bank of Kuwait requirement for the delivery of audited financial statements
     within 90 days of year-end.  The Company has obtained a waiver from both Al
     Ahli Bank of Kuwait and the Commercial Bank of Kuwait related to these this
     debt covenant violations.

     Scheduled  maturities  of debt  outstanding  as of December 31, 2003 are as
     follows:

               Years ending December 31:
                    2004                              $    9,242,195
                    2005                                  11,340,000
                    2006                                   2,160,000
                    2007                                   2,270,222
                    2008                                   2,160,000
                    thereafter                             2,380,000
                                                       -------------
                                                      $   29,552,417
                                                       =============

     Subsequent to December 31, 2003, the Company refinanced the Commercial Bank
     of Kuwait  loan,  which was due on March 31,  2004,  to extend the due date
     until March 31, 2005.  In  accordance  with SFAS No. 6,  Classification  of
     Short-Term   Obligations  Expected  to  Be  Refinanced,   the  Company  has
     classified  this debt as long-term as of December 31, 2003,  as the Company
     has  demonstrated  the ability to refinance  the  obligation on a long-term
     basis by entering  into the financing  agreement on February 23, 2004.  The
     refinanced  debt is due in full on March 31, 2005,  with  interest  payable
     each quarter at a rate of LIBOR plus 2.5%.

(9)  Preferred Stock

     On  December  9,  2002,  the  Company   entered  into  a  Preferred   Stock
     Subscription  Agreement with Al Soor  Consulting  for Financial  Management
     Co., W.L.L. (Al Soor),  whereby Al Soor agreed to purchase 4,000,000 shares
     of newly  designated  series A convertible  preferred  stock, at a purchase
     price of $1.50 per share of series A convertible preferred stock or a total
     amount  of  $6,000,000.  The  sale of the  4,000,000  shares  of  series  A
     preferred  stock  occurred  in two  tranches  of  2,000,000  shares each on
     December 16, 2002 and on March 3, 2003.

     On March 31,  2003,  the  Company  and Al Soor  agreed to  restructure  the
     Certificate of Designation  underlying the Series A preferred stock sold to
     Al Soor in December of 2002. The restructuring  involved the elimination of
     the collateral  provided to Al Soor,  elimination of the redemption feature
     (the  preferred  stock was to have been redeemed by payment of $6.0 million
     to Al Soor by the Company at maturity in March 2008  provided  that Al Soor
     had not converted the preferred stock prior to maturity), added a provision
     to allow the Company to force a conversion of the preferred stock to common
     stock at any time from January 1, 2008 to March 31, 2008, and increased the
     coupon rate for dividends from 6.0% to 6.5%.  Accumulated dividends are due
     and payable upon  conversion of the preferred stock into common stock. As a
     result of the  restructuring of the agreement,  the preferred stock,  which
     was  classified  as debt as of December 31,  2002,  was  reclassified  into
     equity.


                                      F-17
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


(10) Stockholder's Equity

     Preferred Stock

     The  Company  has 9.9  million  shares of Series A  Cumulative  Convertible
     Preferred  Stock  (The  Preferred  Shares)  outstanding.   Holders  of  the
     Preferred  Shares are entitled to receive  cumulative cash dividends at the
     annual rate of 6.5% or 6.0% per share  payable  semi-annually,  when and if
     declared by the Board of Directors.

     The Preferred Shares are convertible, in whole or in part, at the option of
     the holders thereof, into shares of common stock on a one-for-one basis for
     a period  of five  years  from the  closing  date of the  Preferred  Shares
     agreement. The Company may force conversion to common stock for a period of
     time as defined  by each  agreement.  All  accumulated  dividends  plus any
     dividends  earned up through the forced  conversion date are payable to the
     holder at the time of forced conversion.

     Holders of the  Preferred  Shares have no voting  rights and the  Preferred
     Shares  rank  senior as to  dividends  and upon  liquidation  to the common
     stock.

     Common Stock Offerings

     On  December  31,  2003  and  2002,   17,000,000  and  15,000,000   shares,
     respectively, of the Company's common stock were issued and outstanding. On
     December 29, 2003, the Company issued  2,000,000 shares of its common stock
     in a private placement  transaction for $2,000,000.  The investor,  Al Amal
     Investments,  is a related party in that certain of its key  executives are
     also key executives of SHBC.

     Subsequent to December 31, 2003, the Company issued 3,500,000 shares of its
     common  stock in four  separate  private  placement  transactions  to three
     investors  for  $3,500,000.  One million of these  shares were issued to Al
     Amal Investments.

     In 2003,  Telesource issued warrants to certain purchasers of the Preferred
     shares for the purchase of 2,499,999 shares of Telesource's common stock at
     an  exercise  price of $1.50 per share.  The  warrants  issued in 2003 will
     expire on dates  ranging  from July 18, 2008 to December  15,  2008.  As of
     December 31, 2003 there have been no exercises of these warrants.

     In January 2002,  Telesource  agreed to issue  warrants to SHBC to purchase
     1,000,000 shares of Telesource's common stock at an exercise price of $3.00
     per share in connection  with SHBC's  agreement to provide a standby letter
     of credit to  Telesource to be used to secure  financing  with The Hongkong
     Shanghai Banking Corporation Limited. These warrants expired unexercised on
     December 31, 2003.

     In January 2001,  2,000,000 warrants were issued to SHBC in connection with
     an agreement  whereby SHBC  granted a  $10,000,000  letter of credit to the
     Company.  Each warrant  allowed SHBC to receive one share of the  Company's
     common  stock at an  exercise  price of $1 per  share.  The  warrants  were
     exercised on June 29, 2001 resulting in an additional  2,000,000  shares of
     the Company's common stock being issued.


                                      F-18
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


(11) Earnings Per Share

     In accordance  with the disclosure  requirements  of Statement of Financial
     Accounting   Standards   No.  128,   Earnings   Per  Share  (SFAS  128),  a
     reconciliation  of the  numerator  and  denominator  of basic  and  diluted
     earnings per share is provided as follows:

<TABLE>
<CAPTION>
                                                                   Years ended December 31,
                                                          --------------------------------------------
                                                              2003            2002            2001
                                                          ------------    ------------    ------------
<S>                                                       <C>              <C>             <C>
     Numerator - basic and diluted loss per share
          Net loss                                        $ (6,629,441)     (4,886,397)     (7,245,774)
          Less: Preferred stock dividends                     (569,475)             --              --
                                                          ------------    ------------    ------------
          Net loss available to common stockholders       $ (7,198,916)     (4,886,397)     (7,245,774)
                                                          ============    ============    ============

     Denominator - basic and diluted loss
          per share - weighted average common
             shares outstanding                             15,016,438      15,000,000      13,849,315
     Basic and diluted earnings per share                 $      (0.48)          (0.33)          (0.52)
</TABLE>

     Options to purchase  225,000  shares of common stock,  9,799,999  shares of
     convertible  preferred  stock and 2,499,999  warrants were  outstanding  at
     December 31, 2003, but not included in the computation of diluted  earnings
     per share as the effect of the  conversion  of these  instruments  would be
     anti-dilutive.

     For 2002,  options to purchase 225,000 shares of common stock and 3,000,000
     shares of convertible  preferred stock were outstanding but not included in
     the  computation  of  diluted  earnings  per  share  as the  effect  of the
     conversion of these instruments would be anti-dilutive.

     For  2001,  options  to  purchase  225,000  shares  of  common  stock  were
     outstanding  but not included in the  computation  of diluted  earnings per
     share  as the  effect  of the  conversion  of  these  instruments  would be
     anti-dilutive.

(12) Stock Option Plans

     The  Company  has  adopted  the  disclosure-only  provisions  of SFAS  123,
     Accounting for  Stock-Based  Compensation.  Had  compensation  cost for the
     Company's stock option plans been determined using the fair value method of
     accounting  described in SFAS 123, the  Company's  net loss would have been
     equal  to the  pro  forma  amounts  indicated  in  note 2 of the  notes  to
     consolidated financial statements.


                                      F-19
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


     For purposes of calculating the compensation cost consistent with SFAS 123,
     the fair value of each option grant is estimated on the date of grant using
     the  binomial  option-pricing  model with the  following  weighted  average
     assumptions used for grants in 2003, 2002, and 2001:

                                            2003        2002        2001
                                           ------      ------      ------
     Risk free interest rate                    4%          4%          5%
     Expected volatility                       30%         30%         30%
     Expected lives (in years)                  8           8           9
     Expected dividend yield                   --          --          --

     2000 Non-Employee Director's Stock Option Plan

     In  January  2001,  the  Company's  board  of  directors  adopted  the 2000
     Non-Employee Director's Stock Option Plan that provides for the issuance of
     nonqualified  stock options to outside  directors.  Under the terms of this
     plan,  under  which  285,000  shares  of common  stock  were  reserved  for
     issuance,  options to  purchase  common  stock are granted at not less than
     fair market value, become exercisable over a 3 year period from the date of
     grant  (vesting  occurs  annually on the grant date at 33.3% of the grant),
     and expire 10 years from the date of grant.

     Changes in options outstanding are summarized as follows:

<TABLE>
<CAPTION>
                                                  December 31, 2003         December 31, 2002         December 31, 2001
                                               -----------------------   -----------------------   -----------------------
                                                Weighted                  Weighted                  Weighted
                                                 average     Exercise      average     Exercise      average     Exercise
                                                 shares        price       shares        price       shares       price
                                               ----------   ----------   ----------   ----------   ----------   ----------
<S>                                               <C>       <C>             <C>       <C>             <C>       <C>
     Options outstanding at January 1             225,000   $     1.25      225,000   $     1.25           --   $       --
     Granted                                           --                        --           --      225,000         1.25
     Exercised                                         --                        --           --           --           --
     Cancelled                                         --                        --           --           --           --
                                               ----------                ----------                ----------
     Options outstanding at December 31           225,000         1.25      225,000         1.25      225,000         1.25
                                               ==========                ==========                ==========

     Options exercisable at December 31           225,000         1.25      150,000         1.25       75,000         1.25
     Shares available for future grant at
         December 31                               60,000                    60,000                    60,000
</TABLE>

     2000 Incentive Stock Option Plan

     In  January  2001,  the  Company's  board  of  directors  adopted  the 2000
     Incentive  Stock  Option Plan that  provides  for the issuance of qualified
     stock  options  to  employees.  Under the terms of this plan,  under  which
     888,000  shares of common  stock were  reserved  for  issuance,  options to
     purchase  common  stock are  granted  at not less than fair  market  value,
     become  exercisable  over a 3 year period  from the date of grant  (vesting
     occurs  annually  on the grant date at 33.3% of the  grant),  and expire 10
     years from the date of grant.  As of December 31, 2003, no options had been
     awarded under this plan.

     2000 Non-Qualified Stock Option Plan

     In  January  2001,  the  Company's  board  of  directors  adopted  the 2000
     Non-Qualified   Stock  Option  Plan  that  provides  for  the  issuance  of
     nonqualified  stock  options  to  employees.  Under the terms of this plan,
     under


                                      F-20
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


     which 27,000 shares of common stock were reserved for issuance,  options to
     purchase  common stock are granted at less than fair market  value,  become
     exercisable  immediately on the date of grant, and expire 10 years from the
     date of grant.  As of December 31, 2003,  no options had been awarded under
     this plan.

(13) Financial  Instruments With Off-balance  Sheet Risk and  Concentrations  of
     Credit Risk

     Derivative financial instruments - Historically the Company has not engaged
     in hedging  activities and currently does not hold any hedging  instruments
     to minimize foreign exchange rate or interest risk.

     Standby letters of credit and financial guarantees - In the ordinary course
     of  business  with  customers,   vendors,   and  others,   the  Company  is
     contingently  liable  for  performance  under  letters  of credit and other
     financial guarantees totaling approximately $15.1 million and $17.5 million
     at December 31, 2003 and 2002, respectively.  The Company's management does
     not  believe  it is  practicable  to  estimate  the  fair  values  of these
     financial instruments and does not expect any losses from their resolution.

(14) Related-party Transactions

     Certain  of  the  Company's  executive  officers,   directors,   and  major
     stockholders are also owners, officers, and/or directors of SHBC located in
     Kuwait. SHBC is a civil,  electrical,  and mechanical  engineering firm and
     construction contractor with 750 employees and over 30 years of experience.
     SHBC  and  its   affiliates   were  the  sole   stockholder  of  Telesource
     International  prior to July  1999 and now own  approximately  66.7% of the
     common stock outstanding. SHBC and Telesource International bid and compete
     within the same industries;  however,  SHBC has agreed, in writing,  not to
     bid projects  within the United States and its  possessions.  Additionally,
     SHBC  and  its  majority   stockholders,   Fouad  Behbehani  and  Nasrallah
     Behbehani,  have signed as guarantors on Telesource  CNMI's promissory note
     with the Commercial Bank of Kuwait, New York Branch, and as guarantors on a
     $1,000,000  credit  facility  for  Telesource  CNMI with Kuwait Real Estate
     Bank. SHBC and its majority  stockholders have also signed as guarantors on
     a  $2,000,000  letter  of  credit  issued to the Bank of Hawaii to secure a
     $1,900,000  credit facility.  These credit  facilities were used to finance
     the  construction  activities on the power plant,  the West Tinian  Airport
     expansion project, and to provide financing for other projects. See note 8.

     Additionally,  from time to time the  Company  may hire,  on a part time or
     temporary  basis,  individuals  employed by SHBC to provide  assistance  to
     Telesource  on certain  projects in the Northern  Mariana  Islands.  During
     2003, the Company hired SHBC  employees to provide  assistance on a service
     contract to  complete a survey of radio  transmissions  in Iraq.  The rates
     paid did not exceed the fair market value of similar  services  provided by
     unrelated third parties.

     The following table provides a summary of financial  information related to
     all services provided to SHBC by the Company:

<TABLE>
<CAPTION>
                                                           Years ended December 31
                                                     ------------------------------------
                                                        2003         2002         2001
                                                     ----------   ----------   ----------
<S>                                                  <C>             <C>              <C>
     Construction revenues                           $       --      838,331           --
     Sales                                                   --       89,998          256
                                                     ----------   ----------   ----------
                 Total related party revenues        $       --      928,329          256
                                                     ==========   ==========   ==========
</TABLE>


                                      F-21
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


     The following table  summarizes all balances  related to transactions  with
     SHBC as December 31, 2003 and 2002:

                                                            December 31,
                                                      -------------------------
                                                         2003            2002
                                                      ----------     ----------
     Accounts payable to SHBC                         $  657,618      3,736,283
     Other current liabilities                                --        125,000

     The balance of accounts  payable to SHBC was  substantially  higher in 2002
     due to costs of materials purchased by SHBC on behalf of Telesource for use
     on the airport and prison projects

     The  Company  held an  investment  in  Telebond  Insurance  Corporation  at
     December  31,  2003  and  2002  in  the  amount  of  $77,695  and  $71,284,
     respectively.  The  Company  purchased  insurance  from  Telebond  and paid
     premiums of $45,863,  $59,760,  and $23,566 during the years ended December
     31, 2003, 2002, and 2001, respectively.  Telebond provides employment bonds
     along with bid, performance,  and payment bonds for the Company's projects.
     Telebond  is  not  a  U.S.  Treasury  listed  bonding  company.  Most  bid,
     performance, and payment bonds for the Company are secured from third party
     vendors. The Company's President and CEO, K.J. Semikian, serves on Telebond
     Insurance  Corporation's  board of directors  and as President of Telebond,
     and owns 10% of the stock of Telebond.

(15) Income Taxes

     Income tax expense consists of:

<TABLE>
<CAPTION>
                                                 Current       Deferred       Total
                                               -----------   -----------   -----------
<S>                                            <C>                   <C>        <C>
     Year ended December 31, 2003:
          U.S. Federal                         $        --            --            --
          State and local                               --            --            --
          U.S. possession                               --            --            --
          Foreign                                   68,446            --        68,446
                                               -----------   -----------   -----------
                                               $    68,446            --        68,446
                                               ===========   ===========   ===========
     Year ended December 31, 2002:
          U.S. Federal                         $        --            --            --
          State and local                               --            --            --
          U.S. possession                               --            --            --
          Foreign                                       --            --            --
                                               -----------   -----------   -----------
                                               $        --            --            --
                                               ===========   ===========   ===========
     Year ended December 31, 2001:
          U.S. Federal                         $        --            --            --
          State and local                               --            --            --
          U.S. possession                               --            --            --
          Foreign                                   19,440            --        19,440
                                               -----------   -----------   -----------
                                               $    19,440            --        19,440
                                               ===========   ===========   ===========
</TABLE>


                                      F-22
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


     The foreign tax was incurred in connection with the Company's operations in
     Fiji and is based upon earnings  within Fiji. The average tax rate for Fiji
     was 31%. In 2003, 2002, and 2001, the Company recorded a loss for financial
     reporting  purposes as well as a loss for income tax reporting purposes and
     therefore,  no current  U.S.  income tax expense has been  reflected in the
     accompanying consolidated statements of operations.

     The tax  effects of  temporary  differences  that give rise to  significant
     portions  of the  deferred  tax  assets and  deferred  tax  liabilities  at
     December 31, 2003 and 2002 are presented below:

<TABLE>
<CAPTION>
                                                                      2003            2002
                                                                  ------------    ------------
<S>                                                               <C>               <C>
     Deferred tax assets:
          Contribution carryover                                  $     10,000          10,000
          Net operating loss carryforwards                          12,561,047       9,603,605
          Accrued expenses                                             204,123         312,866
                                                                  ------------    ------------
                   Total gross deferred tax assets                  12,775,170       9,926,471
     Less valuation allowance                                      (12,604,716)     (9,814,562)
                                                                  ------------    ------------
                   Net deferred tax asset                              170,454         111,909
                                                                  ------------    ------------
                   Deferred tax liability - excess tax over
                      book depreciation                           $   (170,454)       (111,909)
                                                                  ============    ============
</TABLE>

     The  difference  between the expected  income tax benefit and the actual is
     attributable to the valuation allowance.

     The valuation allowance for deferred tax assets as of December 31, 2003 and
     2002 was $12,604,716 and  $9,814,562,  respectively.  The net change in the
     total  valuation  allowance for the years ended  December 31, 2003 and 2002
     was an increase of $2,790,154 and an increase of $2,104,619,  respectively.
     The net  deferred  tax asset at  December  31, 2003 and 2002 was also fully
     reserved. In assessing the realizability of deferred tax assets, management
     considers  whether it is more likely  than not that some  portion or all of
     the deferred tax assets will not be realized.  The ultimate  realization of
     deferred  tax assets is dependent  upon the  generation  of future  taxable
     income  during the  periods in which  those  temporary  differences  become
     deductible.  Management  believes that the valuation  allowance reduces the
     recognition of deferred tax assets to a level that reflects the amount that
     is more  likely  than  not to be  realized,  considering  the tax  planning
     strategies available to the Company.

     At December 31, 2003, the Company has net operating loss  carryforwards  of
     approximately  $34,340,000.  The net operating loss carryforwards expire in
     the years 2017 through 2023.


                                      F-23
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


(16) Commitments and Contingencies

     Minimum  rental  commitments  under  all  noncancelable-operating   leases,
     primarily related to property,  vehicles,  and construction  equipment,  in
     effect at December 31, 2003 are:

               Years ending December 31:
                    2004                            $    118,279
                    2005                                  84,453
                                                    ------------
                                                    $    202,732
                                                    ============

     Lease  expense was  $242,120  $181,043,  and  $452,045  for the years ended
     December 31, 2003, 2002, and 2001, respectively.

     Telesource entered into an employment  agreement with Khajadour Semikian in
     June 1999,  Nidal Zayed in August 1999,  and Bud Curley in April 2001.  The
     term of the  agreement  with Mr.  Semikian  is from July 1, 1999 to July 1,
     2002,  which  has been  extended  to July 3,  2004.  Under the terms of the
     agreement,  Mr.  Semikian  is  required  to  devote  his  full  time to the
     Company's  business.  The Company has agreed to pay him an annualized  base
     salary of $220,000  during  1999,  increased  to  $270,000  during 2000 and
     remaining  at  $270,000  per year until July 3, 2004.  The  payment of cash
     bonuses to Mr. Semikian will be at the Board's discretion.  The Company has
     agreed to  provide  Mr.  Semikian  with  health  insurance  for him and his
     family.

     The term of the  agreement  with Mr.  Zayed is from  September  1,  1999 to
     September 1, 2002, which has been extended to July 3, 2004. Under the terms
     of the agreement,  Mr.  Zayed's  responsibilities  comprise  serving as the
     number two operating officer  accountable for the full range of operations.
     The Company has agreed to pay him an annualized base salary of $125,000 per
     year for the term of the  agreement.  The  payment  of cash  bonuses to Mr.
     Zayed will be at the  Board's  discretion.  The  Company has also agreed to
     provide Mr. Zayed with health insurance for him and his family along with a
     company  car. The term of the original  agreement  with Mr.  Curley is from
     April 1, 2001 to October 1, 2003,  and has been renewed to October 1, 2005.
     Under the terms of the agreement, Mr. Curley is required to devote his full
     time to the  Company's  business.  The  Company  has  agreed  to pay him an
     annualized  base salary of $165,000 during the period from April 1, 2001 to
     October 31, 2001,  and $175,000  from  November 1, 2001 to October 1, 2005.
     The  payment  of  cash  bonuses  to  Mr.  Curley  will  be at  the  Board's
     discretion.  The  Company  has agreed to provide  Mr.  Curley  with  health
     insurance  for him and his  family.  The  Company has agreed to provide Mr.
     Curley  with a  $10,000  per  year  car  allowance  for  the  term  of this
     agreement.

     The Company is involved in various  litigation  proceedings  arising in the
     ordinary  course of business.  In the opinion of  management,  the ultimate
     disposition of these matters will not have a material adverse effect on the
     Company's financial position, results of operations, or liquidity.

     The  Commonwealth  Port  Authority  (CPA) and  Telesource  are currently in
     negotiations  over the final  billing for the West Tinian  Airport  Project
     (WTA). As of December 31, 2003 Telesource has reflected  approximately $1.8
     million of retentions in accounts receivable related to the WTA. Telesource
     claims that in  addition  to the  retentions  recorded  under the  original
     contract terms and related to work  performed  through 2003 that it is also
     due additional  amounts for work performed outside of the original scope of
     the


                                      F-24
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


     contract.  No revenue for this  additional  work has been  reflected in the
     accompanying   consolidated   financial   statements.   Although   CPA  has
     acknowledged  that work was  performed  outside  of the  original  contract
     scope,  it has  requested  additional  documentation  before it will make a
     final  determination  regarding  payment  on the  additional  work  and the
     retentions. Telesource believes that the resolution of this matter will not
     have a material adverse effect on its financial condition.

     The Company was  scheduled to complete a radio relay  station  expansion on
     the island of Tinian on March 12, 2004. As of the date of this report,  due
     to delays outside of the Company's  control,  the Company has not completed
     the  project,  nor has the Company been  successful  in obtaining a written
     extension  from the  client.  Under the terms of the  contract,  failure to
     complete  the project  within the terms of the  agreement  shall  result in
     liquidated  damages  payable to the client at a rate of $500 per day beyond
     the contractual completion date. The Company has not accrued for liquidated
     damages as management believes, based on negotiations with the client, that
     an extension to the contract will be obtained.

(17) Business Segment Information

     Telesource has three operating segments:  power generation and construction
     of power plants,  trading, and construction  services. The power generation
     and construction of power plants segment includes sales-type lease revenues
     recognized.  There were no material amounts of transfers  between segments.
     Any inter segment revenues have been  eliminated.  The following table sets
     forth certain segment information for the periods indicated:

<TABLE>
<CAPTION>
                                                              December 31, 2003
                                         ------------------------------------------------------------
                                            Power
                                          generation
                                             and
                                         construction
                                           of power
                                            plants         Trading       Construction        Total
                                         ------------    ------------    ------------    ------------
<S>                                      <C>                <C>            <C>             <C>
     Revenue                             $  4,110,417          72,494      15,843,263      20,026,174
     Interest expense, net                  1,415,703              --              (2)      1,415,701
     Depreciation and amortization             71,492          22,502         459,851         553,845
     Income tax expense                        68,446              --              --          68,446
     Net loss                                (553,204)             --      (6,076,237)     (6,629,441)
     Total capital expenditures                    --              --         795,784         795,784
     Total assets                          14,682,813       3,569,685       6,530,944      24,783,442
</TABLE>


                                      F-25
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


<TABLE>
<CAPTION>
                                                              December 31, 2002
                                         ------------------------------------------------------------
                                            Power
                                          generation
                                             and
                                         construction
                                           of power
                                            plants         Trading       Construction        Total
                                         ------------    ------------    ------------    ------------
<S>                                      <C>                <C>            <C>             <C>
     Revenue                             $  2,416,943         397,376      17,506,876      20,321,195
     Interest income                               --              --           2,768           2,768
     Interest expense                       1,791,328              --              --       1,791,328
     Depreciation and amortization              4,125          22,502         474,927         501,554
     Income tax expense                            --              --              --              --
     Net loss                                (602,712)       (233,465)     (4,050,220)     (4,886,397)
     Total capital expenditures                    --          37,083         105,075         142,158
     Total assets                          14,053,008       3,592,187       7,515,140      25,160,335
</TABLE>

<TABLE>
<CAPTION>
                                                              December 31, 2001
                                         ------------------------------------------------------------
                                            Power
                                          generation
                                             and
                                         construction
                                           of power
                                            plants         Trading       Construction        Total
                                         ------------    ------------    ------------    ------------
<S>                                      <C>                <C>            <C>             <C>
     Revenue                             $  6,329,392         130,930      11,825,447      18,285,769
     Interest income                               --              --          32,829          32,829
     Interest expense                       2,250,000              --         149,145       2,399,145
     Depreciation and amortization              4,125          35,785         371,515         411,425
     Income tax expense                        19,440              --              --          19,440
     Net loss                                (618,294)        (91,802)     (6,535,678)     (7,245,774)
     Total capital expenditures                 7,748           3,209         823,002         833,959
     Total assets                          14,655,720       3,788,569       5,577,238      24,021,527
</TABLE>

     The basis used to attribute revenues to individual  countries is based upon
     where the services are provided.

     The power  generation  segment  includes  revenues from the Company's power
     station on Tinian,  Commonwealth  of the  Northern  Mariana  Islands in the
     amounts of $2,273,304,  $2,416,943,  and  $2,276,792,  for 2003,  2002, and
     2001,  respectively.  Power  generation  revenues  for  2003  also  include
     revenues from the Company's operation and maintenance of three power plants
     in Fiji in the amount of $1,837,113.  The construction  revenues recognized
     for the expansion of two power plants in Fiji are included  under the power
     generation  segment  and were zero for 2003 and 2002,  and  $4,052,600  for
     2001.


                                      F-26
<PAGE>

                         TELESOURCE INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


     Revenues from the Company's related party, SHBC, were none,  $928,329,  and
     $256 for 2003, 2002, and 2001, respectively.  All other revenues recognized
     within the  construction  segment for all periods  presented were earned in
     the Commonwealth of Mariana Islands.

     Trading  revenues  generated  by the  Company's  Guam office were  $72,494,
     $307,378,  and $130,205 for 2003, 2002, and 2001,  respectively.  All other
     revenues  recognized  within the trading segment for all periods  presented
     were earned in the United States.

     Long-lived  assets  located in the  Commonwealth  of the  Northern  Mariana
     Islands were $11.5 million, $13.7 million, and $15.7 million as of December
     31, 2003, 2002, and 2001,  respectively.  Long-lived assets located in Fiji
     were $159,390  $12,206,  and none as of December 31, 2003,  2002, and 2001,
     respectively.  Long-lived  assets  located  in  Palau  were  $38,207  as of
     December 31, 2003, and zero in 2002 and 2001.

(18) Subsequent Events (Unaudited)

     Subsequent to December 31, 2003, the Company borrowed $1.5 million and $0.5
     million due on July 31 and December 31, 2005.  The notes bear interest at a
     rate of 7 percent.


                                      F-27
<PAGE>


ITEM 8A. EQUITY COMPENSATION PLAN INFORMATION

Shown below is information as of December 31, 2003 with respect to the shares of
Common Stock that may be issued under Telesource's equity compensation plans.

<TABLE>
<CAPTION>
                                                                                                   Number of shares
                                                                                                  remaining available
                                      Number of shares to be                                      for future issuance
                                       issued upon exercise        Weighted average exercise         under equity
                                      of outstanding options     price of outstanding options     compensation plans
                                      ----------------------     ----------------------------     ------------------
<S>                                         <C>                             <C>                       <C>
Equity compensation plans
approved by shareholders                    225,000(1)                      $1.25                     975,000(2)
</TABLE>

     (1)  Includes  the number of shares that may be issued upon the exercise of
          outstanding  options to purchase  shares of  Telesource  Common  Stock
          under Telesource's stock option plans.

     (2)  Includes shares available for future issuance under Telesource's stock
          option plans, excluding shares quantified under Column 1.


                                       40
<PAGE>

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

Not Applicable

ITEM 9A. CONTROLS AND PROCEDURES

Telesource  International  is committed to maintaining  disclosure  controls and
procedures that are designed to ensure that information required to be disclosed
in its  Exchange  Act reports is recorded,  processed,  summarized  and reported
within the time periods specified in the Commission's  rules and forms, and that
such  information is accumulated and  communicated to its management,  including
its Chief Executive  Officer and Chief  Financial  Officer,  as appropriate,  to
allow for timely  decisions  regarding  required  disclosure.  In designing  and
evaluating the disclosure  controls and procedures,  management  recognizes that
any controls and  procedures,  no matter how well  designed  and  operated,  can
provide only reasonable  assurance of achieving the desired  control  objectives
and are subject to certain  limitations,  including  the exercise of judgment by
individuals,  the difficulty in  identifying  unlikely  future  events,  and the
difficulty  to eliminate  misconduct  completely.  As a result,  there can be no
assurance that our disclosure controls and procedures will prevent all errors or
fraud or ensure that all material  information  will be made known to management
in a timely manner.

During the course of their audit of our  Consolidated  Financial  Statements for
the fiscal year ended December 31, 2003,  our  independent  auditors,  KPMG LLP,
advised  management and the Audit  Committee of our Board of Directors that they
had identified deficiencies in internal control. The deficiencies are considered
to be material weaknesses as defined under standards established by the American
Institute of Certified Public Accountants.  The material  weaknesses  identified
are as follows:

     o    The  monthly  and  quarterly   closing   procedures  did  not  provide
          information  on a timely  basis in order to meet  financial  reporting
          requirements, namely, the financial statements required by Form 10-K.

     o    The monthly  monitoring process for certain projects in Saipan did not
          provide accurate  project  information on a timely basis for financial
          reporting purposes.

We have taken measures to improve the effectiveness of our internal controls and
we believe these efforts address the matters  described above.  Certain measures
we have  taken  through  May 31,  2004  include,  but are not  limited  to,  the
following:

     o    centralized  our United States  regional  finance  organization,  with
          direct reporting responsibilities to the Chief Financial Officer;

     o    hired additional qualified and experienced personnel,  specifically in
          finance, including a controller located in our main operations area of
          the Western Pacific; and

     o    established training plans for personnel.


                                       41
<PAGE>

As required by Rule 13a-15(b) of the Exchange Act, Telesource has carried out an
evaluation,  under the supervision and with the participation of its management,
including its Chief Executive  Officer and its Chief Financial  Officer,  of the
effectiveness  of the  design  and  operation  of its  disclosure  controls  and
procedures.  The evaluation examined those disclosure controls and procedures as
of December 31, 2003, the end of the period  covered by this report.  Based upon
the evaluation,  Telesource's management,  including its Chief Executive Officer
and its Chief  Financial  Officer,  concluded  that,  as of December  31,  2003,
Telesource's  disclosure  controls  and  procedures  were  effective,  except as
described  above, at the reasonable  assurance level to ensure that  information
required to be disclosed in  Telesource's  reports filed or submitted  under the
Exchange  Act was  accumulated  and  communicated  to  Telesource's  management,
including  its Chief  Executive  Officer  and its Chief  Financial  Officer,  as
appropriate to allow timely decisions regarding required disclosure.

It will take some time before we have in place the rigorous  disclosure controls
and procedures,  including  internal controls and procedures,  that our Board of
Directors  and senior  management  are striving for. As a result of our efforts,
however, we believe that our Consolidated  Financial  Statements fairly present,
in all material  respects,  our financial  condition,  results of operations and
cash flows as of, and for, the periods  presented and that this Annual Report on
Form 10-K, and that this report contains the information required to be included
in accordance with the Exchange Act.

During the  fourth  quarter  2003,  we  continued  to make  improvements  in our
financial  reporting by  continuing to hire  qualified  personnel and refine our
formal review  processes.  We will continue to assess our internal  controls and
procedures and will take any further actions that we deem necessary.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The Company currently has a seven-member Board of Directors.  Directors are
elected  for  one-year  terms  elected at each annual  meeting of  stockholders.
Telesource's Board of Directors are:

  Name and Age; Years                   Principal Occupation for Past
   Served as Director                 Five Years; Other Directorships
--------------------------    --------------------------------------------------
Ralph Beck                    Mr.  Beck is a  principal  of Global  Construction
Age 65                        Solutions,  L.L.C.  From  1994 to 1998,  Mr.  Beck
Chairman of the Board         served as the  President  of  Kajima  Construction
Director since 1999           Services,  Inc., a North American  investment of a
                              global  engineering  and  construction  firm. From
                              1965  to  1994,  Mr.  Beck  was  with  the  Turner
                              Corporation,   an  international  engineering  and
                              construction firm. Mr. Beck served as the chairman
                              of the board for Turner Steiner International from
                              1987 to 1994,  and as a senior vice  president for
                              Turner Corporation.


                                       42
<PAGE>

Khajadour Semikian            Khajadour Semikian,  President and Chief Executive
Age 50                        Officer,   joined   Telesource   International  in
Director Since 1995           September 1996. From January 1986 to December 1996
                              Mr.  Semikian was Assistant  General  Manager with
                              Sayed Hamid  Behbehani & Sons.  Mr.  Semikian  has
                              also   served  as  a   director   for   Computhink
                              Incorporated   since  1994,   Telebond   Insurance
                              Corporation  from  1998  through  2003  and  Retsa
                              Development   Incorporated   since  1998,  and  as
                              President of Telebond  Insurance  Corporation from
                              1998 through 2003.

Nidal Zayed                   Nidal  Zayed,  Executive  Vice  President,  joined
Age 43                        Telesource  International  in January  1996. He is
Director Since 1998           also engaged in the practice of law. He received a
                              law degree from Loyola University School of Law in
                              1985  and  a  B.A.  in   Accounting   from  Loyola
                              University  of  Chicago  in  1982.  He  serves  as
                              Chairman for Computhink  Incorporated and has been
                              a director for Computhink since 1994.

Jeffery Adams                 Mr. Adams is an Electrical Engineer trained in the
Age 61                        United  Kingdom.  From  1978 to  1986,  Mr.  Adams
Director Since 1999           served  as  the  marketing   director  of  Babcock
                              Industries and Electrical  Group of Companies.  In
                              1986,    Mr.   Adams    became   an    independent
                              international  sales  marketing  consultant.  From
                              1987 to present,  Mr. Adams is the general manager
                              for Trafex Ltd., an engineering  supplies  company
                              serving the Middle East.

Max Engler                    From  1988  to  present  Mr.  Engler  has  been an
Age 54                        independent  Financial  Consultant  and is also on
Director Since 1997           the Board of  Directors  of various  companies  in
                              Switzerland  and  abroad.  From  1984 to 1988  Mr.
                              Engler  headed the Private  Banking  desk  (Middle
                              East and Far East) of Bank Leu as Vice  President.
                              He  is  a  director  of  Computhink  Incorporated,
                              Belmoral   S.A.,   Computhink   Ltd.,   Telesource
                              International  CNMI Inc., Retsa  Development Inc.,
                              Golden Osprey Ltd.,  Computhink  Technology  Ltd.,
                              FSD Holdings PLC,  Litra Holdings AG, Linos Finanz
                              AG, Trafex Ltd., R.C.W.  Enterprises S.A., Formvac
                              S.A.,  Sanop AG, and Protea  Beratungs-und  Finanz
                              AG.

Ibrahim M. Ibrahim            Mr. Ibrahim is now with the Al Ahli Bank of Kuwait
Age 62                        in the commercial  lending area since 2002 and has
Director Since 1999           been Head of International  Banking for Commercial
                              Bank of Kuwait from 2001 through 2002 and the Head
                              of International  Banking for The Gulf Bank K.S.C.
                              in Kuwait from 1986 to 2001. Mr. Ibrahim served as
                              the  Vice   President   and  Head  of  Credit  and
                              Marketing  for the First  National Bank of Chicago
                              for the middle  east  region from 1984 to 1986 and
                              he also served as the Vice  President  and General
                              Manager of  Continental  Illinois  Bahrain  Branch
                              from 1969 to 1984. Mr. Ibrahim received his M.B.A.
                              in International Business from De Paul University,
                              his M.S.  in  Taxation  and  Islamic  Law from the
                              University   of   Alexandria   and  his  B.A.   in
                              Accounting from the University of Alexandria.

Weston W. Marsh               Mr. Marsh is a member of the law firm Freeborn and
Age 54                        Peters.  Prior to joining  Freeborn  and Peters in
Director Since 1999           September  1990, Mr. Marsh served as the Assistant
                              General  Counsel for the nation's  seventh largest
                              railroad.  Mr. Marsh  obtained his law degree from
                              the  University  of  Illinois,  where he graduated
                              with honors,  Order of the Coif, and was associate
                              editor of the Law  Review.  He  received  his B.A.
                              from  Yale  University  and  an  M.B.A.  from  the
                              University of Chicago, where he graduated first in
                              his class.

For a  discussion  of  Telesource's  executive  team,  please  see  Item  4.(a).
Executive Officers of the Registrant


ITEM 11. EXECUTIVE COMPENSATION


                                       43
<PAGE>

<TABLE>
<CAPTION>
                                     SUMMARY COMPENSATION TABLE


           Name and                                                        All Other Annual
      Principal Position            Year       Salary (1)      Bonus        Compensation(2)
-----------------------------    ---------   ------------    ---------    ---------------------
<S>                                 <C>        <C>             <C>            <C>
Khajadour Semikian                  2003       $ 278,167       $    -         $   59,931
  President and                     2002       $ 285,458       $    -         $   50,458
  Chief Executive Officer           2001       $ 296,250       $    -         $   53,288

Nidal Zayed                         2003       $ 123,281       $    -         $   24,756
  Executive Vice President          2002       $ 125,000       $    -         $   25,191
                                    2001       $ 125,000       $    -         $   32,329

Bud Curley                          2003       $ 165,000       $    -         $   13,700
  Vice President and                2002       $ 162,814       $    -         $   23,387
  Chief Financial Officer           2001       $ 161,635       $    -         $   16,598
</TABLE>

     (1)  Includes  salary paid by Telesource  International,  before any salary
          reduction  for  contributions  to  Telesource  International's  401(k)
          Savings Plan.

     (2)  Telesource  International paid director fees of $20,000 in 2001 to Mr.
          Semikian and Mr. Zayed. Beginning in 2002, director fees were not paid
          to directors who were also employees. Telesource provided Mr. Semikian
          with  housing in Saipan at a cost of $24,000 in 2001,  and  $36,000 in
          2002 and 2003. Telesource provided a vehicle to Mr. Semikian in Saipan
          at a cost of $8,400 in 2001,  2002 and 2003.  Telesource  provided Mr.
          Semikian  with health  insurance at a cost of $6,058 in 2002 and $ 913
          in 2003.  Telesource  provided  a  vehicle  to Mr.  Zayed at a cost of
          $8,350  in  2001,  $11,667  in 2002,  and $ 8,843 in 2003.  Telesource
          provided Mr. Zayed with health  insurance  for him and his family at a
          cost of $13,524 in 2002 and $ 15,913 in 2003.  Telesource provided Mr.
          Curley with a car  allowance  of $10,000 in 2001,  and $9.863 in 2002.
          Telesource  provided Mr. Curley with health  insurance for him and his
          family at a cost of $6,598 in 2001,  $13,524 in 2002,  and $ 19,388 in
          2003.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following  table contains  information as of December 31, 2003 regarding the
ownership  of the Common  Stock of the Company  by: (i) all persons  who, to the
knowledge  of the  Company,  were  the  beneficial  owners  of 5% or more of the
outstanding  shares of Common  Stock of the  Company,  (ii)  each  director  and
director nominee of the Company,  (iii) the Chief Executive  Officer and the two
other most highly  compensated  executive officers of the Company as of June 24,
2004,  whose  salary  and bonus for the  fiscal  year ended  December  31,  2003
exceeded $100,000,  and (iv) all executive officers and directors of the Company
as a group:


                                       44
<PAGE>

                                                 Amount and
                                                    Nature        Percent of
                                                of Beneficial    Common Stock
                    Name                        Ownership (1)   Outstanding (2)
--------------------------------------------    -------------   ---------------
Sayed Hamid Behbehani & Sons, Co. W.L.L. (3)     11,339,000           66.7%
K.J. Semikian                                       200,000            1.2%
Max Engler(4)                                        95,000             *
Ibrahim Ibrahim(5)                                   57,500             *
Jeff Adams(6)                                        46,000             *
Ralph Beck(7)                                        45,000             *
Weston Marsh(8)                                      45,000             *
Nidal Z. Zayed                                            -             *
Bud Curley                                                -             *
All Executive Officers and Directors
    as a Group (9 Persons) (4-8)                    488,500            2.9%

*    Less than 1%

(1)  Except as indicated in the  footnotes to this table,  the persons  named in
     the table have sole voting and investment  power with respect to all shares
     of Common Stock shown as beneficially  owned by them,  subject to community
     property laws where applicable.

(2)  Calculated on the basis of 17,000,000 shares of Common Stock outstanding as
     of December  31,  2003,  plus  shares of Common  Stock  underlying  options
     exercisable  within  60  days  of  December  31,  2003,  which  are  deemed
     outstanding for purposes of calculating the beneficial  ownership of Common
     Stock of the holders of such options.

(3)  Includes  2,020,000  shares of Common  Stock  held by eight  members of the
     Behbehani family or their affiliates.

(4)  Max Engler serves as a director for Litra Holding AG. Litra Holding AG owns
     directly 495,000 shares of Telesource  International's  common stock. Based
     upon   information   provided  to  Telesource   International,   Telesource
     International  does not consider these shares to be  beneficially  owned by
     Mr. Engler. Includes 45,000 shares of Common Stock which Mr. Engler has the
     right to acquire as of December 31, 2003 as a result of options  vested and
     exercisable under the 2000 Non-Employees Director Stock Option Plan.

(5)  Includes  45,000 shares of Common Stock which Mr.  Ibrahim has the right to
     acquire  as of  December  31,  2003  as a  result  of  options  vested  and
     exercisable under the 2000 Non-Employees Director Stock Option Plan.

(6)  Includes  45,000  shares of Common  Stock which Mr.  Adams has the right to
     acquire  as of  December  31,  2003  as a  result  of  options  vested  and
     exercisable under the 2000 Non-Employees Director Stock Option Plan.

(7)  Includes  45,000  shares of Common  Stock  which Mr.  Beck has the right to
     acquire  as of  December  31,  2003  as a  result  of  options  vested  and
     exercisable under the 2000 Non-Employees Director Stock Option Plan.

(8)  Includes  45,000  shares of Common  Stock which Mr.  Marsh has the right to
     acquire  as of  December  31,  2003  as a  result  of  options  vested  and
     exercisable under the 2000 Non-Employees Director Stock Option Plan.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain of the Company's executive officers,  directors,  and major stockholders
are also owners, officers, and/or directors of SHBC located in Kuwait. SHBC is a
civil,  electrical,  and mechanical engineering firm and construction contractor
with 750 employees and over 30 years of experience. SHBC and its affiliates were
the sole stockholder of Telesource  International prior to July 1999 and now own
approximately  66.7%  of the  common  stock  outstanding.  SHBC  and  Telesource
International  bid and compete  within the same  industries;  however,  SHBC has
agreed,  in  writing,  not to bid on projects  within the United  States and its
possessions.  Additionally, SHBC and its majority stockholders,  Fouad Behbehani
and  Nasrallah  Behbehani,  have  signed  as  guarantors  on  Telesource  CNMI's
promissory  note with the  Commercial  Bank of Kuwait,  New York Branch,  and as
guarantors on a $1,000,000 credit facility for Telesource


                                       45
<PAGE>


CNMI with Kuwait Real Estate Bank. SHBC and its majority  stockholders have also
signed as  guarantors  on a  $2,000,000  letter of credit  issued to the Bank of
Hawaii to secure a $1,900,000 credit facility. These credit facilities were used
to finance  the  construction  activities  on the power  plant,  the West Tinian
Airport expansion project, and to provide financing for other projects. See note
8.

Additionally,  from  time  to time  the  Company  may  hire,  on a part  time or
temporary  basis,   individuals  employed  by  SHBC  to  provide  assistance  to
Telesource on certain projects in the Northern Mariana Islands. During 2003, the
Company  hired SHBC  employees to provide  assistance  on a service  contract to
complete a survey of radio  transmissions in Iraq. The rates paid did not exceed
the fair market value of similar services provided by unrelated third parties.

The Company held an investment in Telebond Insurance Corporation at December 31,
2003, and 2002 in the amount of $77,695 and $71,284,  respectively.  The Company
purchased  insurance  from Telebond and paid premiums of $45,863,  $59,760,  and
$23,566 during the years ended December 31, 2003, 2002, and 2001,  respectively.
Telebond  provides  employment  bonds along with bid,  performance,  and payment
bonds for the Company's projects. Telebond is not a U.S. Treasury listed bonding
company.  Most bid,  performance,  and payment bonds for the Company are secured
from third party vendors. The Company's President and CEO, K.J. Semikian, serves
on Telebond  Insurance  Corporation's  board of  directors  and as  President of
Telebond, and owns 10% of the stock of Telebond.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Aggregate  fees of  $166,925  were  billed  by KPMG LLP  during  the year  ended
December 31, 2003, primarily for the following professional services:

            Audit-related services                             $147,225
            Income tax compliance and related tax services     $ 19,700



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<PAGE>


                                     PART IV


ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1)  The   following   consolidated   financial   statements   of  Telesource
International, Inc. and Subsidiaries are included in Part II, Item 8:

Financial Statements:

Consolidated Balance Sheets--December 31, 2003  and 2002

Consolidated  Statements of Operations--Years  Ended December 31, 2003, 2002 and
2001

Consolidated  Statements of Cash Flows--Years  Ended December 31, 2003, 2002 and
2001

Consolidated  Statements of Stockholders'  Equity and Comprehensive  Loss--Years
Ended December 31, 2003, 2002 and 2001

Notes to Consolidated Financial Statements

(a)(2) The  following  financial  statement  schedules are included in this Form
10-K report:

None.

(b) Reports on Form 8-K:

We filed a Form 8-K on April 20, 2004 regarding the company's prior 10-K filing.

We filed a Form 8-K on May 18, 2004 announcing that the Form 10-Q for the period
ended March 31, 2004 would be delayed.

ITEM 15(a)(3). EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS

The  following   executive   compensation  plans  and  arrangements  are  listed
incorporated by reference in this Form 10-K:


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<PAGE>


   Employment Contract between K.J. Semikian and Telesource International, Inc.
   Employment Contract between Nidal Z. Zayed and Telesource International, Inc.
   Employment Contract between Bud Curley and Telesource International, Inc.
   Telesource International, Inc. 2000 Incentive Stock Option Plan
   Telesource International, Inc. 2000 Non-Qualified Stock Option Plan
   Telesource International, Inc. 2000 Non-Employee Director Stock Option Plan





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<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.

                         TELESOURCE INTERNATIONAL, INC.
                                  (Registrant)


Date: July 7, 2004                /s/ K.J. Semikian
                                  -------------------------------------------
                                  K.J. Semikian
                                  President and Chief Executive Officer



PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING  PERSONS ON BEHALF OF THE  REGISTRANT AND
IN THE CAPACITIES INDICATED ON JULY 7, 2004.

    /s/ Ralph Beck                         Chairman of the Board of Directors
    ----------------------------------
    Ralph Beck

    /s/ K.J. Semikian                      Director, President and Chief
    ----------------------------------     Executive Officer
    K.J. Semikian

    /s/ Nidal Z. Zayed                     Director and Executive Vice President
    ----------------------------------
    Nidal Z. Zayed

    /s/ Max Engler                         Director
    ----------------------------------
    Max Engler

    /s/ Jeffery Adams                      Director
    ----------------------------------
    Jeffery Adams

    /s/ Weston Marsh                       Director
    ----------------------------------
    Weston Marsh

                                           Director
    ----------------------------------
    Ibrahim Ibrahim

    /s/ Bud Curley                         Chief Financial Officer
    ----------------------------------
    Bud Curley



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<PAGE>


                                  EXHIBIT INDEX

  EXHIBIT
   NUMBER                           EXHIBIT DESCRIPTION
  --------                          -------------------

      2.01     Amended and Restated Agreement and Plan of Merger and Plan of
               Reorganization among Sixth Business Service Group and Telesource
               International, Inc. Appendix A**
      3.01     Certificate of Incorporation of Telesource International **
      3.02     By-laws of Telesource International **
      10.01    Agreement for Design, Supply of Plant and Equipment, Private
               Construction, Maintenance and Operation, and Transfer of
               Ownership dated June 10, 1997**
      10.02    Agreement for Design, Supply of Plant and Equipment, Private
               Construction, Maintenance and Operation, and Transfer of
               Ownership, Change Order Number 1, dated November 30, 1998**
      10.03    Agreement for Design, Supply of Plant and Equipment, Private
               Construction, Maintenance and Operation, and Transfer of
               Ownership, Change Order Number 2, dated November 30, 1998**
      10.04    Agreement and Contract for Construction of Koblerville Expansion
               Project between the Northern Mariana Islands and Telesource
               International dated July 28, 1998**
      10.06    Memorandum of Understanding between Sayed Hamid Behbehani & Sons,
               Co. W.L.L. and Telesource International, Inc. regarding right of
               first refusal for certain areas**
      10.07    Memorandum of Understanding between Sayed Hamid Behbehani & Sons,
               Co. W.L.L. and Telesource International, Inc. regarding
               commission fees **
      10.10    Note Agreement between the Commercial Bank of Kuwait, New York
               Branch, and Telesource International CNMI, Inc. dated August 20,
               1998**
      10.10A   Note Agreement between the Commercial Bank of Kuwait, New York
               Branch, and Telesource CNMI, Inc. dated December 11, 2001 **
      10.11    Term Loan Agreement between the Kuwait Real Estate Bank and
               Telesource International CNMI, Inc. dated May 2, 1999**
      10.12    Line of Credit Agreement between the Bank of Hawaii and
               Telesource International CNMI, Inc.**
      10.13    Credit Agreement between Hongkong and Shanghai Bank Corporation,
               Limited and Telesource CNMI, Inc. dated January 21, 2000**
      10.13A   Credit Agreement between Hongkong and Shanghai Bank Corporation,
               Limited and Telesource CNMI, Inc. dated March 26, 2002 **
      10.14    Lease of Tinian Land between the Commonwealth Utilities
               Corporation and Telesource International CNMI, Inc.**
      10.15    Employment Contract between K.J. Semikian and Telesource
               International, Inc.**
      10.16    Employment Contract between Nidal Z. Zayed and Telesource
               International, Inc.**
      10.17    Employment Contract between Bud Curley and Telesource
               International, Inc. **
      10.18    Adoption Agreement for Aetna Life Insurance and Annuity Company
               Standardized 401(k) Profit Sharing Plan and Trust between Aetna
               Life Insurance and Annuity Company and Commsource International,
               Inc. dated November 13, 1998**
      10.19    Agreement for Design, Supply of Plant and Equipment, Private
               Construction, Maintenance and Operation, and Transfer of
               Ownership, Change Order Number 3 dated May 11, 2001**
      10.20    Telesource International, Inc. 2000 Incentive Stock Option Plan
               **
      10.21    Telesource International, Inc. 2000 Non-Qualified Stock Option
               Plan **
      10.22    Telesource International, Inc. 2000 Non-Employee Director Stock
               Option Plan **
      10.23    Warrant to Purchase 1,000,000 Shares of Common Stock between SHBC
               and Telesource International, Inc. **
      31.1     Rule 13a-14(a)/15d-14(a) Certification of CEO*
      31.2     Rule 13a-14(a)/15d-14(a) Certification of CFO*
      32.1     Section 1350 Certification-- Chief Executive Officer *
      32.2     Section 1350 Certification Chief Financial Officer *

*   Filed herewith
**  Previously filed


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