** **

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM 10-K**

 

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007**

 

**COMMISSION FILE NUMBER 0-2564**

 

**TELESOURCEINTERNATIONAL, INC.**

(EXACTNAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

| **Delaware**                                                   | ** ** | **6770**                                                 | ** ** | **36-4025775**                      |
|----------------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------|
| State or other  jurisdiction of  Incorporation or organization |       | PRIMARY STANDARD  INDUSTRIAL  CLASSIFICATION CODE NUMBER |       | I.R.S. Employer  Identification No. |

 

**860 Parkview Blvd**

**Lombard, Illinois 60148**

 

REGISTRANT’S TELEPHONENUMBER, INCLUDING AREA CODE

**(630)620-4787**

 

SECURITIES REGISTEREDPURSUANT TO SECTION 12(G) OF THE ACT:

 

**COMMONSTOCK, PAR VALUE $.01 PER SHARE**

(Title of each class)

 

SECURITIES REGISTEREDPURSUANT TO SECTION 12(B) OF THE ACT:

**NONE**

 

Check whether the issuer is not required to file reports pursuant to Section 13or Section 15(d) of the Exchange Act Yes  o  No  x

 

Check whether the issuer (1) filed all reports required to be filedby Section 13 or 15(d) of the Exchange Act during the past 12 months(or for such shorter period that the registrant was required to file suchreports) and (2) has been subject to such filing requirements for the past90 days.  Yes  x  No  o

 

Check if there is no disclosure of delinquent filers in response  to Item 405 of Regulation S-B contained inthis form, and no disclosure will  becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-KSBor any amendment to the Form 10-K. x

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company. See the definitions of“large accelerated filer,” “accelerated filer” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one)

 
| Large accelerated filer  o |   | Accelerated filer o |   | Non-accelerated filer o                        |   | Smaller reporting  company x |
|----------------------------|--------|---------------------|--------|------------------------------------------------|--------|------------------------------|
|                       |   |                |   | (Do not check if a  smaller reporting company) |   |                         |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule12b-2 of theExchange Act). Yes  o    No  x

 

Issuer’s revenues for itsmost recent fiscal year: $16,681,283

 

State the aggregate marketvalue of the voting and non-voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was sold, or theaverage bid and asked prices of such common equity, as of a specified datewithin the past 60 days. The Registrant’s voting stock held by non-affiliatesof the Registrant on March 12, 2008 was approximately $4,386,000.

 

Number of shares of CommonStock outstanding as of the close of business on March 12, 2008:128,885,661 shares.

 

**DocumentsIncorporated by Reference**

 

None

#  

 

# 

#  

# **TABLE OFCONTENTS**

 
| ** ** | **PART I**                                                                                                                         | ** ** |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|
| Item  1.   | Description  of Business                                                                                                                |       |
|       |                                                                                                                                    |       |
| Item  2.   | Properties                                                                                                                              |       |
|       |                                                                                                                                    |       |
| Item  3.   | Legal  Proceedings                                                                                                                      |       |
|       |                                                                                                                                    |       |
| Item 4.    | Submission of  Matters to a Vote of Security Holders                                                                                    |       |
|       |                                                                                                                                    |       |
| ** ** | **PART II**                                                                                                                        | ** ** |
|       |                                                                                                                                    |       |
| Item 5.    | Market for the  Registrant’s Common Equity, Related Stockholder Matters, and Small Business  Issuer Purchase of Equity securities  |       |
|       |                                                                                                                                    |       |
| Item 6.    | Management’s  Discussion and Analysis                                                                                              |       |
|       |                                                                                                                                    |       |
| Item 7.    | Financial  Statements                                                                                                                   |       |
|       |                                                                                                                                    |       |
| Item 8     | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                                                   |       |
|       |                                                                                                                                    |       |
| Item 8A    | Controls and  Procedures                                                                                                                |       |
|       |                                                                                                                                    |       |
| Item 8B    | Other Information                                                                                                                       |       |
|       |                                                                                                                                    |       |
| ** ** | **PART III**                                                                                                                       | ** ** |
|       |                                                                                                                                    |       |
| Item 9.    | Directors  Executive Officers, Promoters, Control Persons and Corporate Governance;  Compliance with section 16(a) of Exchange Act |       |
|       |                                                                                                                                    |       |
| Item 10.   | Executive  Compensation                                                                                                                 |       |
|       |                                                                                                                                    |       |
| Item 11.   | Security  Ownership of Certain Beneficial Owners and Management and Related matters                                                     |       |
|       |                                                                                                                                    |       |
| Item 12.   | Certain  Relationships and Related Transactions, and Directors Independence                                                             |       |
|       |                                                                                                                                    |       |
| Item  13.  | Exhibits                                                                                                                                |       |
|       |                                                                                                                                    |       |
| Item 14.   | Principal  Accountant Fees and Services                                                                                                 |       |

 

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**PART I**

 

**ITEM 1. BUSINESS**

 

The terms “Telesource,” “Company,” “our,” and“us,” as used in this annual report, refer to Telesource International Inc. Theterm “SHBC” refers to Sayed Hamid Behbehani and Sons Company.

 

You are cautioned that the Form 10-KSB contains“forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995. When the words “believes,” “plans,”“anticipates,” “will likely result,” “will continue,” “projects,” “expects,”and similar expressions are used in the Form 10-KSB, they are intended toidentify “forward-looking statements,” and such statements are subject tocertain risks and uncertainties which could cause actual results to differmaterially from those projected. Furthermore, the Company’s plans, strategies,objective, expectations and intentions are subject to change at any time at thediscretion of management and the Board. These forward-looking statements speakonly as of the date this report is filed. The Company does not intend to updatethe forward-looking statements contained in this report, so as to reflectevents or circumstances after the date hereof or to reflect the occurrence ofunanticipated events, except as may occur as part of its ongoing periodicreports filed with the SEC.

 

 

**GENERAL**

 

Telesource is an international company engaged in two businesssegments. We offer construction services as a Design Build General Contractor, and we also invest in Energy Projectsas an Independent Power Producer with full-scale  and construction capabilities. Telesourcedoes not have in-house design capabilities so we rely on longstandingrelationships with world-class design firms to ensure that our projects andcustomers have the benefit of the best design services available in the UnitedStates.   As a general contractorTelesource  pursues  US government federal contracts with a focuson expanding our presence in the continental U.S. Our internationalconstruction experience has primarily been on US territories abroad and thevast majority of our future targeted market will be projects located on USsoil.

 

The Company’s energy business is generally  predicated on executing bankable contractswith  credit worthy customers on aproject financing basis without recourse to the Company..  The Company has experience as an IndependentPower Producer (IPP) and with Build Own Operate Transfer (BOOT) projects. Ourenergy projects have been in the North and South Pacific but our focus will nowbe in North America.

 

 Telesource conducts itsoperations through its three subsidiaries located in four geographic locations.Telesource, was formed in November 1996 and its headquarters are at 860Parkview Blvd., Lombard, Illinois U.S.A., 60148.

 

The Company has a subsidiary located in Fiji, Telesource Fiji, Ltd. (TFL).  TFL has a 20-year contract with the FijiElectricity Authority to operate and maintain two separate  diesel-fired  power generation plants, with a total outputof 78 Mega Watts.   The power produced atthe power plants is connected directly into the main power grid of Fiji.  In addition, our contract is to sell power ona wholesale level at a contractually determined rate.  The Company has been operating in Fiji for over seven years and  is attempting to develop and expand itsservices in the country and the South Pacific region.

 

The Company maintains a second wholly owned subsidiary in theCommonwealth of Northern Mariana Islands (CNMI).  This Mariana subsidiary, Telesource CNMI, Inc.(TCNMI)  is located on the Island ofSaipan with operations on the Island of Tinian, both islands being part of theCNMI which is a  U.S. Territory. Sinceits incorporation in 1997 TCNMI has executed over Eighty Million Dollars worthof construction work in the CNMI.  TCNMIalso designed and built a 20 Mega Watt power plant on the Island of Tinian on a20 year BOOT basis. The contract for this project will expire in 2020.  Our agreement with the Commonwealth UtilityCorporation stipulates that we will sell into the grid at wholesale.  Allmarketing and business development activities in the North Pacific and theOceania regions are directed through the Saipan office.

 

The Company has re-established its construction business and  implemented effective project managementtools and systems. We have extensive references from projects executed duringthe past 10 years and are leveraging these credentials and experiences forfuture growth. Our past experience includes: airport and runway expansion;adult correctional facility; museum; shortwave radio relay station with high-powertransmitters and antennas; and single-family development projects to 

 

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mention a few. TheCompany will now conduct its construction business both on its own and throughstrategic joint ventures and other alliances.

 

In 2006, the Company entered into a joint venture with SHBC, called Telesource International, Inc./Sayed Behbehani & Sons Company, Joint Venture, L.P. (“TSI/SHBC JV”).This JV  operates out of theCompany’s  Lombard, Illinois office. TSI/SHBCJV is a limited partnership, with an equity split of 51% for Telesource and 49%for SHBC. Telesource International, Inc., is the general and controllingpartner of the TSI/SHBC JV and it earns 99% of the  JV profits.  TSI/SHBC JV was formed for the purpose ofbidding  US federal construction andinfrastructure development projects.   InJanuary, 2007 the JV received a final award and notice to proceed with a $42.5million contract to design and build a new embassy compound for the UnitedStates Department of State in Suva, Fiji. To execute the local works the JVformed a wholly owned subsidiary in Fiji, called Telesource SHBC Fiji (“TSF”).

 

The Company plans to become a major provider of construction servicesto the US Federal Government. In furtherance of this strategic objective andwith the support of the US Department of State, the Company was recentlygranted its secret level facility security clearance. Key Company managers havealso been  granted secret level clearance..

 

ConstructionServices

 

As noted above, Telesource has implemented a new strategy for theconstruction market. It will seek out business on its own and will also bid onprojects under the JV with SHBC as well as other potential joint ventures.  When bidding with SHBC,  the Company will have the benefit of  SHBC’s experienced personnel and success inthe construction industry. In both cases the Company will be employing its newsystems for project management and controls, all designed to heighten thelikelihood of success and profitability on our projects. Telesource hasaugmented its management team by hiring prominent construction industryprofessionals who have a proven track record of realizing a healthy profit onconstruction projects. Our future growth will be built on a solid foundation oftransparency, customer satisfaction, stage of the art technology and alwaysfocused on making a fair profit..

 

As stated  TSI/SHBC JV has been awarded the contract tobuild a United States Embassy in Suva, Fiji. The Company has extensive experiencein Fiji, primarily from building and operating power plants in the country.Through this experience it has developed a strong understanding of the economicand business climate and has developed strong relations with local businesses.Our experience in Fiji was very helpful in mobilizing and starting up theEmbassy Project. The Department of State intends to build over 70 new embassiesin the next 8 years and TSI/SHBC JV will continue to bid embassy work.  As noted above, the Company recently receivedsecret facility clearance from the State Department which expands its marketopportunities to include bids on and execution of secret classifiedprojects.  All secret level classifiedembassy projects will be bid by the Company and not the TSI/SHBC JV.

 

Telesource hasworked extensively with the United States Information Agency (previously knownas Voice of America).  Along with ourrecent experience on the Suva U.S. Embassy project with the Overseas BuildingsOffice (OBO) the Company is now poised to take advantage of our ability to workwith, understand and respond to complex US federal government contractual andregulatory requirements. These experiences have tremendously improved ouridentification of potential projects and the technical proposal responses. The ability to competently andcompetitively respond to government-issued requests for proposals and toexecute projects when awarded to the satisfaction of government contractingofficers is a skill set that Telesource has now demonstrated on numerousprojects.

 

The Company isemploying state of the art management tools and technology to ensure that allrisks inherent with the construction of complex buildings and structures iscontrolled and mitigated. It is the Company’s intention to continue to employstate-of-the art management practices and to employ the best project managersand superintendants resulting in producing the most value possible on ourcustomer’s projects.

 

Telesource maypursue opportunities at the municipal and state levels. We may considerinternational projects but we will be extremely selective and only do so whenthe customer is very creditworthy and meets certain Company-establishedcriteria. The Company may also bid on US based non-government projects if thecustomers are creditworthy and the projects meet the Company’s financialpre-requisites and conditions.

 

Although our focusover the past years has been on the international markets, the Company intendsto pursue US federal government projects located  in the continental United States. Infurtherance of this effort the Company is developing a 

 

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strategy to secureand expand its bonding capacity. By extinguishing over $10.0 million of debt in2007 the Company has taken a major step in enhancing its financial strength andhence its standing with the surety markets.

 

ActiveConstruction Projects and Services

 

As noted earlier,the TSI/SHBC JV was awarded the contract to build the new United States Embassyin Fiji in November of 2006. This contract is a design-build contractvalued at $42.6 million.  As of December 31,2007, the project was 27% completed.  The project is forecasted to be completed in March of 2009.

 

US FederalGovernment Construction Business Opportunity

 

The Company’s futurestrategy is to pursue design-build projects with five government agencies. Wewill also consider public private partnerships and enhanced-use landopportunities where feasible and within our core capabilities. The followingfactors make the US federal government construction business a worthwhileopportunity.

 

·                  **Design-Build is becoming moreprevalent**. U.S.government agencies like a design-buildproject’s ability to speed up the construction process. OverseasBuildings Operations (OBO) is trying to move to a “true” design-build deliverymethod for its embassy projects by providing the building team a standarddesign that equals approved construction documents.

 

·                  **The government is shifting morefunctions and responsibilities to the private sector**. TheOffice of Management and the Budget encourages agencies to consider privatizingservices. The military services are privatizing family housing on bases as partof an effort to upgrade the quality of life for service members. With thesuccess of privatized residential construction, the military is currentlyconsidering privatizing base construction in the future.

 

·                  **Aging government buildings arecreating increased construction opportunities.**The GSA, DOD, DOS and VA all have significantrenovation programs. The programs are in place to rehabilitate buildings thatare currently out-of-date or are in need of upgrades.

 

·                  **The desire for increased speedand efficiency has led to the development of standardized building programs.** The DOS has had success using standarddesigns in the construction of international embassies. Its performance ratingsindicate that the agency’s efforts in standardization and productivity arewell-received, resulting in further funding and increased construction spendingfor the agency through 2012.

 

·                  **Construction spending across thefive identified federal agencies increased $2.73 billion between FY 2003 and FY2007.**

 

·                  **In 2007, more than $10.9 billionwas awarded for federal construction projects of $1 million or more.**The Department of Defense represents thelion’s share; its construction projects alone account for 75% of the total.

 

# Selected Agency Profiles

#  

The Company believestheir greatest opportunities are with the Department of State and theDepartment of Defense.  However, thereare a total of five Agencies that may offer a potential market forTelesource.These are:

 

Department of Defense(includes USACE)

General ServicesAdministration

Department of Justice(includes FBOP)

Department of State(includes OBO)

Department of VeteransAffairs

 

 

**The Department of Defense**

 

The Department of Defensehas the most construction expenditures of all agencies observed in this report.The construction budget between 2003 and 2007 totaled $50 billion and had a 20%compound annual growth rate for the period (taken from 

 

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the Federal BudgetAuthority, 2009). In 2008, the department’s construction budget is $21.2billion, a 34% increase over the 2007 budget due to new constructionrequirements. The proposed budget for 2009 requests $22.6 billion, a 7%increase over the 2008 budget. Construction spending over the two-year 2008 and2009 period could potentially approximate $43.9 billion.

 

 

### **Construction Spending History andForecast**

###  

Historical and forecastedconstruction spending shows large annual increases for the 15-year 1998-2012period, with significant increases in the 2008-2012 period. During the period,annual spending grows from $6.2 billion to approximately $32 billion with aCAGR of 12%. By the end of 2011, the Army, the largest military division of theDOD, plans to re-station one-third of its active global personnel. This effortwill affect nearly 400,000 people at more than 300 locations. Constructionspending for the Army is reported to be an estimated $66.4 billion though 2013with 743 projects.

 

 

## **General Services Administration**

##  

### **Facilities and Construction ProgramOverview**

###  

·                  The U.S. General Services Administration helps federalagencies better serve the public by offering workplaces, consulting services,acquisition services and management policies.

 

GSA is in charge ofmaintaining the Federal Building Fund, which provides capital for expenses inoperating, maintaining and constructing federal buildings. The GSA’s PublicBuilding Service (PBS) is the largest public real estate organization in theUnited States. The PBS’s mission is “To provide superior workplaces for federalcustomer agencies at good economies to the American taxpayer.” The GSA 2008construction budget as noted by the Federal Budget Authority is $76 million;however, expenses on the construction and acquisition of facilities areexpected to reach an estimated $1.2 billion as a result of several largeupcoming new construction projects.

 

The largest portion (46%)of the GSA’s construction spending is in public buildings, which would includethe majority of the government’s office buildings and courthouses.

 

 

**Construction Spending History andForecast**

 

In the last ten years,construction spending at the GSA has more than doubled. Contract spending in1998 was $204 million and contract spending in 2007 was $564 million. The GSAcurrently has a strong backlog of planned projects as seen in the table in theFacilities and Construction Program Overview section.

 

 

## **Department of Justice (IncludingFederal Bureau of Prisons)**

##  

### **Facilities and Construction ProgramOverview**

###  

The Department of Justice(DOJ) has $563 million available for its FY 2008 construction programs. The FY2009 President’s Budget requests an additional $139 million, for a combinedconstruction-funding total of more than $700 million during the next two fiscalyears.  The proposed FY 2009 President’sBudget has $96 million allocated for the Bureau of Prisons (BOP) buildings andfacilities, which is a 74% decrease from $373 million in FY 2008. TheDepartment’s remaining construction funding will be primarily allocated to theFederal Bureau of Investigation (FBI) as well as the Drug EnforcementAdministration (DEA) and several department offices.

 

### **Construction Spending History andForecast**

###  

Following two years ofrecord-high construction, totaling over $1 billion, spending for the DOJ  will decrease to $141 million per yearthrough 2012. In 2007, several large DOJ construction contracts, with anaverage value of more than $180 million were awarded. These three projectsrepresented 97% of the agency’s total construction contracts value in 2007.While projects greater than $20 million totaled $541 million in 2007, theprevious three years’ projects of this magnitude totaled 

 

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$119 million.  Since 2003, the annual number of DOJ projectsless than $10 million has been at least 75% of the total number of awardedcontracts.  Penal facilities representedmore than 90% of awarded DOJ construction contracts.

 

 

## **Department of State (IncludingOverseas Buildings Operations)**

##  

### **Facilities and Construction ProgramOverview**

###  

The Department of State(DOS) has $1.67 billion available for its FY 2008 construction programs, andthe FY 2009 President’s Budget requested an additional $1.83 billion, anincrease of 22% over FY 2007. The Bureau of Overseas Buildings Operations (OBO)will use nearly 98% of the requested amount for embassy security, constructionand maintenance. The International Boundary and Water Commission (IBWC) willuse the remaining $40 million in requested construction funding.

 

More than 80,000 UnitedStates government employees from 30 agencies at more than 265 posts and theirfamilies depend on the facilities support provided by OBO. As a direct resultof OBO’s performance, more than 4,900 overseas employees were moved into safer,more secure facilities in 2007, bringing the total number to more than 16,000since the year 2000. Since 2001, OBO has delivered a total of 55 new facilitiesand has an additional 34 under design or construction, totaling more than $4billion. The FY 2006-2011 Long-Range Overseas Building Plan includes 76 NewEmbassy Compound (NEC) projects worth $6.5 billion.

 

 

**Construction Spending History andForecast**

 

Exhibit 34 showsthat DOS construction spending will increase 277% between 2006 and 2012. Thisgrowth is a result of six consecutive years of increased construction spending.Driving this increase is the construction of new embassies. The agency’sLong-Range Overseas Building Plan includes more than 75 NEC projects worth $6.5billion. Over the next two years, 20 new facilities are planned forconstruction worldwide.

 

 

## **Department of Veterans Affairs**

##  

### **Facilities and Construction ProgramOverview**

###  

The Department of Veterans Affairs (VA) has undergonea profound transformation in the delivery of its health care over the last twodecades and has moved from a hospital-driven health care system to anintegrated delivery system that emphasizes a full continuum of care. Newtechnology and treatment modalities have altered how and where care isprovided, with a considerable shift from inpatient to outpatient services. TheVeterans Health Administration’s (VHA) infrastructure was designed and builtdecades ago, under a different concept of health care delivery. Capital AssetRealignment for Enhanced Services (CARES) is a comprehensive, system wide approachto, and ongoing process for, identifying the demand for VA care and projectinginto the future the appropriate function, size and location for VA facilities.Since the VHA’s capital assets often do not fully align with current healthcare needs for optimal efficiency and access, the capital investment needs arevast. Nearly 75% of the FY 2009 President’s Budget request for the VA isallocated to the VHA.

 

 

### **Construction Spending History andForecast**

###  

VA construction spendinghas been very inconsistent since 2004 with several peaks and valleys. Thistrend should continue through 2012 with a low of $389 million in 2008 and ahigh of $551 million in 2011. The building of hospitals and their associatedfacilities drives the VA’s construction spending. These two groupings typicallyrepresent more than 70% of the agency’s construction projects, as shown inexhibit 46.

 

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**Third-Party Financing and EULOverview**

 

**Third-Party Financing Involvementin Federal Projects**

 

Rather than relying onregular appropriations or other forms of federal financing, agencies havearranged for third-party financing (or Public-Private Partnerships) of variousfederal projects. Projects include housing on military bases, government officebuildings and electrical power facilities. Federal agencies arrange thisfinancing through long-term commitments to use the facilities. From 1998through 2005, the Congressional Budget Office estimates that third parties haveborrowed approximately $12 billion in PPPs to fund federal projects.

 

Federal funding for theseprojects is primarily driven by the income that would be generated by thebuilding’s operation, which usually comes from federal spending. Assurance offuture cash flows from the government is important, and investors would need tocarefully look at the use agreements in place when a project is approved todetermine if the income will cover its costs. For most third party financedprojects done so far, the government is the only dominant source of capital.Financial considerations follow historical trends in funding levels as well asother management actions and collateral agreements. Projects completed to-datehave been rated as investment grade suggesting that sponsors have given lendersgood proof that the government will pay for the projects.

 

One common use of thirdparty financing is military housing by the DOD. The DOD has raised about $6billion since 1996 in constructing and renovating housing on military bases.Although private companies build and manage the houses, the DOD chooses thedevelopers and managers of the projects, sets the guidelines for constructionand operations, controls the assets and is the source of capital backing. Inaddition, the developer can not use the property as a source of collateral forother debt or sell its interest in the project without governmental approval.The government controls the cash flows, who is eligible to rent the house andhow much they can be charged. However, it also ensures that most of theproject’s income will come from funds paid to the military personnel.

 

 

**Enhanced-Use Leasing Involvementin Federal Projects**

 

Enhanced-Use Lease (EUL)is a method for funding construction or renovations on military property byallowing a private developer to lease underutilized property, with rent paid bythe developer in the form of cash in-kind services. Since the agency can issueenhanced use leases only on land that is excess to their needs, theimprovements must not be directly tied to any programmatic requirements of theinstallation. The Department of Defense (DOD) and the Veterans Administrationuse EULs. Temporary authority has also been given to the U.S. General ServicesAdministration and the National Aeronautics and Space Administration. EUL authorityis derived from Congress and is specific to each agency.

 

EULs are becoming a verypopular tool for the DOD to accommodate the realignment of military functionsunder BRAC. Currently, there are more than 30 projects on the U.S. Army’s EULproject list, including Redstone Arsenal in Huntsville, Alabama. It remains tobe seen whether this form of privatization will create increased financial,security or environmental risks. Legal complications that have emerged includehow EUL-encumbered property will be handled when an installation is targetedfor closure under BRAC (e.g., Building 40 at Walter Reed Hospital).

 

Energy Business

 

Telesource’senergy business has historically been focused on building and operating fossilfuel  power generation plants. We havedesigned and built and now operate and maintain on a 20 year contract a 20 MWdiesel fired power plant on the Island of Tinian in the CNMI. We also builtpower plants in Fiji and currently operate and maintain, on a 20 year contractbasis, two separate plants with a total output of 78 MW. Looking forward, thereis no doubt that the world needs less fossil fuel based power output and morerenewable and clean energy. As an IPP, Telesource may well expand on its fossilfuel portfolio, when customer demand dictates, but we are committed to pursuingclean and renewable energy projects.

 

The Company isuniquely situated to bring state of the art construction and designcapabilities to its power generation/utility customers. As a potential stakeholder in BOOT or IPP power contracts, Telesource would be involved not only onthe operations and financial side of projects, but also in constructing thepower plants thereby giving us a vested interest to ensure that the powerfacilities are built under the most stringent and highest internationalstandards.  We believe that this approachwill be very appealing to our customers and will give Telesource a competitiveadvantage.

 

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Telesource has hadlongstanding financial relationships with many international banks and equityinvestors. We feel confident in our ability to raise the required equity andproject financing necessary to pursue financially sound and bankable  energy projects .

 

Current EnergyBusiness

 

In March 2003,Telesource was awarded a 20-year, multi-million dollar, energy conversionagreement with the Fiji Electric Authority for the operation and maintenance oftwo diesel power plants with generation capacity of 78 MW. The two power plantsare located in Kinoya and Vuda, Fiji. In 2006, the Company negotiated a revisedcontract to manage a new power plant in Kinoya and is responsible for managingthe new Caterpillar engines in the  powerplant and will receive additional fees for providing these services.  In addition, the Company also negotiated toreceive increased fees for the conversion of certain of the engines to HeavyFuel Oil (HFO).  Furthermore, the Companyhas expanded its operations and receives fees for the maintenance ontransmission and distribution lines in certain regions of Fiji.

 

Our agreement withthe governmental agency in the Commonwealth of the Northern Mariana Islands isfor the management of one of their power plants. Under the terms of thisagreement, Telesource designed, financed and built the power plant. Telesourceobtained financing for the project through a $25,000,000 line of credit fromthe Commercial Bank of Kuwait, New York branch. For the construction of thefirst phase of this power plant, Telesource is paid $180,000 per month for tenyears by the governmental agency. Each monthly payment is secured by apromissory note in the amount of $180,000 issued by the Commonwealth UtilitiesCorporation.

 

Telesource has a20-year lease on the land on which the power plant is built, plus title to theentire plant and a two-month escrow account of no less than $360,000 on whichTelesource has a first lien. In the event the governmental agency is unable tomeet its obligations either to make payments of monthly maintenance fees or onthe promissory notes, Telesource may sell, lease, assign or transfer the powerplant or any part of the plant equipment.

 

In the first phaseof the project, the governmental agency also pays Telesource a production feebased upon a fixed fee per kilowatt-hour for each kilowatt-hour produced on itsbehalf. In the second phase, which added 10-megawatts of capacity, thegovernmental agency has agreed to pay Telesource an additional production feeper kilowatt-hour. In addition, the governmental agency pays Telesource amonthly service fee for operating and maintaining the power plant.

 

In May 2001,the governmental agency and Telesource executed Change Order No. 3 to theTinian Power Plant Contract. Change Order No. 3 provides a suspension inthe 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 of10 years following commissioning of the last constructed phase (currently PhaseII was commissioned in March 2000 and therefore the contract was to haveexpired in March 2010) to an new expiration date of March 31, 2020.Change Order No. 3 does not include an expansion of the power generationcapacity of the power plant. The power plant will continue to operate at itscurrent maximum generation capacity of 20 Mwh. Effectively, the contract hasbeen extended for an additional 10 years. Power rates agreed to under theoriginal contract and Change Order No. 1 remain unchanged. Change Order No. 3does provide the customer with an early termination option related to theextended agreement beginning on March 31, 2010 and available annuallythereafter; however, the customer is required to give a six-month notice and topay an early termination fee of $6,000,000. Change Order No. 3 prohibitsthe customer from purchasing power from any source other than Telesource forthe first 30 MW. The expanded agreement executed under Change Order No. 3only extends the power generation contract term and does not require additionalperformance by Telesource, with respect to building additional power generationcapacity.

 

Change Order No. 3requires Telesource to upgrade the power distribution system incertain areas of the Tinian Island. The Company is responsible for thecosts of the upgrade which include labor and material. The Company has incurredapproximately $1,250,176 in costs associated with this upgrade through December 31,2007. The Company will be seeking a final certification for the upgrade fromthe client. Such certification includes certain negotiating issues that willhave a immaterial effect on the remaining cost to complete the upgrade. TheCompany has completed the upgrade in 2007 however some minor additional costsnot to exceed $25,000 may be incurred.

 

Future EnergyOpportunities

 

Based on previousexperience, extensive research and  basicknowledge of the energy markets, management believes there will be a growing demand for power around theworld.  While competition andderegulation could limit the market potential and opportunities for Telesource,there is no question that demand will continue to increase for the foreseeablefuture. In the 

 

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U.S., two-thirdsof the country’s installed plants are 25 or more years old and need to bereplaced and re-powered, principally with new combustion turbines. The world’suse of electricity is projected to increase by two-thirds over the forecasthorizon, from 13 trillion kilowatt hours in 1999 to 22 trillion kilowatt-hoursin 2020. The strongest growth rates in electricity consumption are projectedfor the developing world. Our focus will be on small power plants withgenerating capacity of less than 50 MW. This will ensure that regulatory andenvironmental risks associated with larger plants are mitigated and controlled.

 

**Market**

 

**Broad market - North America**

 

According to the EnergyPolicy Act of 2001, energy usage in the United States will increase at the rateof 1.5% per year from 2000 to 2020. This is projected to occur while energyproduction remains relatively constant. This fact alone helps to explain risingcosts for energy in any form. More efficient use of energy and better controlof it has moderated the effect of rising costs of energy.

 

In the industrializedworld, electricity consumption is expected to grow at a more modest pace.  Slower population and economic growth, alongwith the market saturation and gains from more efficient electrical drives andappliances help to explain expected slower growth of electricity use (in therange of 1.5% to 2.5%) although growing computer usage and the introduction ofnew electrical entertainment devices could accelerate that trend.

 

While the United States,like Europe, represents a mature market for electric power, the generation anddistribution assets are aging, and growth has occurred in geographic areas thatthe supporters of national grid did not anticipate. Further, planning,approval, and financing of large electric power generation plants have becomevery difficult whether the technology employed is nuclear, coal-fired, orgas-fired.

 

It often takes many yearsto bring a large plant on stream, and by then the assumptions that were used tosupport its development are frequently obsolete. That is especially the casewith coal fired plants at this time. The Company will pursue smaller projectsbased on technologies that can be planned and brought to service in a muchshorter time.

 

Over 50% of electricalpower is currently obtained from large, pollution-intensive central generatingplants. Large new or replacement plants are hard to permit, costly to build,and represent technologies that are becoming obsolete or have image problems toovercome, such as with coal-based or nuclear technologies.

 

Thermal efficiencies (useof the heat contained in the fuel consumed) of such plants are approximately30-35%. But such plants and similar new ones will continue to provide the vastmajority of electric power in North America in the next decade and beyond.Power from these plants is diminished by high losses of electrical power whenit is transmitted over great distances to remote loads. Still, transmissionlines must be sized to accommodate peak requirements of demand.

 

Over the past 10 to 15years, as demand has grown, improvements in generating and control technologieshave resurrected an old market called DGCHP. Distributed generation (DG) makesand uses electrical power near to the load. Combined heat and power (CHP) makesbetter use of heat that is wasted by inefficient generating and transmission assets.

 

According to the U.S.Energy Information Administration Energy Outlook for 2008, Cumulative UnplannedAdditions to Distributed Generation from 2008 to 2030 amounts to 197.2gigawatts (or 197200 MW). If the average size of new plant was 10 MW each, thatrepresents 19,720 new plants to be brought online over the next 22 years.

 

These plants are inaddition to larger coal fired, nuclear, and renewable fuel plants also to beneeded over the same period, per this same report. These plants representapplication of existing proven technologies such as gas-fueled combustionturbines, reciprocating engine driven generation, wind farms, and more advancedcutting edge technologies such as fuel cells.

 

Such projects are usuallyused for both “peak shaving” and base load applications.  Peak shaving facilities are used to moderatethe highest unit costs charged by traditional utilities during times of highdemand, while base loaded plants are used to supply power on continuous bases.

 

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These plants representapplication of existing proven technologies such as gas-fueled combustionturbines, reciprocating engine driven generation, wind farms, and more advancedcutting edge technologies such as fuel cells. Such projects are planned to beused for both “peak shaving” and base load applications.

Growth in this marketwill not replace very large projects (over 100MW), but will bring theseresources on line much more quickly and require much less capital exposure thanthe very large projects. Some very large coal-fueled and nuclear projects havebeen delayed for a wide variety of reasons — some economic, some having to dowith permitting resistance, and some having to do with real or perceivedpotential for adding to pollution. Delays of these large projects only helpsmaller DGCHP projects progress.

 

The large, central,monopoly based business is being reconsidered by not only environmentalists,but by owners and communities interested in reliability of available power andgreater control over their energy costs. That is the potential client andmarket that the Company intends to address. In addressing this market theCompany will reply on proven technologies with a focus on renewable greenenergy.

 

In North America, alongwith other industrialized regions, certain industries require around-the-clockcertainty of electric power. In the event of a large scale loss of electricpower, as has happened in recent years in North America, these industries canexperience significant economic loss. Depending on the industry, the timing, and duration of electric powerloss involved, these economic losses can amount to millions of dollars perfacility.

 

For many of theseindustries, reliability and availability of electric power can be as importantif not more important than actual cost savings over the prices paid for powerto traditional utilities.  An addedattraction for owners and power developers is that the distributed generationfacility itself can represent a captive market that does not have to competewith other customers for access to sometimes overcrowded transmissionassets.  Many of these facilities consumelarge amounts of both electric power and conventional heat energy fromhydrocarbon fuels such as natural gas. Heat energy is used for steam production at various pressures to supportmanufacturing processes.  These plantsoften purchase and consume 1 to 10 MW of power in addition to the natural gasused for process steam generation.

 

If the heat energy can beused to generate electric power as well as supply process steam, there may bean advantage to considering co-generation. Such opportunities represent a strong population of potential projectsbased on process economies that make better use of the energy the plant currentlyconsumes.

 

In North America, somesmaller communities, such as small towns and counties, purchase electric poweron a wholesale basis from traditional electric utility firms.  They supply their populations, as retailcustomers, with electric power.  Recently,some of these communities have experienced substantial cost increases for theirpurchased wholesale electric power.

 

Some of these communitiesare now actively exploring generation of their own electric power in lieu ofpurchasing it wholesale from traditional large utilities.  This approach to energy supply is especiallyattractive to those communities that own their distribution asset, and do nothave to pay a fee to transmission and distribution companies that frequentlyare associated with large generating companies.

 

However, these samecommunities may lack the financial muscle to put distributed generation inplace. Those situations where the local governments lack the up-front fundingto build the additional power plants represent an opportunity for a resourcefuldeveloper to find alternative solutions to execution of the project That mightinclude Telesource offering to locate the needed project financing in returnfor the overall program management of the project.

 

After carefully screeningsuch opportunities, Telesource may consider offering“Build-Own-Operate-Transfer” (BOOT) services to such customers.  These services were previously available onlyto the large traditional utilities, and the providers of such services havetraditionally been very large engineering and construction firms.

 

Few of the largeengineering and construction firms are interested in projects of less than 100megawatts in size, and are not eager to alienate large utility customers byassisting with an approach that can dilute the utility’s market. But withoutthe additional energy, Telesource believes that many of the infrastructureupgrades envisioned by local governments, such as potable water supply andtreatment, wastewater treatment, and communications infrastructure will beunable to occur.

 

In Telesource’sexperience, in return for securing project financing in a manner similar tothat obtained for the project in the Commonwealth of the Northern MarianaIslands, local governments will be willing to enter into contracts whichguarantee Telesource a minimum amount of power consumption, coupled withlong-term operation and maintenance contracts.

 

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**International Market**

 

While the Company’s focuswill be on the North American market, we will consider international projectsthat meet our strict project financial and risk profiles or pre-conditions.

 

The most rapid expansionin electricity use is expected for developing countries in Asia, Central andSouth America, and other less-developed regions. According to estimates fromthe Energy Statistics Yearbook published by ENERDATA 2007, these regions areestimated to grow annually at rates exceeding 3.5 percent between 1999 and2020.

 

Telesource has aninternational presence through its construction business and existing powerfacilities.  We also have strongalliances and strategic partners in various parts of the world.  Our partners and affiliations includeequipment manufacturers, financial institutions, existing customers andinvestors.

 

The world electricitydemand is expected to grow at a rate upwards of 2.0% per annum, from 16trillion kilowatt-hours in 2004 to 30 trillion kilowatt-hours in 2030. Asexpected most of this growth will take place in the developing world. Thebiggest growth is expected in Asia followed by Africa. Central/ South Americaand Middle East regions follow next. In developed regions North America isexpected to have a higher growth as compared to Europe. The growth in non-OECDcountries is expected to be three times faster than OECD countries.

 

World Energy Council had projected an investmentrequirement of $11 trillion in electricity generation and distribution sectorin the period 2005-2030 with generation accounting for 46% of the same. Privateparticipation is a must to ensure such huge investments. Those situations wherethe local governments lack the up-front funding to build the additional*smaller* power plants will represent an opportunity forTelesource to find alternative solutions locating the needed project financing.However lack of legislative frame work, political will, subsidized electricityrates and transparency particularly in developing and under-developed countriesare some of the key impediments to private sector investment in the electricalpower sector.

 

Electricity generation projects have a long gestationperiod from concept to bid stage. Market intelligence regarding upcomingopportunities, well in advance of an RFP being issued is necessary. Thecompanies and equipment manufacturers active in a particular country are thefirst to know about an upcoming or prospective opportunity giving them a headstart in evaluating the project, assembling the right team and ultimatelypreparing the winning proposal once the RFP documents are issued. At times itallows them to provide input to the RFP development process itself.

 

The big developers are only interested in large powerplant projects. These large plants have large risks. Telesource plans toactively seek business in 10-50MW range conventional oil / gas power plants andrenewables based plants by way of Build-Own-Operate (BOO) orBuild-Own-Operate-Transfer (BOOT) schemes, with minimum take or pay guarantees,based on recourse project financing. To this end Telesource is looking athaving strategic business alliances with equipment manufacturers for locatingand developing bankable power generation projects.

 

 

**Technologies**

 

Telesource envisions theapplication of any or all the available technologies in its projects. Therewill be no wedding of DGCHP projects to any technology that will put economicor technological constraints on proposal presentation or project development.That being said, financial viability combined with the most appropriatetechnology will be a primary test for project viability in this marketingeffort.

 

A wide variety oftechnologies are available for use in DGCHP projects. The technologies fallinto two main categories, older proven technologies and newer sometimes cuttingedge technologies that may or may not be widely accepted in future powergeneration applications.

 

Older technologiesusually require less initial capital outlay, and are generally more readilyavailable in the marketplace. Operational data is more readily available forproven technologies as well.

 

Some older proventechnologies such as reciprocating engines are of the type used worldwide fornearly 100 years to power vehicles, construction equipment, pumping equipment,generators, and a multitude of other applications. There are many 

 

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manufacturers of theseengines, and in the market for the lower end of electric power generatingcapacity, 1 to 10 MW, they may be the most useful.

 

They have been proven bydecades of reliable service, and have been adapted to many hydrocarbon fuels.These technologies may find a very good application for such renewable fuels asbio-diesel.

 

Other older technologiesthat have an updated twist are wind powered generators. These applications maybe suitable for sale of power to the grid since fuel is not a consideration,and power generation may be very competitive with the largest hydrocarbonpowered plants.

 

However, thesetechnologies are disadvantaged by having an intermittent energy source, andtherefore may not be the most useful technology for applications that requirearound-the-clock power supply. Further, they are not especially useful forcombined heat and power applications that such markets as hotels, hospitals,and certain industries may find most beneficial.

 

Sales andMarketing Strategies

 

The Company isprimarily interested in government-funded and government-sponsored constructionand power  projects    Due to the nature of these projects theyoften are obtained through a public bid process.  In obtaining contracts:

 

·                  Telesource reviews market trends in thegeographic locations it presently operates, or where it wishes to expandTelesource’s research also includes analyzing numerous government documents andreviewing previous and current international tenders and requests forproposals..

 

·                  Telesource utilizes its relationshipswith industry specialists and equipment manufacturers, including consultantswho have experience and have been in their respective industries for a longperiod of time.

 

·                  Telesource is actively involved in publicrelations with the governments and agencies that might contract forTelesource’s services. Much of this effort is informational and intelligencegathering, learning the specific needs of each governmental agency while at thesame time explaining what services Telesource has to offer.

 

·                  Telesource has created and provides topotential clients a survey to help governmental agencies evaluate whetherTelesource’s resources and services might be more efficient and cost-effectivethan their current system.

 

## Competition

##  

The population andcomposition of the competition has created a fragmented market. Aggregators andbrokers of electric power and natural gas seek profits from that portion of thecommodity price structure that can be brokered. Utilities with an interest inmaintaining their customer base will often discount to large customers such asoil refiners. Equipment suppliers bring innovative lease financing thatsupports sales of their equipment. Creating a complete development package thataddresses this fragmentation of revenue and profit is challenging.

 

Competition inthis industry is substantially based on price with competitors discoveringlower cost alternatives for providing electricity. The electric industry isalso characterized by rapid changes in regulations, which Telesource expectscould continue to increase competition. Telesource does not believe the Tinianpower plant would be significantly impacted by competition in the wholesaleenergy market since its revenues are subject to contracted rates which aresubstantially fixed for several years.

 

Competition forattractive development opportunities is expected to be intense as there are anumber of competitors in the industry. Many of the companies competing in thismarket have substantially greater resources. Telesource believes its projectdevelopment experience and its experience in creating strategic alignments withother development firms with greater financial and technical resources couldenable Telesource to continue to compete effectively in the development market ifand when opportunities arise. Presently, Telesource believes there are a numberof opportunities for project development similar to those previously developed by Telesource.

 

Presently, thereis significant merger and consolidation activity occurring in the electricindustry. From time to time, Telesource may consider merger and acquisitionproposals when they appear to present an opportunity to enhance 

 

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stockholder value.Telesource is not involved in any of these discussions or negotiations at thistime and there can be no assurance that any opportunities will develop.

 

CustomerDependence

 

Telesource depends on two customers, CUC and FEA, for power-generationrevenues. The loss of either single customer would have a material adverseimpact on the company’s financial performance. Together, CUC and FEA represent24.2% of Telesource’s total revenues of $16.7 million. Revenues from CUCtotaled $925,784 or 22.9% of combined power generation revenues whereas FEAtotaled $3,115,072 or 77.1% of combined power generation revenues.

 

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

 

Telesourceoperates two additional power plants for a period of 20 years within Fiji forone customer, the Fiji Electric Authority. Telesource is to operate the twopower plants in Fiji by converting fuel provided by the customer intoelectricity for which Telesource receives a fee. The Fiji Electric Authority inturn sells the power produced to various users in Fiji. If the end-usercustomer defaults or increases in power use do not materialize as anticipated,Telesource’s revenue base may not grow to support other operations.

 

Energy Regulation

 

Telesource’sprojects are subject to regulation under federal and local energy laws andregulations. Telesource is subject to the requirements established by itspermitting authorities, i.e. the Department of Environmental Quality (“DEQ”)and the Environmental Protection Agency (“EPA”).

 

Presently, neitherthe Customer Choice Act nor proposed legislation dealing with U.S. energypolicy directly impacts Telesource because the legislation and restructuringplan pertain to the retail market or new contracts in the wholesale market.However, as discussed above, Telesource could be impacted in the future by,among other things, increases in competition as a result of deregulation.Telesource is actively monitoring these developments in energy proceedings inorder to evaluate the impact on existing projects and also to evaluate newbusiness opportunities created by the restructuring of the electric industry.

 

EnvironmentalRegulation

 

Telesource’sprojects are subject to regulation under federal, foreign and local environmentallaws and regulations and must also comply with the applicable laws pertainingto the protection of the environment, primarily in the areas of water and airpollution. These laws and regulations in many cases require a lengthy andcomplex process of obtaining and maintaining licenses, permits and approvalsfrom federal and local agencies. As regulations are enacted or adopted in anyof these jurisdictions, Telesource cannot predict the effect of compliancetherewith on its business. Telesource’s failure to comply with all applicablerequirements could result in delays in proceeding with any projects underdevelopment or require modifications to operating facilities. During periods ofnon-compliance, Telesource’s operating facilities may be forced to shut downuntil the instances of non-compliance are corrected. Telesource is responsiblefor ensuring compliance of its facilities with applicable requirements and,accordingly, attempts to minimize these risks by dealing with reputablecontractors and using appropriate technology to measure compliance with theapplicable standards.

 

Insurance andBonding

 

Telesourcemaintains general and excess liability, construction equipment, and workers’compensation insurance: all in amounts consistent with industry practices.Telesource believes its insurance programs are adequate subject to deductiblessome of which are approximately $800,000.

 

TSI/SHBC JV wasrequired to obtain two stand-by letters of credit representing performance andpayment bonds on its most recent construction project, the United StatesEmbassy in Fiji. The Company was able to obtain these stand-by letters of 

 

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credit with AlAhli Bank of Kuwait and confirmed by the Bank of New York. The total of thesestand-by letters of credit are $21.5 million.

 

Employees

 

As of December 31,2007, Telesource employed 145 people, consisting of 14 managers, 21 engineersand technicians, 24 support staff and 86 hourly employees. All of Telesource’semployees are non-union workers, although Telesource may employ unionsubcontractors from time to time.

 

Telesource’snon-engineering level employees are hourly workers, while its engineering andsupervisory staffs are full-time employees on monthly salaries.

 

Sources andAvailability of Raw Materials

 

Telesource relies on third parties for important raw materials andtechnical expertise. Telesource’s ability to enter into new engagements or toconduct the business in a profitable manner will be harmed if its access tothese important resources is limited or becomes too costly.

 

Telesource relieson third-party suppliers for raw materials like wood, steel and concrete; forfabrication of technical equipment subsystems including diesel generation andtechnical expertise. Telesource’s ability to obtain cost-effective rawmaterials, fabrication services and technical assistance is subject to a numberof external factors which are outside of its control, including:

 

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

 

·                  Third-party raw material suppliers, fabricators ortechnical expertise providers may decide not to provide Telesource withmaterials or services.

 

·                  Telesource has no long-term contracts with third-partysuppliers of raw materials, fabrication services or technical expertiseproviders.

 

·                  Telesource’s third-party contracts are usually shortterm in duration and are cancelable by such third party.

 

**ITEM 2.          PROPERTIES**

 

Telesourcemaintains leased office space and leases land for storage of constructionequipment. In the corporate offices in Lombard, Illinois, Telesource has leasedspace through April 30, 2011. Telesource’s Mariana subsidiary’s headoffice in the Commonwealth of the Northern Mariana Islands is leased for a termwhich extended through December 2004 and is currently on a month-to-monthrenewal. In Fiji, Telesource’s power generation subsidiary is leasing officespace for a three-year term ending December 31, 2009.  Management believes its existing arrangementsfor its office facilities and the condition of such facilities are adequate.

 

**ITEM 3.          LEGAL PROCEEDINGS**

 

In the ordinarycourse of its business Telesource becomes involved from time to time in legalproceedings and claims asserted by and against Telesource. It is the opinion ofmanagement that the ultimate disposition of these routine pending matters willnot have a materially adverse impact on the Company.

 

In 1999, theCompany was awarded a contract to build 45 housing units for the NorthernMariana Housing Agency, a government unit. The houses were built andsubsequently occupied. The Northern Marianas Housing Corporation has filed alawsuit against Telesource and two other parties for $3.0 million in damagesrelated to this project. These claims involve 

 

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allegations ofvarious construction defects. The Company estimates that, if the plaintiff issuccessful, the Company may have an estimated liability in the range of $500,000to $1,200,000. The Company recorded a $300,000 estimated loss during 2004,$200,000 during 2006, and an additional $609,000 during 2007. In 2007, theCompany paid $139,000 to claimants resulting in an accrual of $970,000 at December 31,2007.  Telesource has denied anyliability and will aggressively defend itself to mitigate and/or dismiss thisclaim.

 

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

 

None

 

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**PART II**

 

**ITEM 5.          MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS**

 

MARKETINFORMATION. On November 1, 2001, Telesource’s common stock began tradingon the Over-the-Counter Bulletin Board under the symbol “TSCI” and currently istraded in the Pink Sheets. Prior to that time, Telesource’s common stock wasnot listed for trading.

 

The followingtable sets forth high and low sales prices for the common stock for the periodsindicated as reported on Pink Sheets:

 
| ** **     | ** ** | **HIGH**   | ** ** | **LOW**    | ** ** |
|----------------|------------|------------|------------|------------|------------|
| 2007           |       |       |       |       |       |
| First Quarter  |       | 1.10       |       | 1.05       |       |
| Second Quarter |       | 1.05       |       | 1.05       |       |
| Third Quarter  |       | 1.05       |       | 1.05       |       |
| Fourth Quarter |       | 1.05       |       | 0.51       |       |
| ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| 2006           |       |       |       |       |       |
| First Quarter  |       | 0.25       |       | 0.25       |       |
| Second Quarter |       | 0.25       |       | 0.25       |       |
| Third Quarter  |       | 0.25       |       | 0.25       |       |
| Fourth Quarter |       | 1.10       |       | 0.25       |       |

 

On the most recenttrade date of December 27, 2007, the stock traded at $0.51 per share for1,000 shares. The Company did not declare any dividends in 2006 or 2007.

 

HOLDERS. As of December 31,2007, there were 185 shareholders of record.

 

EquityCompensation Plans

 

**2000Non-Employee Director’s Stock Option Plan**

 

In January 2001,the Company’s board of directors adopted the 2000 Non-Employee Director’s StockOption Plan that provides for the issuance of nonqualified stock options tooutside directors. Under the terms of this plan, under which 285,000 shares ofcommon stock were reserved for issuance, options to purchase common stock aregranted at not less than fair market value, become exercisable over a3 year period from the date of grant (vesting occurs annually on the grantdate at 33.3% of the grant), and expire 10 years from the date of grant.

 
| ** **                                             | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **Weighted  average  shares**   | ** ** | **Exercise  price**             | ** ** | **Weighted  average  shares** | ** ** | **Exercise  price** | ** ** |
| Options outstanding at January 1                  |       | 180,000                         |       | $                               | 1.25       |   | 180,000 |   | $ | 1.25 |   |
| Granted                                                |       | —                          |       |                            |       | — |   |   |   |
| Exercised                                              |       | —                          |       |                            |       | — |   |   |   |
| Cancelled                                              |       | —                          |       |                            |       | — |   |   |   |
| Options outstanding at December 31                |       | 180,000                         |       | 1.25                            |       | 180,000 |   | 1.25 |   |
| Options exercisable at December 31                |       | 180,000                         |       | 1.25                            |       | 180,000 |   | 1.25 |   |
| Shares available for future grant at  December 31 |       | 60,000                          |       |                            |       | 60,000 |   |   |   |
|                                                        |            |                                 |            |                                 |            |  |  |  |  |  |  |

 

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**2000 Incentive Stock Option Plan**

 

In January 2001,the Company’s board of directors adopted the 2000 Incentive Stock Option Planthat provides for the issuance of qualified stock options to employees. Underthe terms of this plan, under which 888,000 shares of common stock werereserved for issuance, options to purchase common stock are granted at not lessthan fair market value, become exercisable over a 3 year period from thedate of grant (vesting occurs annually on the grant date at 33.3% of thegrant), and expire 10 years from the date of grant. As of December 31,2007, no options had been awarded under this plan.

 

**UNREGISTEREDSALES OF SECURITIES**.

 

We issuedunregistered securities to SHBC in the following transactions during 2007:

 

·                  On February 1, 2007 we issued310,000 shares of common stock pursuant to an exemption under Regulation S ofthe Securities Act for $155,000.

 

·                  On February 19, 2007 we issued730,000 shares of common stock pursuant to an exemption under Regulation S of theSecurities Act for $365,000.

 

·                  On April 10, 2007 we issued 530,000 shares ofcommon stock pursuant to an exemption under Regulation S of the Securities Actfor $265,000.

 

·                  On May 4, 2007 we issued 350,000 shares of commonstock pursuant to an exemption under Regulation S of the Securities Act for$175,000.

 

·                  On June 6, 2007 we issued 1,348,000 shares ofcommon stock pursuant to an exemption under Regulation S of the Securities Actfor $674,000.

 

·                  On July 5, 2007 we issued 280,000 shares ofcommon stock pursuant to an exemption under Regulation S of the Securities Actfor $140,000.

 

·                  On September 5, 2007 we issued 410,000 shares ofcommon stock pursuant to an exemption under Regulation S of the Securities Actfor $205,000.

 

·                  On September 26, 2007 we issued 15,000,000 sharesof common stock pursuant to an exemption under Regulation S of the SecuritiesAct for $7,500,000.

 

·                  On October 8, 2007 we issued 510,000 shares of common stockpursuant to an exemption under Regulation S of the Securities Act for $255,000.

 

·                  On November 12, 2007 we issued 800,000 shares ofcommon stock pursuant to an exemption under Regulation S of the Securities Actfor $400,000.

 

The funds receivedfrom these sales were used to reduce long-term debt, vendor payables andsupport on-going operations.

 
| **ITEM 6.** | ** ** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION** |
|-------------|------------|-------------------------------------------------------------------------------------------------|

 

The following discussion of our financial conditionand plan of operation should be read in conjunction with our financialstatements and the related notes included elsewhere in this annual report on Form 10-KSB.

 

**HIGHLIGHTS**

 

Revenues for theyear ended December 31, 2007 were $ 16.7 million compared to $5.5 millionfor the year ended December 31, 2006. Net loss to common stockholders was $2.9 million for 2007 compared to$3.5 million for 2006, a decrease of $0.6 

 

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million or17.1%.  Basic and diluted net loss to common stockholders per share was$0.03 for 2007 compared to $0.04 per share for 2006.

 

**Liquidity**

 

As of December 31,2007, the Company’s total assets exceeded total liabilities by $2.7million.  This was a $8.5 million improvement over 2006.  The Company continues to rely on equity salesto SHBC to support its operations.  As of December 31, 2007 theCompany had total outstanding debt of $4.6 million of which $2.2 million is duein 2008. As of December 31, 2007 the Company had an accumulated deficit of$65.8 million and total stockholders’ equity of $1.6 million.

 

The Company incurredoperating losses of $2.2 million and $2.1 million for the years ended December 31,2007 and 2006, respectively. The Company incurred net losses to commonstockholders of $2.9 million and $3.5 million for the years ended December 31,2007 and 2006, respectively.

 

Cash provided byoperating activities was $0.8 million in 2007 whereas cash used in operatingactivities was $1.3 million in  2006.Funds provided through financing activities representing either debt or commonstock issuance amounted to $1.2 million and $2.8 million for the years ended December 31,2007 and 2006, respectively.

 

During 2006management addressed operating and working capital deficits by working with itskey investor, SHBC.  As reported in Item5, herein, management raised $10.1 million in 2007 and $5.7 million in 2006through the combination of short term debt and issuance of commonstock.   The short term debt wasconverted into equity in December of 2006 subsequent to shareholderapproval to increase the number of outstanding shares to 200,000,000.  The sales of common stock were made throughprivate, unregistered sales of the Company’s securities.  The additionalequity raised during 2007 was used to pay down debt and fund continuing operations.  Much of the debt obligations coming dueduring 2007 were project-financing-based and the Company repaid a portion ofthese obligations with cash generated from the collection of billings. These collections along with the additional equity and short term debt weresufficient to cover Telesource’s 2007 obligations.  Beyond the cashexpected to be generated by the U.S. Embassy Project in Fiji the Companyexpects to  seek support from itsprincipal stockholder, SHBC, on an as-needed basis only.   SHBC has signed a Stock Purchase Agreementthat provides  a guarantee of $2.950million cash infusion in 2008.  Thesefunds would supplement cash needs arising from operational working capitalshortages and debt repayment.  SHBC hascontinued its support of the Company and has agreed to guarantee or provideletters of credit covering all of the Company’s debt of $4.6 million.

 

During  2006 the Company  received $4.0 million in loans from SHBCrelated companies.  On October 31,2006 at the annual general meeting, results of the shareholder proxy were reported.  Five incumbent members of the Board ofDirectors were re-elected and a measure to increase the authorized number ofcommon stock shares to 200,000,000 was passed. Afterward, the entirety of the $4.0 million in debt plus another $1.7million of cash infusion were converted into 11,629,521 shares of common stock.

 

**OPERATINGSEGMENTS**

 

Telesource’sbusiness consists of the following operating segments: Construction, powergeneration  and trading. Revenue of thepower generation segment includes sales-type lease revenues. The constructionsegment represents revenue from building a U.S. Embassy in Suva, Fiji. Thepower generation activities occurred in Fiji and the Commonwealth of NorthernMariana Islands, a U.S. territory, (“CNMI”).While trading activities occurredin the United States. Telesource is responsible for certain warranty workassociated with the Adult Correctional Facility located in Saipan.

 

**OVERVIEW**

 

During 2007, totalassets increased from 2006 by $1,977,312 due primarily to higher cash  ($1.8 million), accounts receivable ($0.9million) and prepaid expenses and other current assets ($1.4 million) levels,partially offset by a decrease in the net investment in sales-type-lease ($2.4million).  Changes in property, plant andequipment and other assets made up the remaining portion of the increase.  On a subsidiary level the U.S. EmbassyProject generated the majority of the increase in cash ($3.2 million), accountsreceivable ($1.3 million) and prepaid expenses and other current assets ($1.5 million),while the Corporate Office and TCNMI were net users of cash.  TCNMI reduced its receivable balance due tocollections on delinquent balances from the Commonwealth Utility Corporation.  Net investment in sales-type lease wasreduced through the normal amortization of the sale/leaseback amount related tothe construction agreement of the Tinian power plant.

 

 

19

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The Company’svendor and related party payables increased by $1.7 million primarily due to theU.S. Embassy Project ($1.2 million) and higher balances maintained with CUC($0.2 million) and SHBC ($0.3 million). On the other hand, the Company reduced total debt by $10.0 million byextinguishing the loan with the Arab Banking Corporation ($7.5 million), theBank of Hawaii ($300K) and the normal principal payments on the Commercial Bankof Kuwait loan ($2.2 million).  The cashfor extinguishing the Arab Banking Corporation loan came from the proceeds ofequity sales.  The sales of thesecurities were primarily to SHBC and their affiliates.

 

Total revenuesincreased in 2007 by $11.2 million.  Thiswas solely due to the U.S. Embassy Project ($11.9 million), partially offset bya $0.7 million decrease in power generation revenues and a $0.2 million decreasein finance lease revenues.  A $0.1million reduction in service fees made up the remaining offset.  The cost of revenues increased by $10,779,653from 2006 levels attributed to the U.S. Embassy ($10.7 million) and the FijianTransmission Distribution ($0.2 million) Projects, partially offset by lowerpower generation costs ($0.2 million).

 

Operating expensesincreased by $0.4 million in 2007 due to higher salaries and related costs($0.3 million) and general and administrative expenses ($0.1 million).

 

**RESULTSOF OPERATIONS**

 

**Comparisonof the twelve months ended December 31, 2007 and 2006**

 

*ConstructionRevenues* –Construction revenues increased to $11.9 million in 2007 from $46,000 in 2006due to the Company’s U.S. Embassy Project in Fiji.  Management’s efforts to implement its newjoint-venturing strategy under the name of TSI/SHBC JV gave rise to a $42.6construction project award in late November, 2006 from the Department of Stateto build the United States Embassy. Revenue, including change orders are recognized on a percentage ofcompletion method.  Change orders areonly recognized when approved.

 

*ServiceFees – Power Generation Plant*. Service fees – power generation plant decreased 15.3% to $4.0 million in 2007 from $4.8 million in 2006. The $728K decrease inservice fees – power generation plant is attributed to a reduction in dieselpower demand in Fiji due to a greater reliance on hydro-generated power as aresult of increased rainfalls throughout the year ($675K).  The decrease in Tinian ($53K) was due to asignificant rate increases implemented during the prior year by theCommonwealth Utilities Corporation (the governing organization that controlsutilities in Tinian) which continues to reduce demand for electricity, and,consequently, a decrease in power generation.

 

*ServiceFees –*increasedto $307K in 2007 from $67K in 2006 was primarily a result of additionalworkorders to repair and maintain transmission lines in our Fiji operations($193K).  Fiji Electric Authority issuesRFP’s for this work and awards the contracts to the lowest and most experiencedbidders.  In addition, we also provideservices to the Butoni Wind Farm operation. These services are basically administrative in nature and contributed$46K to the increase.

 

*ServiceFees – related party –* Service fees decreased to $5,962 in 2007 from $9,544 in 2006.  The decrease was due to a lower demand forTSI’s purchasing services in locating products to be used by SHBC, our primarycustomer for this line of revenue.

 

*OtherIncome* – representsrental income, which increased to $2,103 in 2007 from $956 in 2006 fromslightly higher power generation equipment rentals.  This business is very erratic and is offeredonly to supplement our services to our major customers.

 

*FinanceLease Revenues*.Finance lease revenues decreased 34.1% to $0.4 million in 2007 from $0.6million in 2006. Finance lease revenue for the Tinian power plant will decreaseeach year until the investment in sales-type-lease is fully amortized in March,2009.

 

***Expenses***

 

*ConstructionCosts* – Totalconstruction costs increased to $10.7 million in 2007 from $0 in 2006.  Construction costs are recorded uponcompletion of a service or receipt of goods. All construction costs are related to the Fiji Embassy Project.  This increase resulted solely from the startof the U.S. Embassy project during 2007.

 

 

20

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*Operationand Maintenance Costs – Power Generation Plant* - Operation and maintenance costs – power generationplant decreased 6.1% to $3.6 million in 2007 from $3.7 million in 2006.  The slight decrease was attributed to lowermaintenance costs in Fiji on the G8 and G9 engines at Kinoya and on the G3 andG4 engines at Vuda.  Maintenance costsinclude items such as labor, engine parts and lubrication of the engines.  The lower costs were associated with thelower production levels as noted above in Service Fees – Power Generation Plantservice fees.

 

*Provisionfor Uncollectible Accounts –*Provision for uncollectible accounts decreased to$29,496 in 2007 from $36,168 in 2006. The decrease in the 2007 expense waswholly related to TCNMI receivables from our primary customer the CommonwealthUtility Corporation.

 

*Salariesand Employee Benefits* – Salaries and employee benefits increased by $307K due to morepersonnel at Telesource’s Corporate Office and increases in salaries forexisting management.  The addition ofpersonnel included a General Counsel as well as positions in procurement,accounting, and administration.  Thesepositions were added due in part to the U.S. Embassy project as well as theCompany’s strategy to improve systems, develop new procedures and controls forexpected future growth.

 

*Occupancyand Equipment* –Occupancy and equipment expenses decreased $2K to $219K in 2007 from $221K in2006. The decrease resulted from the net affect of no lease expenses for thefirst four months of 2007 offset by the increase in the monthly rent at theCorporate Office in Lombard, Illinois. The increase in Lombard rent was due to increasing the space for the newhires.  In addition, the Company hasleased new space in Fiji for the some of the administrative staff related toour power operations.

 

*Generaland Administrative Expenses* – General and administrative expenses increased 5.5%to $2.7 million in 2007 from $2.6 million in 2006, mostly due to an increase inthe accrual for Koblerville, partially offset by lower travel ($100K),insurance ($50K), miscellaneous taxes ($40K) and postage and shipping  ($40K) expenses.

 

*Otherincome/ (expense)*– Net other expense decreased to $405K in 2007 from $870K in 2006 due primarilyto lower interest expense resulting from extinguishing  the Arab BankingCorporation and Bank of Hawaii loans. Also contributing to the decrease was a reduction on gain/(losses) onthe sales of fixed assets in the TCNMI subsidiary ($128K).  Partially offsetting this decrease wasforeign exchange gains related to the U.S. embassy project in Fiji.

 

*IncomeTax Expense* –Telesource recognized an income tax provision of $301,355 in 2007 down from$464,565 in 2006, the result of lower before tax income in the Fijianoperation.  Telesource had net operatingloss carry forwards for U.S. purposes of approximately $15 million and $13million at December 31, 2007 and 2006, respectively.  The Company hasapproximately $41 million of net operating loss carry forwards for theCommonwealth of Northern Mariana Islands.

 

**SUBSEQUENTEVENTS**

 

The Company issuedunregistered securities to SHBC in the following transactions subsequent to December 31,2007:

 

·                  On January 7, 2008 we issued 2,950,000 shares ofcommon stock for $1,475,000.

 

·                  On February 1, 2008 we issued 600,000 shares ofcommon stock  for $300,000.

 

21

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**ITEM 7.          FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

**TELESOURCE INTERNATIONAL,INC.AND SUBSIDIARIES**

** **

Consolidated Financial Statements

 

December 31, 2007 and 2006

 

**Table of Contents**

 

 
| Report of Independent Registered Public Accounting  Firm                               |   | 23     |
|----------------------------------------------------------------------------------------|--------|--------|
|                                                                                   |   |   |
| Consolidated Balance Sheets                                                            |   | 24     |
|                                                                                   |   |   |
| Consolidated Statements of Operations                                                  |   | 25     |
|                                                                                   |   |   |
| Consolidated Statements of Stockholders’ Equity (Deficit)  and Comprehensive Loss |   | 26     |
|                                                                                   |   |   |
| Consolidated Statements of Cash Flows                                                  |   | 27     |
|                                                                                   |   |   |
| Notes to Consolidated Financial Statements                                             |   | 28     |

** **

**22**

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** **

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

To the Board of Directors and StockholdersTelesource International, Inc.Lombard, Illinois

 

We have audited the accompanying balance sheets ofTelesource International, Inc. as of December 31, 2007 and 2006, andthe related consolidated statements of operations, stockholders’ deficit,comprehensive loss, and cash flows for each of the years in the two-year periodended December 31, 2007. These financial statements are the responsibilityof the company’s management. Our responsibility is to express an opinion onthese financial statements based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of thecompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the financial position ofTelesource International, Inc. as of December 31, 2007 and 2006, andthe results of its operations and its cash flows for each of the years in thetwo-year period ended December 31, 2007 in conformity with accountingprinciples generally accepted in the United States of America.

 

As discussed in Notes 2 and 15 to the consolidatedfinancial statements, the Company adopted Financial Accounting Standards BoardInterpretation No. 48, “Accounting for Uncertainty in Income Taxes” as ofJanuary 1, 2007. As discussed in Note 2 and 13 to the consolidated financialstatements, the Company adopted Statement of Financial Accounting Standard No.133, “Accounting for Derivative Instruments and Hedging Activities” as of January 1, 2007 in connectionwith its foreign currency forward contracts.

 

L J Soldinger Associates, LLC

 

Deer Park, IllinoisMarch 21, 2008

 

23

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**TELESOURCEINTERNATIONAL, INC.AND SUBSIDIARIES**ConsolidatedBalance SheetsDecember 31, 2007 and 2006

 

 
| **Assets**                                                                                                                                                     | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Current assets:                                                                                                                                                |       |                       |       |                       |       |
| Cash and cash  equivalents                                                                                                                                     |       | $                          | 4,032,631  |                       | $          | 2,194,207 |   |
| Accounts  receivable less allowance for doubtful accounts of $91,841 at  December 31, 2007 and $62,345 at December 31, 2006                          |       | 2,129,419                  |       | 1,226,912                  |       |
| Accounts  receivable – related party                                                                                                                      |       | —                     |       | 2,582                      |       |
| Current portion  of net investment in sales-type lease                                                                                                         |       | 2,583,819                  |       | 2,352,864                  |       |
| Inventories –  Engine Components                                                                                                                          |       | 1,091,870                  |       | 1,117,723                  |       |
| Prepaid expenses  and other current assets                                                                                                                     |       | 2,021,013                  |       | 546,191                    |       |
| Total current  assets                                                                                                                                          |       | 11,858,752                 |       | 7,440,479                  |       |
| Net investment  in sales-type lease – long term                                                                                                           |       | 454,651                    |       | 3,038,470                  |       |
| Property, plant,  and equipment, net                                                                                                                           |       | 623,304                    |       | 553,016                    |       |
| Other assets                                                                                                                                                   |       | 111,904                    |       | 39,334                     |       |
| Total assets                                                                                                                                                   |       | $                          | 13,048,611 |                       | $          | 11,071,299 |   |
|                                                                                                                                                           |       |                       |       |                       |       |
| **Liabilities  and Stockholders’ Equity/(Deficit)**                                                                                                       | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| ** **                                                                                                                                                     | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Current liabilities:                                                                                                                                           |       |                       |       |                       |       |
| Current portion  of long-term debt                                                                                                                             |       | $                          | 2,197,497  |                       | $          | 2,513,107 |   |
| Accounts payable                                                                                                                                               |       | 1,952,349                  |       | 484,701                    |       |
| Accounts payable  – related party                                                                                                                         |       | 504,332                    |       | 212,974                    |       |
| Accrued expenses                                                                                                                                               |       | 1,975,312                  |       | 1,544,082                  |       |
| Other current  liabilities                                                                                                                                     |       | —                     |       | 10,110                     |       |
| Billings in  excess of costs and estimated earnings                                                                                                            |       | 1,325,384                  |       | —                     |       |
| Total current  liabilities                                                                                                                                     |       | 7,954,874                  |       | 4,764,974                  |       |
|                                                                                                                                                           |       |                       |       |                       |       |
| Long-term debt                                                                                                                                                 |       | 2,424,994                  |       | 12,117,289                 |       |
| Total  liabilities                                                                                                                                             |       | 10,379,868                 |       | 16,882,263                 |       |
|                                                                                                                                                           |       |                       |       |                       |       |
| Minority interest                                                                                                                                              |       | 1,112,757                  |       | —                     |       |
|                                                                                                                                                           |       |                       |       |                       |       |
| Commitments and Contingencies                                                                                                                                  |       |                       |       |                       |       |
|                                                                                                                                                           |       |                       |       |                       |       |
| Stockholders’ equity/(deficit):                                                                                                                           |       |                       |       |                       |       |
| Convertible  Preferred Stock, $0.01 par value authorized 50,000,000 shares, none issued  and outstanding at December 31, 2007 and December 31, 2006. |       |                       |       |                       |       |
| Common stock,  $0.01 par value. Authorized 200,000,000 shares, 125,335,661 issued at  December 31, 2007 and 105,067,661 issued at December 31, 2006. |       | 1,253,357                  |       | 1,050,677                  |       |
| Additional  paid-in capital                                                                                                                                    |       | 65,981,965                 |       | 56,050,645                 |       |
| Accumulated  deficit                                                                                                                                           |       | (65,829,850                | )          | (62,920,570                | )          |
| Accumulated  comprehensive income (loss)                                                                                                                       |       | 150,514                    |       | 8,284                      |       |
| Total  stockholders’ equity/(deficit)                                                                                                                     |       | 1,555,986                  |       | (5,810,964                 | )          |
|                                                                                                                                                           |       |                       |       |                       |       |
| Total  liabilities, minority interest and stockholders’ equity/(deficit)                                                                                  |       | $                          | 13,048,611 |                       | $          | 11,071,299 |   |

 

See accompanyingnotes to consolidated financial statements.

 

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**TELESOURCEINTERNATIONAL, INC.AND SUBSIDIARIES**ConsolidatedStatements of OperationsYears ended December 31, 2007 and 2006

 

 
| ** **                                                     | ** ** | **2007**    | ** ** | **2006**   | ** ** |
|----------------------------------------------------------------|------------|-------------|------------|------------|------------|
| Revenues:                                                      |       |        |       |       |       |
| Construction  revenues                                         |       | $           | 11,918,054 |       | $          | 46,000 |   |
| Service fees                                                   |       | 307,172     |       | 66,825     |       |
| Service fees –  power generation plant                    |       | 4,040,856   |       | 4,769,011  |       |
| Service fees –  related party                             |       | 5,962       |       | 9,544      |       |
| Finance lease  revenue                                         |       | 407,136     |       | 617,448    |       |
| Other revenue                                                  |       | 2,103       |       | 956        |       |
| Gross revenues                                                 |       | 16,681,283  |       | 5,509,784  |       |
| Costs and expenses:                                            |       |        |       |       |       |
| Construction  costs                                            |       | 10,398,833  |       | —     |       |
| Construction  costs – related party                       |       | 311,269     |       | —     |       |
| Operation and  maintenance costs – power generation plant |       | 3,552,955   |       | 3,729,472  |       |
| Costs of service                                               |       | 404,258     |       | 151,518    |       |
| Provision for  unbilled and uncollected accounts               |       | 29,496      |       | 36,168     |       |
| Cost of revenues                                               |       | 14,696,811  |       | 3,917,158  |       |
| Gross profit                                                   |       | 1,984,472   |       | 1,592,626  |       |
| Operating expenses:                                            |       |        |       |       |       |
| Salaries and  employee benefits                                |       | 1,255,324   |       | 948,325    |       |
| Occupancy and  equipment                                       |       | 218,967     |       | 220,726    |       |
| General and  administrative                                    |       | 2,700,322   |       | 2,560,676  |       |
| Total operating expenses                                       |       | 4,174,613   |       | 3,729,727  |       |
| Operating (loss)                                               |       | (2,190,141  | )          | (2,137,101 | )          |
| Other income (expense):                                        |       |        |       |       |       |
| Interest expense                                               |       | (914,658    | )          | (1,304,840 | )          |
| Foreign exchange  gain/(loss)                                  |       | 243,178     |       | —     |       |
| Other  income/(expense), net                                   |       | 266,353     |       | 434,687    |       |
| Total other expense                                            |       | (405,127    | )          | (870,153   | )          |
|                                                           |       |        |       |       |       |
| Loss before  income taxes and minority interest                |       | (2,595,268  | )          | (3,007,254 | )          |
| Income tax expense                                             |       | 301,335     |       | 464,565    |       |
|                                                           |       |        |       |       |       |
| Net loss to  common stockholders before minority interest      |       | (2,896,603  | )          | (3,471,819 | )          |
| Minority interest                                              |       | 12,677      |       | —     |       |
|                                                           |       |        |       |       |       |
| Net loss to  common stockholders after minority interest       |       | $           | (2,909,280 | )          | $          | (3,471,819 | ) |
|                                                           |       |        |       |       |       |
| Basic and diluted net loss per share                           |       | $           | (0.03      | )          | $          | (0.04 | ) |
| Weighted average shares outstanding                            |       | 111,801,721 |       | 93,501,812 |       |

 

See accompanying notes toconsolidated financial statements.

 

25

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**TELESOURCE INTERNATIONAL, INC.**

 

**AND SUBSIDIARIES**

 

Consolidated Statements of Stockholders’ Equity (Deficit) andComprehensive Loss

 

Yearsended December 31, 2007 and 2006

 
| ** **                                                                | ** ** | **Common  stock** | ** ** | **Additional** | ** ** | ** **  | ** ** | ** **      | ** ** | **Accumulated**   | ** **  | **Total**          | ** ** |
|---------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|-------------|------------|-----------------|------------|-------------------|-------------|--------------------|------------|
| ** **                                                                | ** ** | ** **        | ** ** | **Par**        | ** ** | **paid-in** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** **  | **comprehensive**  | ** ** | **stockholders’** | ** ** |
| ** **                                                                | ** ** | **Shares**        | ** ** | **value**      | ** ** | **capital** | ** ** | **deficit**     | ** ** | **loss**          | ** **  | **income  (loss)** | ** ** | **deficit** | ** ** |
| Balance at  December 31, 2005                                        |       | 93,438,140        |       | $              | 934,381    |        | $          | 50,352,181      |       | $                 | (59,448,751 | )                  |       |   | $ | (81,528 | ) | $ | (8,243,717 | ) |
|                                                                      |       |              |       |           |       |        |       |            |       |              |        |               |       |   |   |
| Sale of common  stock – 3,350,000 shares at $0.50 per share          |       | 3,350,000         |       | 33,500         |       | 1,641,500   |       | —          |       | —            |        | —             |       | 1,675,000 |   |
| Conversion of  debt into common stock 8,279,521 shares at $0.50 per share |       | 8,279,521         |       | 82,796         |       | 4,056,964   |       | —          |       | —            |        | —             |       | 4,139,760 |   |
| Net loss                                                                  |       | —            |       | —         |       | —      |       | (3,471,819      | )          | (3,471,819        | )           | —             |       | (3,471,819 | ) |
|                                                                      |       |              |       |           |       |        |       |            |       |              |        |               |       |   |   |
| Foreign currency  translation adjustment                                  |       | —            |       | —         |       | —      |       | —          |       | 89,812            |        | 89,812             |       | 89,812 |   |
| Comprehensive loss                                                        |       |              |       |           |       |        |       |            |       | $                 | (3,382,007  | )                  |       |   |   |   |
| Total                                                                     |       | 11,629,521        |       | 116,296        |       | 5,698,464   |       | (3,471,819      | )          |              |        | 89,812             |       | 2,432,753 |   |
|                                                                      |       |              |       |           |       |        |       |            |       |              |        |               |       |   |   |
| Balance at   December 31, 2006                                       |       | 105,067,661       |       | $              | 1,050,677  |        | $          | 56,050,645      |       | $                 | (62,920,570 | )                  |       |   | $ | 8,284 |   | $ | (5,810,964 | ) |
|                                                                      |       |              |       |           |       |        |       |            |       |              |        |               |       |   |   |
| Sale of common  stock at $0.50 per share                                  |       | 20,268,000        |       | 202,680        |       | 9,931,320   |       | —          |       | —            |        | —             |       | 10,134,000 |   |
| Net loss                                                                  |       | —            |       | —         |       | —      |       | (2,909,280      | )          | (2,909,280        | )           | —             |       | (2,909,280 | ) |
| Foreign currency  translation adjustment                                  |       |              |       |           |       |        |       |            |       | 142,230           |        | 142,230            |       | 142,230 |   |
| Comprehensive loss                                                        |       | —            |       | —         |       | —      |       | —          |       | $                 | (2,767,050  | )                  | —     |   | — |   |
| Total                                                                     |       | 20,268,000        |       | 202,680        |       | 9,931,320   |       | (2,909,280      | )          |              |        | 142,230            |       | 7,366,950 |   |
|                                                                      |       |              |       |           |       |        |       |            |       |              |        |               |       |   |   |
| Balance at  December 31, 2007                                        |       | 125,335,661       |       | $              | 1,253,357  |        | $          | 65,981,965      |       | $                 | (65,829,850 | )                  |       |   | $ | 150,514 |   | $ | 1,555,986 |   |

 

See accompanying notes to consolidated financial statements

 

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**TELESOURCEINTERNATIONAL, INC.AND SUBSIDIARIES**ConsolidatedStatements of Cash FlowsYears ended December 31, 2007 and 2006

 
| ** **                                                                   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Cash flows from operating activities:                                        |       |       |       |       |       |
| Net loss                                                                     |       | $          | (2,909,280 | )          | $          | (3,471,819 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |       |       |       |       |
| cash used in  operating activities:                                          |       |       |       |       |       |
| Depreciation                                                                 |       | 260,201    |       | 203,735    |       |
| Gain on sale or  disposal of fixed assets                                    |       | (37,404    | )          | (166,824   | )          |
| Interest expense  paid through issuance of common stock                      |       | —     |       | 147,760    |       |
| Provision for unbilled  and uncollected accounts                             |       | 29,496     |       | 36,168     |       |
| Minority  interest                                                           |       | 12,677     |       | —     |       |
| Changes in  assets and liabilities:                                          |       |       |       |       |       |
| Accounts  Receivable                                                         |       | (906,095   | )          | 758,056    |       |
| Accounts  Receivable - related party                                         |       | 2,582      |       | 7,815      |       |
| Prepaid expenses  and other current assets                                   |       | (1,351,596 | )          | (343,403   | )          |
| Net investment  in sales-type lease                                          |       | 2,352,864  |       | 2,142,553  |       |
| Other assets                                                                 |       | (70,288    | )          | 3,022      |       |
| Accounts payable                                                             |       | 1,424,355  |       | (565,872   | )          |
| Accounts payable  - related party                                            |       | 291,358    |       | 78,636     |       |
| Accrued expenses                                                             |       | 397,620    |       | (130,837   | )          |
| Billings in  excess of cost and estimated earnings                           |       | 1,325,384  |       | —     |       |
| Other  liabilities                                                           |       | (10,110    | )          | (12,629    | )          |
| Net cash used in  operating activities                                       |       | 811,764    |       | (1,313,639 | )          |
|                                                                         |       |       |       |       |       |
| Proceeds from  sale of equipment                                             |       | 44,500     |       | 391,282    |       |
| Capital  expenditures                                                        |       | (311,280   | )          | (288,646   | )          |
| Net cash  provided by (used in) investing activities                         |       | (266,780   | )          | 102,636    |       |
| Cash flows from financing activities:                                        |       |       |       |       |       |
| Payments of  short-term debt                                                 |       | (398,123   | )          | —     |       |
| Proceeds from  borrowings - related party                                    |       | —     |       | 3,992,000  |       |
| Principal  payments on borrowings - related party                            |       | —     |       | —     |       |
| Payments of  long-term debt                                                  |       | (9,616,413 | )          | (2,829,546 | )          |
| Proceeds from  sale of common stock                                          |       | 10,134,000 |       | 1,675,000  |       |
| Capital  contributions from minority interest holders                        |       | 1,100,080  |       | —     |       |
| Net cash  provided by financing activities                                   |       | 1,219,544  |       | 2,837,454  |       |
|                                                                         |       |       |       |       |       |
| Effect of exchange rate changes on cash                                      |       | 73,896     |       | 89,812     |       |
| Net increase in  cash and cash equivalents                                   |       | 1,838,424  |       | 1,716,263  |       |
| Cash and cash equivalents at beginning of period                             |       | 2,194,207  |       | 477,944    |       |
| Cash and cash equivalents at end of period                                   |       | $          | 4,032,631  |       | $          | 2,194,207 |   |
| Supplemental disclosure:                                                     |       |       |       |       |       |
| Cash paid during  the year for interest                                      |       | $          | 873,970    |       | $          | 1,268,610 |   |
| Cash paid during  the year for income taxes                                  |       | 423,580    |       | 118,186    |       |

 

See accompanyingnotes to consolidated financial statements.

 

27

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** **

**TELESOURCE INTERNATIONAL, INC.AND SUBSIDIARIES**

** **

** **

**Notes to Consolidated Financial Statements**

** **

**(1)****                    ****Background**

 

Telesource International, Inc.(“Telesource” or the “Company”) was incorporated in Delaware in 1994.Telesource was formed 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 mechanicalengineering and construction company. Telesource entered into contracts as aninternational engineering and construction company for various projectsincluding airport runways as well as moving large radio broadcast towers. Inaddition, Telesource also constructed and manages the operation of energyconversion power plants. In Tinian, an island in the Commonwealth of theNorthern Mariana Islands (U.S. Territory), the Company operates a diesel firedelectric power generation plant for the sale of electricity to the local powergrid. In Fiji, the Company operates two diesel fired electric power generationplants for the sale of electricity to the local power grid. The Company’sfacility in Lombard, Illinois, handles the procurement, export, and shipping ofU.S. fabricated products for use by the Company’s subsidiaries or for resale tocustomers outside of the mainland. In addition, it bids on constructionprojects with its joint venture partner, SHBC under the name, TelesourceInternational, Inc./Sayed Hamid Behbehani & Sons, Co., JointVenture, LP (“TSI/SHBC JV”). TSI/SHBC JV was awarded a $42.6 million contractin November, 2006 to build a United States Embassy in Suva, Fiji. Constructionwas in process during 2007.

 

The Company conducts itsoperations through the parent and its three subsidiaries. The Company’sTelesource International division includes its trading business. The Company’sTSI/SHBC JV bids construction projects. The Company’s Mariana subsidiary,Telesource CNMI, Inc., handles the management of the Company’s energyconversion facilities in the Commonwealth of the Northern Mariana Islands. TheCompany’s other subsidiary, Telesource Fiji, Ltd., handles the Company’s powergeneration activities in Fiji.

 

Telesource has three mainoperating segments: power generation , trading and construction services. Thepower generation activities commenced in March 1999.

 

**(2)****                    ****Summary of Significant AccountingPolicies**

 

***(a)******                     ******Principlesof Consolidation***

 

The consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries: Telesource International ,Telesource CNMI Inc., and TelesourceFiji, Ltd. In addition, the consolidated financial statements will also include51% of the initial equity contributions and 99% of the operating income or lossof the joint venture TSI/SHBC JV. As of December 31, 2006 no materialtransactions related to TSI/SHBC JV occurred. All significant intercompanytransactions and accounts have been eliminated.

 

***(b)******                     ******Liquidity***

 

The Company has beenexperiencing recurring losses and negative cash flows from operations and priorto the current year, working capital deficits. The Company plans to raise approximately $2.950 million of funding fromits principal shareholder, SHBC in 2008 to cover planned operating deficits in2008. SHBC related companies have signed a Stock Purchase Agreement thatcommits to purchasing $2.950 million of equity shares during 2008. The Companyreceived $2.6 and $4.0 million in equity infusion from SHBC related companiesin 2007 and 2006, respectively. During the latter part of 2005, a newmanagement team was promoted and hired to develop a plan to improve operations.The new management team has implemented new marketing and sales plans as wellas improvements in the systems and controls. Management plans to improve profitability and cash flow by reducing costsand securing additional projects. However, no assurance can be given that suchincreased revenues will be achieved. The Company has and expects to continue toseek support from its principal stockholder, SHBC, for its operations, and forworking capital needs, debt repayment, and business expansion as may berequired. SHBC has continued its support of the Company.

 

 

28

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The company entered intoa Joint Venture Agreement with SHBC during 2006. Telesource International Inc.is the General Partner and is expected to allocate profits/losses to theCompany and SHBC on a 99% to 1% basis, respectively. SHBC has provided a standby letter of credit in the amount of $21.5 million for the performance bondrequirements of the $42 million embassy project in Fiji.

 

As of December 31,2007, the Company’s total assets exceeded its total liabilities by $2.7million. The Company relies heavily on financing its principal investors, SHBCto support its operations. As of December 31, 2007 the Company had totaloutstanding debt of $4.6 million of which $2.2 million is due in 2008 and $2.4million is due in 2009. As of December 31, 2007 the Company had anaccumulated deficit of $65.8 million and total stockholders’ equity of $1.6million.

 

The Company incurred anet loss to common stockholders of $2,909,280 and $3,471,819 for the yearsended December 31, 2007 and 2006, respectively.

 

**Net cashprovided by financing activities was $1,219,544 and $2,837,454 for the yearsended December 31, 2007 and 2006, respectively.**

** **

***(c)******                      ******CashEquivalents***

 

Telesource records ascash equivalents all highly liquid short-term investments with originalmaturities of three months or less.

 

***(d)******                     ******ForeignCurrency***

 

Except for the Company’sTSI/SHBC JV operations in Fiji, all assets and liabilities denominated inforeign currencies are translated at the exchange rate on the balance sheetdate. Revenues, costs, and expenses are translated at average rates of exchangeprevailing during the period. Translation adjustments are deferred as aseparate component of stockholders’ equity.

 

However, the financialposition and results of operations of the Company’s TSI/SHBC JV operations arerecorded using the local currency (Fijian dollars) however, the Company’sfunctional currency is U.S. dollars.  Thefinancial statements for this subsidiary are measured in U.S. dollars using thehistorical exchange rate for fixed assets and certain other assets andliabilities.  The exchange rate at theend of the reporting period is used to convert all monetary assets andliabilities.  An annual average exchangerate is used for each period for revenues and expenses.  The resulting foreign exchange transactiongains or (losses) are recorded in the consolidated statement of operations.

 

The Company is exposed toforeign currency exchange risk on foreign payments to vendors related to theU.S. embassy construction project in Fiji. The Company attempts to reduce the exposure to exchange risk by enteringinto foreign forward exchange contracts. The Company manages cash flow exposure of certain payables andanticipated transactions through the use of foreign currency forward exchangecontracts. Foreign currency forward exchange contracts are contracts requiringthe Company to exchange a stated quantity of a currency for a fixed amount of asecond currency. At December 31,2007, the Company did not apply hedgeaccounting treatment to any of its foreign currency forward exchange contracts.Accordingly, the change in fair value of these contracts was recorded inincome.  (See footnote 13)

 

***(e)******                      ******Depositsin Excess of Federal Deposit Insurance Corporation Insurance***

 

The Company maintains its cash accounts at numerous financialinstitutions. Certain of these financial institutions are located in foreigncountries which do not have Federal Deposit Insurance Corporation, “FDIC”insurance. Those accounts covered by the FDIC are insured up to $100,000 perinstitution. As of December 31, 2007, the amount of bank deposits thatexceeded or are not covered by the FDIC insurance was $4,089,822.

 

 

29

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***(f)******                        ******RevenueRecognition***

 

The Company receivesvariable monthly payments as compensation for its production of power. Thevariable payments are recognized based upon power produced and billed to thecustomer as earned during each accounting period.

 

**Construction revenues** are determined by applying thePercentage-of-Completion method which requires the use of estimates on thefuture revenues and costs of a construction project.    Our current project is a design/buildcontract with a fixed contract price.  This contract is with the United States Government and includesprovisions of termination for convenience by the party contracting with us,such provisions also allow payment to us for the work performed through thedate of termination.  Revenues recognizedunder the Percentage of Completion methodology, require applying a percentage(actual costs incurred through the reporting date divided by the totalestimated costs to complete the project) to the fixed contract price.  The resultant amount is recorded as revenuefor the applicable period.  This methodof revenue recognition requires that we estimate future costs to complete aproject.  Estimating future costs requiresjudgment of the value and timing of material, labor, scheduling, productdeliveries, contractual performance standards, liability claims, impact ofchange orders, contract disputes as well as productivity.   In addition, sometimes clients, vendors andsubcontractors will present claims against us for recovery of costs theyincurred in excess of what they expected to incur, or for which they believethey are not contractually responsible. In turn, we may also present claims to our clients, vendors and subcontractorsfor costs that we believe were not our responsibility or may be beyond ourscope of work.  The company will includecosts associated with these claims in their financial information when suchcosts can be reliably identified and estimated. Similarly, the company will include in revenue amounts equal to costsfor claims, where the outcome is probable that the claim will be found in thefavor of the company.   The Company willrecord a provision for losses when estimated costs exceed estimated revenues.

 

Revenue from constructioncontracts, with the exception of the power plant constructed on Tinian which isaccounted for using the sales-type lease method of accounting as discussedbelow, is recognized using the percentage-of-completion method of accounting,based upon costs incurred and estimated total projected costs. Cost of revenueconsists of direct costs on contracts, including labor and materials, amountspayable to subcontractors, direct overhead costs, equipment expense (primarilydepreciation, maintenance, and repairs), and interest associated withconstruction projects, and insurance costs. Contracts frequently extend over aperiod of more than one year and revisions in cost and profit estimates duringconstruction are recognized in the accounting period in which the facts thatrequire the revision become known. Losses on contracts are provided for intotal when determined, regardless of the degree of project completion. Claimsfor additional contract revenue are recognized in the period when it isprobable that the claim will result in additional revenue and the amount can bereasonably estimated.

 

The Company accounts forits leasing activities in accordance with the requirements of Statement ofFinancial Accounting Standards No. 13, *Accountingfor Leases*. Revenue associated with the sale of the Tinian powerplant constructed and sold under a sales-type lease, measured as the presentvalue of noncancelable rents, was recognized in connection with recording theloss on sale in 1997 and 1998. The Company recognizes finance lease revenue onthe resulting sales-type lease receivable at a constant rate using the interestmethod. Service revenues received from operating and maintaining the Tinianpower plant for the duration of the lease are recognized as earned based onactual kilowatt hours of electricity produced and delivered to the lessee’scustomers. To the extent that variable payments based on kilowatt-hours ofproduction exceed the fair value of operation and maintenance services provided,the Company recognizes such contingent payments as additional finance leaserevenue as they are earned.

 

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

 

 

30

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***(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 todepreciate the cost over the estimated economic lives of the assets.Depreciable lives used for financial reporting purposes are as follows:

 
| **Asset description**           | ** ** | **Estimated  useful life**  | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| Leasehold improvements               |       | Lesser of lease term or  7 years |       |
| Automobiles                          |       | 5 years                          |       |
| Construction machinery and equipment |       | 10 years                         |       |
| Office furniture and fixtures        |       | 5 years                          |       |
| Computer and communication equipment |       | 3-5 years                        |       |
| Other Assets                         |       | 1 year                           |       |

 

Cost and accumulateddepreciation are eliminated from the accounts when assets are sold or retiredand any resulting gain or loss is reflected in operations in the year ofdisposition.

 

***(h)******                     ******Impairmentof Long-lived Assets***

 

The Company accounts forlong-lived assets in accordance with the provisions of Statement of FinancialAccounting Standards No. 144, *Accountingfor the Impairment of Long-Lived Assets*. This statement requiresthat long-lived assets and certain identifiable intangibles be reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. Recoverability of assets tobe held and used is measured by a comparison of the carrying amount of an assetto future net cash flows expected to be generated by the asset. If such assetsare considered to be impaired, the impairment to be recognized is measured bythe amount by which the carrying amount of the assets exceeds the fair value ofthe assets. Assets to be disposed of are reported at the lower of the carryingamount or fair value less costs to sell. Fair values are determined based onquoted market value, discounted cash flows or internal and external appraisals,as applicable. During 2007 and 2006 Telesource did not recognize assetimpairment charges.

 

***(i)******                        ******IncomeTaxes***

 

Telesource International, Inc.,Telesource CNMI, Inc., and Telesource Fiji, Ltd. file separate corporationincome tax returns. Telesource International, Inc. is a U.S. corporationthat files a separate U.S. corporate income tax return. Telesource CNMI, Inc.is a Commonwealth of Northern Mariana Islands corporation and files a corporationtax return for this commonwealth. Telesource Fiji, Ltd. is a Fijian corporationand files a Fijian corporation tax return.

 

Deferred income taxes areaccounted for under the asset and liability method. Deferred tax assets andliabilities are recognized for the estimated future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective income tax bases. Deferredtax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date.

 

A valuation reserve isrecorded to offset a portion of the deferred tax benefit if management hasdetermined it is more likely than not that the deferred tax assets will not berealized.

 

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 ofthe Northern Mariana Islands in Political Union with the United States,” whichadopted the Internal Revenue Code as the local territorial income tax regime.Beginning 

 

31

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January 1, 1985, 95%of any income tax due on the CNMI source income is rebated to the extent thatit exceeds local business gross receipts taxes. In 1995, the rebate percent wasdecreased and currently ranges from 90% decreasing to 50% depending upon theamount of taxable income. The amounts paid for the gross receipts tax amountedto $79,677 and  $163,566 in 2007 and2006, respectively, and are included in general and administrative expenses onthe accompanying consolidated statements of operations.

 

On January 1,2007 the Company adopted FASB Interpretation No. 48 (“FIN 48”),“Accounting for Uncertainty in Income Taxes, an interpretation of FASBStatement No. 109,” which seeks to reduce the diversity in practiceassociated with the accounting and reporting for uncertainty in income taxpositions. This Interpretation prescribes a comprehensive model for thefinancial statement recognition, measurement, presentation and disclosure ofuncertain tax positions taken or expected to be taken in income tax returns.

 

***(j)******                           ******Use of Estimates***

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could be different from those estimates.

 

Significant estimatesused in preparing these financial statements include those assumed in computingprofit percentages under the percentage-of-completion revenue recognitionmethod.

 

***(k)******                     ******FairValue of Financial Instruments***

 

The Company’s financialinstruments include cash and cash equivalents, receivables, short-term debt,accounts payable, and long-term debt. The gross carrying amount of the notesreceivable related to the sales-type lease approximates fair value as the noteshave been discounted at a rate approximating the Company’s borrowing rate. Thecarrying amount of the long-term debt approximates fair value due to thevariable interest rates. The carrying amounts of other financial assets andliabilities approximate fair value because of the short maturities of thoseinstruments.

 

***(l)******                        ******StockBased Compensation***

 

The Company has stockincentive plans that provide for stock-based employee compensation, includingthe granting of stock options to certain key employees. The plans are morefully described in note 12.

 

The Companyadopted SFAS No. 123R, “Share-Based Payment,” as of January 1, 2006,using the modified prospective application. Under this method, all equity-basedcompensation awarded after the adoption date will be determined under the fairvalue provision of SFAS No. 123R. Additionally, for all equity-basedcompensation awarded prior to the adoption date, compensation for the portionof awards for which the requisite service is performed after the adoption dateis recognized as service is rendered.

 

There was no stock basedcompensation granted in 2007 or 2006.

 

***(m)******                  ******Maintenanceof Power Generation Equipment***

 

The Company’s powergeneration equipment has required maintenance schedules based upon hours ofservice and capacity. The Company accounts for this maintenance as costs areincurred.

 

***(n)******                     ******Recent Accounting Pronouncements***

 

In September 2006,the FASB issued a new standard which defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements. The new standard doesnot require new fair value measurements, rather, its provisions will apply whenfair value measurements are performed under other accounting pronouncements.The standard is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007 and interim periods 

 

32

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within those fiscalyears. In February 2008, the standard was deferred for one year as itapplies to nonfinancial assets and liabilities that are recognized or disclosedat fair value on a nonrecurring basis (e.g. those measured at fair value in abusiness combination and goodwill impairment). We are reviewing the potentialimpact, if any, of this new guidance.

 

In February 2007,the FASB issued a new standard that permits entities to choose to measure manyfinancial instruments and certain other items at fair value. This standardexpands the use of fair value measurement and applies to entities that electthe fair value option. The fair value option established by the new standard permitsall entities to choose to measure eligible items at fair value at specifiedelection dates and is effective for fiscal years beginning after November 15,2007. We do not expect the adoption of this pronouncement to have a materialimpact on our financial position or results of operations.

 

In December 2007,the FASB issued enhanced guidance related to the measurement of identifiableassets acquired, liabilities assumed and disclosure of information related tobusiness combinations and their effect. The standard applies prospectively tobusiness combinations in 2009 and is not subject to early adoption. We arecurrently evaluating the potential impact of this new guidance on businesscombinations and related valuations.

 

In December 2007,the FASB issued a new standard for the noncontrolling interest in a subsidiaryand for the deconsolidation of a subsidiary. Specifically, this statementrequires the recognition of a noncontrolling interest (minority interest) as acomponent of consolidated equity. This is a change from the current practice topresent noncontrolling interests in liabilities or between liabilities andstockholders’ equity. Similarly, the new standard requires consolidated netincome and comprehensive income to be reported at amounts that include theamounts attributable to both the parent and the noncontrolling interests. Thestandard is effective prospectively with respect to transactions involvingnoncontrolling financial interests that occur on or after January 1, 2009.We are currently evaluating the potential impact, if any, of this new guidance.

 

**(3)****                    ****Customer Concentrations**

 

The Company has aconcentration of risk with two significant customers. The Company wascontracted by the Commonwealth Utilities Corporation (CUC) to construct and operatea power generation facility. In March 1999, the power generation plantbecame operational. Power revenues from this plant began in March 1999 andare earned under the terms of a long-term power energy conversion agreementwith this customer. Revenues from the CUC were approximately $0.9 millionand  $1.0 million for 2007 and 2006,respectively.

 

Upon commissioning of theCompany’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 $180,000representing the guaranteed payment due from CUC over the term of theagreement. The par value balance of promissory notes outstanding was $2.5million and $4.7 million as of December 31, 2007 and 2006, respectively.The discounted value of the promissory notes was $2.4 million and $4.2 millionat December 31, 2007 and 2006, respectively. Under the agreement theCompany also receives a monthly operation and maintenance fee of $50,000 for120 months. The discounted value of the operation and maintenance fee was $0.7million and $1.2 million at December 31, 2007 and 2006, respectively. Thepromissory notes have been included in the original net investment insales-type lease as discussed in note 6. Revenues from the Tinian powerplant were 5.5% and 29.0% of the Company’s revenues for 2007 and 2006,respectively. Gross receivables for the investment in sales-type lease were$3.2 million and $6.0 million at December 31, 2007 and 2006, respectively.

 

The second significantcustomer is the Fiji Electric Authority (FEA). The Company signed a 20-yearoperations and maintenance agreement with the FEA in April 2003 andrecognized revenues under the contract of $3.1 million and $3.8 million in 2007and 2006, respectively. Revenues from FEA were 19% and 69% of the Company’stotal revenues for 2007 and 2006, respectively.

 

The Company previouslyhad several construction contracts for projects that were completed in Saipan,Tinian, Palau and Guam. These projects have all been completed and the Companybegan to bid on new contracts under the TSI/SHBC JV company during 2006. Asnoted earlier, the Company was awarded a $42.6 million contract to build a 

 

33

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United States Embassy inSuva, Fiji. This project began in 2007. Revenue from this customer totaled$11.9 million in 2007.

 

**(4)****                    ****Accounts Receivable**

 

Accountsreceivable consist of the following at December 31, 2007 and 2006:

 
| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                             |       |                  |       |   |   |
| Construction contracts completed and in progress |       | $                     | 1,262,635  |   | $ | 0 |   |
| Trade and Other                                  |       | 935,625               |       | 1,289,257 |   |
|                                             |       | 2,221,260             |       | 1,289,257 |   |
| Less allowance for doubtful accounts             |       | 91,841                |       | 62,345 |   |
| Net accounts  receivable                         |       | $                     | 2,129,419  |   | $ | 1,226,912 |   |

 

Direct write-offs ofuncollectible accounts were $0 in 2007 and 2006.

 

During the twelve monthperiod ended December 31, 2007 the accounts receivable balance ofCommonwealth Utilities Corporation (CUC), the major power production customerof TCNMI, decreased $341,774 or 40.4% to $503,456 from $845,230. The accountsreceivable balance represents the total amount billed for variable and fixedservice fees related to power production that had not been collected from theCUC during this period. During the year, CUC had become delinquent in theirpayments to TCNMI . However CUC had reduced the outstanding delinquent amountthrough payments in accordance with an agreed upon payment plan.  CUC continues to be slow to delinquent on itscurrent receivables and the Company is working with CUC to resolve thecontinual delinquency problem.

 

**(5)****                    ****Property, Plant, andEquipment**

 
| ** **                                     | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|------------------------------------------------|------------|-----------|------------|-----------|------------|
| Buildings/Leasehold improvements               |       | $         | 90,208     |      | $          | 84,570 |   |
| Transportation equipment                       |       | 525,702   |       | 412,375   |       |
| Construction machinery and equipment           |       | 19,452    |       | 275,557   |       |
| Office furniture and equipment                 |       | 486,630   |       | 322,218   |       |
| Computer and communication equipment           |       | 233,710   |       | 141,065   |       |
|                                           |       | 1,355,702 |       | 1,235,785 |       |
| Less accumulated depreciation and amortization |       | 732,398   |       | 682,769   |       |
| Net property, plant, and equipment             |       | $         | 623,304    |      | $          | 553,016 |   |

 

Total depreciationexpense was $260,201 and $203,735, in 2007 and 2006, respectively. Depreciationfor construction machinery and equipment is recognized as a project expensewhen appropriate.

 

**(6)****                    ****Investment in Sales-typeLease**

 

The Company’s contractwith Commonwealth Utilities Corporation (CUC) for the construction andoperation of a power plant on the island of Tinian is accounted for as asales-type lease. The minimum lease payments due under the agreement began uponcommissioning of the first phase of the power plant and are comprised of aguaranteed 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 andtwenty (120) months. These minimum lease payments were discounted at aninterest 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 paymentsbegan in March 1999 when the plant was commissioned and the Company begancollecting payments on the promissory notes and service fees for operating theplant. The Company also receives variable monthly production fee payments basedupon the Kwh produced plus an additional fee for Kwh produced in excess of the first5,140,000 Kwh produced each month. The variable payments are recognized basedupon power produced and delivered to the customer as earned during eachaccounting period. Service fees earned in 2007 and 2006 were not in excess ofthe estimated fair value of the services performed.

 

 

34

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

 
| ** **                               | ** ** | **December 31** | ** ** | **June 20, 1997** | ** ** |
|------------------------------------------|------------|----------------------|------------|------------------------|------------|
| ** **                               | ** ** | **2007**             | ** ** | **2006**               | ** ** | **inception** | ** ** |
| Guaranteed monthly payment               |       | $                    | 2,520,000  |                   | $          | 4,680,000 |   | $ | 21,600,000 |   |
| Minimum operation and maintenance fee    |       | 700,000              |       | 1,300,000              |       | 6,000,000 |   |
| Total minimum  lease payments receivable |       | 3,220,000            |       | 5,980,000              |       | 27,600,000 |   |
| Less unearned income                     |       | 181,530              |       | 588,666                |       | 9,750,000 |   |
| Net investment  in sales-type lease      |       | $                    | 3,038,470  |                   | $          | 5,391,334 |   | $ | 17,850,000 |   |
|                                     |       |                 |       |                   |       |   |   |
| Current portion                          |       | $                    | 2,583,819  |                   | $          | 2,352,864 |   |   |   |
| Long-term portion                        |       | 454,651              |       | 3,038,470              |       |   |   |
|                                     |       |                 |       |                   |       |   |   |
|                                     |       | $                    | 3,038,470  |                   | $          | 5,391,334 |   |   |   |

 

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

 

Phase I of the powerplant was commissioned in March of 1999. Phase II was commissioned in March of2000. The Company recognized power generation revenues from billings on theTinian power plant of $925,784 and $978,534 for the years ended December 31,2007 and 2006, respectively.

 

**(7)****                    ****Billings in Excess ofCost on Uncompleted Contracts**

 

Long-term constructioncontracts in progress are accounted for using the percentage-of-completionmethod. In 2007 and 2006, respectively, balances for billings in excess of costand estimated earnings were $1,325,384 and $0. Total billings for the project in2007 and 2006 totaled $13,205,379 and $0 respectively.

 

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**(8)****                    ****Long-term Debt andCredit Arrangements**

 

Long-term debt consistsof the following at December 31, 2007 and 2006:

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **2007**              | ** ** | **2006**              | ** ** |
| Bank of Hawaii loan, due in quarterly principal  installments of $118,750 and interest payable monthly at prime with the loan  maturing on June 3, 2007, secured by an irrevocable standby letter of  Credit for $625,000 issued by the Bank of New York on behalf of SHBC. The  remaining balance of this loan was paid on June 3, 2007.                                                                                                                                                                                                                                                                                                                                                                                         |       | $                     | 0          |                  | $          | 235,967 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |       |                  |       |
| Bank of Hawaii loan, due in quarterly principal  installments of $37,491 and interest payable monthly at prime with the loan  maturing on June 3, 2007, secured by an irrevocable standby letter of  credit for $625,000 issued by Bank of New York on behalf of SHBC. The  remaining balance of this loan was paid on June 3, 2007.                                                                                                                                                                                                                                                                                                                                                                                              |       | 0                     |       | 74,983                |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |       |                  |       |
| 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 note bears interest at LIBOR plus  3%. The loan is guaranteed by SHBC and two shareholders of SHBC. In the event  the Company defaults on one installment payment, the entire loan and accrued  interest become due and payable.                                                                                                                                                                                                                                                            |       | 4,540,000             |       | 6,700,000             |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |       |                  |       |
| Arab Banking Corporation Loan Facility with interest  payments due in six month periods, and principal balance due June 30,  2008. Interest is charged at 1.25% plus Libor. Guaranteed by Al Ahli Bank of  Kuwait. The loan was paid off on September 26, 2007. Interest had been  charged at 1.25% plus LIBOR, and the loan had been guaranteed by Al Ahli Bank  of Kuwait. On September 26,2007 Telesource paid $7,749,492 to the Arab  Banking Corporation for the entire loan balance plus interest. Of this amount  $7,500,000 was derived from the sale of 15,000,000 shares of common shares to  Ernil and Halbarad at a price of $0.50 per share and the remaining amount for  interest was derived from operations. |       | 0                     |       | 7,500,000             |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |       |                  |       |
| ANZ Motor Vehicle Principal. Consists of three  leases each running 36 months from November 22, 2006 through  October 31, 2009, total monthly payments of $3,513.05 bearing interest  rates ranging between 10.5% and 11.5% per annum.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 82,491                |       | 119,446               |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |       |                  |       |
| Notes Payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       | $                     | 4,622,491  |                  | $          | 14,630,396 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |       |                  |       |
| Less current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 2,197,497             |       | 2,513,107             |       |
| Long term portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | $                     | 2,424,994  |                  | $          | 12,117,289 |   |

 

During November 2006,the Company revised its credit facility agreement with Australia and NewZealand Banking Group Limited (“ANZBGL”). The revised credit facility is in theamount of FJD $200,000 (approximately $129,080 USD at December 31, 2007)for the purchase or leasing of vehicles. Interest will be charged at the rateof 11.5% per annum. This facility is revolving and is subject to annual review.As of December 31, 2007 the Company has drawn upon the credit facility inthe amount of FJD $127,814 (approximately $82,491 USD).

 

Scheduled maturities ofdebt outstanding as of December 31, 2007 are as follows:

 
| **Years ending December 31:** |   |      |      |
|------------------------------------|--------|-----------|-----------|
| 2008                               |   | $         | 2,197,497 |   |
| 2009                               |   | 2,424,994 |      |
|                               |   | $         | 4,622,491 |   |

 

 

36

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**(9)****                ****401K Plan**

 

The Company discontinuedthe former 401K non-matching plan that was previously managed by Aetna.  The Company has a new 401K non-matchingretirement plan named Telesource International, Inc. Retirement Plan(“Plan”). The Plan allows employees who elect to participate, to contribute upto the allowable maximum amount into a fund managed by Paychex. There were nocontributions to this plan in 2007 or 2006.

 

**(10)****             ****Stockholder’s Equity**

 

*PreferredStock*

 

The Company has 50 million shares of Series A Cumulative ConvertiblePreferred Stock (The Preferred Shares) authorized. None of these PreferredShares are issued nor outstanding as of December 31, 2007 or 2006. Holdersof the Preferred Shares are entitled to receive cumulative cash dividends atthe annual rate of 6.5%. The Preferred Shares have no voting rights and ranksenior as to dividends and upon liquidation to the common stock.

 

Common Stock Offerings

 

As of December 31,2007, 125,335,661 shares of the Company’s common stock were issued andoutstanding compared to 105,067,661 shares at December 31, 2006.

 

During 2007 Telesourceissued 20,268,000 Common Shares to Ernil and Halbarad at a price of $0.50 pershare.  With the proceeds the companypaid off the Arab Banking Corporation loan of $7,500,000 and covered workingcapital needs.  An incremental amount forloan interest of $249,492 was paid from operations.

 

During 2006 Telesourceissued 8,279,521 Common Shares in debt conversion transactions totaling$4,139,760. In addition the Company issued 3,350,000 shares in fourtransactions totaling $1,675,000.

 

**(11)     Earnings Per Share**

 

In accordance with thedisclosure requirements of Statement of Financial Accounting Standards No. 128,*Earnings Per Share*(SFAS 128), areconciliation of the numerator and denominator of basic and diluted earningsper share is provided as follows:

 
| ** **                                                                                             | ** ** | **2007**    | ** ** | **2006**   | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|
| Numerator – basic and diluted loss per share Net  loss                                            |       | $           | (2,909,280 | )          | $          | (3,471,819 | ) |
| Less: Preferred  stock dividends                                                                       |       | —      |       | —     |       |
| Net loss  available to common stockholders                                                             |       | $           | (2,909,280 | )          | $          | (3,471,819 | ) |
|                                                                                                   |       |        |       |       |       |
| Denominator – basic and diluted loss per share –  weighted average common shares outstanding |       | 111,801,721 |       | 93,501,812 |       |
| Basic and diluted earnings per share                                                                   |       | $           | (0.03      | )          | $          | (0.04 | ) |

 

Fully-vested options topurchase 180,000 shares of common stock granted under the 2000 non-employeedirector stock option plan, and 2,999,999 warrants were outstanding at December 31,2007 and 2006, but not included in the computation of diluted earnings pershare as the effect of the conversion of these instruments would beanti-dilutive (i.e. reduce the loss per share).

 

These warrants, issued atvarious dates in 2003 and 2004, expire in 2008 and 2009 and are exercisablebetween $0.50 and $1.50 per share.

 

**(12)     Stock Option Plans**

 

***2000 Non-Employee Director’s Stock Option Plan***

 

In January 2001, theCompany’s board of directors adopted the 2000 Non-Employee Director’s StockOption Plan that provides for the issuance of nonqualified stock options tooutside directors. Under the terms of this plan, under which 

 

37

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285,000 shares of commonstock were reserved for issuance, options to purchase common stock are grantedat not less than fair market value, become exercisable over a 3 year periodfrom the date of grant (vesting occurs annually on the grant date at 33.3% ofthe grant), and expire 10 years from the date of grant.

 

Changes in optionsoutstanding are summarized as follows:

 
| ** **                                             | ** ** | **December 31, 2007**    | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| ** **                                             | ** ** | **Weighted  average  shares** | ** ** | **Exercise  price**        | ** ** | **Weighted  average  shares** | ** ** | **Exercise  price** | ** ** |
| Options outstanding at January 1                  |       | 180,000                       |       | $                          | 1.25       |   | 180,000 |   | $ | 1.25 |   |
| Granted                                                |       | —                        |       |                       |       | — |   |   |   |
| Exercised                                              |       | —                        |       |                       |       | — |   |   |   |
| Cancelled                                              |       | —                        |       |                       |       | — |   |   |   |
| Options outstanding at December 31                |       | 180,000                       |       | 1.25                       |       | 180,000 |   | 1.25 |   |
| Options exercisable at December 31                |       | 180,000                       |       | 1.25                       |       | 180,000 |   | 1.25 |   |
| Shares available for future grant at  December 31 |       | 60,000                        |       |                       |       | 60,000 |   |   |   |
|                                                        |            |                               |            |                            |            |  |  |  |  |  |  |

 

During 2006, Wes Marsh resigned as a Director.Participants of this plan have 90 days to exercise their options afterseparation of service. Mr. Marsh did not exercise his options.

 

***2000 Incentive Stock Option Plan***

 

In January 2001, theCompany’s board of directors adopted the 2000 Incentive Stock Option Plan thatprovides for the issuance of qualified stock options to employees. Under theterms of this plan, under which 888,000 shares of common stock were reservedfor issuance, options to purchase common stock are granted at not less thanfair market value, become exercisable over a 3 year period from the date ofgrant (vesting occurs annually on the grant date at 33.3% of the grant), andexpire 10 years from the date of grant. As of December 31, 2007, nooptions had been awarded under this plan.

 

***2000 Non-Qualified Stock Option Plan***

 

In January 2001, theCompany’s board of directors adopted the 2000 Non-Qualified Stock Option Planthat provides for the issuance of nonqualified stock options to employees.Under the terms of this plan, under which 27,000 shares of common stock werereserved for issuance, options to purchase common stock are granted at lessthan fair market value, become exercisable immediately on the date of grant,and expire 10 years from the date of grant. As of December 31, 2007, nooptions had been awarded under this plan.

 

**(13)     Financial Instruments With Off-balanceSheet Risk and Concentrations of Credit Risk**

 

Telesource utilizesforeign exchange contracts to reduce exposure to foreign exchange risksassociated with payments for services and products related to the U.S. embassyconstruction project in Fiji.  As of December 31,2007, the Company had entered into foreign exchange contracts in Fijian dollarsamounting to $20.2 million and in U.S. dollars in the amount of $13.3million.  These contracts are fordelivery of Fijian dollars over a period of ten months.  The Company has recorded $63K of foreignexchange gains in it’s consolidated statement of operations as of December 31,2007.

 

Standby letters of creditand financial guarantees – The Company is liable for its obligations, some ofwhich are further secured under letters of credit obtained by SHBC on behalf ofthe Company, and other financial guarantees totaling approximately $4.6 millionand $14.6 million at December 31, 2007 and 2006, respectively. TheCompany’s management does not believe it is practicable to estimate the fairvalues of these financial instruments and does not expect any losses from theirresolution.

 

**(14)     Related-party Transactions – Not describedelsewhere**

 

Certain of the Company’sexecutive 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

 

38

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contractor with 750employees and over 30 years of experience. SHBC and its affiliates were thesole stockholders of Telesource International prior to July 1999 and nowown approximately 96.5% of the common stock outstanding. SHBC and TelesourceInternational bid and compete within the same industries; however, SHBC hasagreed, in writing, not to bid projects within the United States and itspossessions. Additionally, SHBC and its majority stockholders, Fouad Behbehaniand Nasrallah Behbehani, have signed as guarantors on Telesource CNMI’spromissory note with the Commercial Bank of Kuwait, New York Branch. SHBC andits majority stockholders have also signed as guarantors on a $625,000 letterof credit issued to the Bank of Hawaii to secure two installment loans. Thesecredit facilities were used to finance the construction activities on the powerplant, the West Tinian Airport expansion project, and to provide financing forother projects. These loans were paid off during 2007.  See note 8. Furthermore, as noted above SHBCand Telesource International, Inc. have formed a joint venture (TSI/SHBCJV) to bid on future construction projects.

 

Additionally, from timeto time the Company may hire, on a part time or temporary basis, individualsemployed by SHBC to provide assistance to Telesource on certain projects. Therates paid do not exceed the fair market value of similar services provided byunrelated third parties. The Company did not hire any SHBC employees to provideassistance on contracts during 2007 and 2006.

 

The following tableprovides a summary of financial information related to all services provided toSHBC by the Company:

 
| ** **                    | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Sales                         |       | $                     | 5,962      |   | $ | 9,544 |   |
| Total related  party revenues |       |                  |       |   |   |
|                               |            |                       |            |  |  |  |  |

 

The following tablesummarizes all balances related to transactions with SHBC as of December 31,2007 and 2006:

 
| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Accounts payable to SHBC |       | $493,626              |       | $197,397 |   |

 

The following tableprovides a summary of expense related to all services provided by SHBC to theCompany:

 
| ** **                         | ** ** | **Twelve Months Ended  December 31, 2007** | ** ** | **Twelve Months Ended  December 31, 2006** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| Consulting Fees                    |       | $                                               | 300,000.00 |                                            | $          | — |   |
| Costs on standby letters of credit |       | 99,369.00                                       |       | 90,391.00                                       |       |
| Interest (on  unreturned capital)  |       | 66,915.00                                       |       |                                            |       |
|                               |       |                                            |       |                                            |       |
| Total                              |       | $                                               | 466,284.00 |                                            | $          | 90,391.00 |   |

 

SHBC has an agreementwith the joint venture to provide consulting services for $25,000 per month forthe duration of the U.S. Embassy project in Fiji. The joint venture limitedpartnership agreement between SHBC and Telesource also requires a payment toSHBC of 6.5% per annum on the unreturned capital.

 

During 2006, the Companyhad short term borrowings of $3,992,000 from SHBC at an interest rate of 6%.The Company converted $3,992,000 principle and $148,760 of interest into commonstock. See Footnote 10.

 

The Company paidComputhink, Inc. a total of $62,819 in 2007 and $ 87,888 in 2006 . Thepayments to Computhink, Inc. represent rent for office space occupied bythe Company and for computer hardware and software provided by Computhink, Inc.  The Company owed Computhink $9,701 and$14,527, respectively, at December 31, 2007 and 2006. See note 16.

 

 

39

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The Company also rentsoffice space as well as land from Retsa in Saipan and Tinian. Retsa is anaffiliated company of SHBC. The Company paid Retsa $83,932 and $125,526 in 2007and 2006, respectively. The following table summarizes balances payable toRetsa as of December 31, 2007 and 2006:

 
| ** **                | ** ** | **December 31,** | ** ** |
|---------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Accounts payable to Retsa |       | $                     | 1,005      |   | $ | 1,050 |   |
|                           |            |                       |            |  |  |  |  |

 

Total related partyaccounts payable are summarized as follows:

 
| ** **                     | ** ** | **December 31** | ** ** |
|--------------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2007**             | ** ** | **2006** | ** ** |
| Accounts payable to SHBC       |       | $                    | 493,626    |   | $ | 197,397 |   |
| Accounts payable to Computhink |       | 9,701                |       | 14,527 |   |
| Accounts payable to Retsa      |       | 1,005                |       | 1,050 |   |
|                           |       | $                    | 504,332    |   | $ | 212,974 |   |

 

**(15)    IncomeTaxes**

 

Income tax expense(benefit) consists of:

 
| ** **                         | ** ** | **Current** | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|------------------------------------|------------|-------------|------------|--------------|------------|-----------|------------|
| Year ended December 31, 2007: |       |        |       |         |       |      |       |
| U.S. Federal                       |       | $           | —     |         | $          | —    |       | $ | — |   |
| State and local                    |       | —      |       | —       |       | —    |       |
| U.S. possession                    |       | —      |       | —       |       | —    |       |
| Foreign                            |       | 301,335     |       | —       |       | 301,335   |       |
|                               |       | 301,335     |       | —       |       | 301,335   |       |
| Year ended December 31, 2006: |       |        |       |         |       |      |       |
| U.S. Federal                       |       | $           | —     |         | $          | —    |       | $ | — |   |
| State and local                    |       | —      |       | —       |       | —    |       |
| U.S. possession                    |       | —      |       | —       |       | —    |       |
| Foreign                            |       | 464,565     |       | —       |       | 464,565   |       |
|                               |       | $           | 464,565    |         | $          | —    |       | $ | 464,565 |   |

 

The foreign tax expense(benefit) was incurred in connection with the Company’s operations in Fiji andis based upon earnings (loss) within Fiji. The average tax rate for Fiji was31%. The power generation business in Fiji had pre-tax income of $681,356 in2007, while the construction business had pre-tax income of $472,862.

 

In 2007 and 2006 theCompany recorded a loss for financial reporting purposes as well as a loss forincome tax reporting purposes and, therefore, no current U.S. income taxexpense has been reflected in the accompanying consolidated statements ofoperations.

 

The tax effects oftemporary differences that give rise to significant portions of the deferredtax assets and deferred tax liabilities at December 31, 2007 and 2006 arepresented below:

 
| ** **                        | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|
| Deferred tax assets:              |       |       |       |       |       |
| Net operating  loss carryforwards |       | $          | 20,100,000 |       | $          | 18,900,000 |   |
| Accrued expenses                  |       | 300,000    |       | 100,000    |       |
| Total gross  deferred tax assets  |       | 20,400,000 |       | 19,000,000 |       |
| Less valuation allowance          |       | 20,400,000 |       | 19,000,000 |       |
| Net deferred tax  asset           |       | $          | —     |       | $          | — |   |

 

The valuation allowancefor deferred tax assets as of December 31, 2007 and 2006 was $20,400,000and $19,000,000 , respectively. The net change in the total valuation allowancefor the years ended December 31, 2007 and 2006 was an increase of$1,400,000 and an increase of $2,285,000, respectively. In assessing therealizability of deferred tax assets, 

 

40

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management considerswhether it is more likely than not that some portion or all of the deferred taxassets will not be realized. The ultimate realization of deferred tax assets isdependent upon the generation of future taxable income during the periods inwhich those temporary differences become deductible. Management believes thatthe valuation allowance reduces the recognition of deferred tax assets to alevel that reflects the amount that is more likely than not to be realized,considering the tax planning strategies available to the Company.

 

At December 31,2007, the Company has total net operating loss carryforwards from U.S.operations of approximately $14 million and approximately $43 million from itsoperations in the Commonweath of Northern Mariana Islands. The net operatingloss carryforwards expire in the years 2017 through 2027. Certain of these netoperating losses may be subject to a limitation on future utilization due toownership changes or foreign tax laws.

 

Areconciliation of the differences between income taxes computed at the U.S.federal statutory rate of 34%, the Fiji tax rate of 31%, and the Company’sreported provision for income taxes is as follows:

 
| ** **                                                     | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                     | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Income tax (benefit) at statutory rate                         |       | $                                | (882,391   | ) | $ | (1,022,466 | ) |
| Difference between U.S. tax rate and Fiji tax rate             |       | (34,642                          | )          | (39,866 | ) |
| Adjustment of prior year’s deferred tax estimate          |       | (124,984                         | )          | (765,520 | ) |
| Other                                                          |       | (56,628                          | )          | 7,417 |   |
| Provision/(benefit) not recognized due to valuation  allowance |       | 1,400,000                        |       | 2,285,000 |   |
|                                                           |       |                             |       |   |   |
| Provision (benefit) for income taxes                           |       | $                                | 301,355    |   | $ | 464,565 |   |

 

**                                   **As of January 1,2007, the Company adopted FASB Interpretation No. 48, “Accounting foruncertainty in Income Taxes – an interpretation of FASB Statement No. 109”(FIN 48), which clarifies the accounting and disclosure for uncertaintiy in taxpositions, as defined. Pursuant to FIN 48, the Company has analyzed filingpositions in all of the federal, foreign and state jurisdictions where it isrequired to file income tax returns, as well as all open tax years in thesejurisdictions. The only periods subject to examination for the Company’s U.S.tax returns are the 2003 through 2006 tax years. The Company believes that itsincome tax filing positions and deductions would be sustained on audit and doesnot anticipate any adjustments that would result in a material change to itsfinancial position. Therefore, no reserves for uncertain income tax positionshave been recorded pursuant to FIN 48. In addition, the Company did not recorda cumulative effect adjustment related to the adoption of FIN 48.

 

**(16)    Commitmentsand Contingencies**

 

Minimum rentalcommitments under all noncancelable-operating leases, primarily related toproperty, vehicles, and construction equipment, in effect at December 31,2006 are:

 

| **Years ending December 31,** | ** ** |
|------------------------------------|------------|
| 2008                               |       | $109,745 |   |
| 2009                               |       | 109,779 |   |
| 2010                               |       | 90,855 |   |
| 2011                               |       | 30,700 |   |
| 2012                               |       | 0 |   |
| TOTAL                              |       | $341,079 |   |

 

Lease expense was$165,555 and $151,595 for the years ended December 31, 2007 and 2006,respectively.

 

On April 1, 2007 theCompany entered into a sublease with Computhink for a term of  four years from May 1, 2007 through April 30,2011.  The sublease calls for a baserental payment of $6,791 per month in the first year with a 3.0% escalation inthe monthly rate in each of the three subsequent years.  The base monthly amount includes rent andreception services.

 

 

41

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The Company is involvedin various litigation proceedings arising in the ordinary course of business.In the opinion of management, the ultimate disposition of these matters willnot have a material adverse effect on the Company’s financial position, resultsof operations, or liquidity.

 

Telesource previously completed negotiations over the final billing forthe West Tinian Airport Project (“WTA”). The Company had a continuing warrantyobligation for three years from the date of final acceptance, which was December 3,2003 and for which there were no material claims.

 

The Company, in 1999 was awarded a contract to build 45 housing unitsfor the Northern Marina Housing Agency, a government unit. The houses werebuilt and subsequently occupied. The Northern Marianas Housing Corporation hasfiled a lawsuit against Telesource and two other parties for $3.0 million indamages related to this project. These claims involve allegations of variousconstruction defects. The Company estimates that, if the plaintiff issuccessful, the Company may have an estimated liability in the range of$500,000 to $1,200,000. The Company accrued a $300,000 estimated loss in 2004,$200,000 in 2006 and an additional $609,000 during 2007. In 2007, the Companypaid $139,000 to claimants resulting in an accrual of $970,000 at December 31,2007. These amounts are reflected under accrued expenses as of December 31,2007. Telesource has denied any liability and will aggressively defend itselfto mitigate and/or dismiss these claims.

 

TelesourceInternational’s power generation activities involve significant risks ofenvironmental damage, equipment damage and failures, personal injury and finesand costs imposed by regulatory agencies. Though management believes itsinsurance programs are adequate, if a liability claim is made against it, or ifthere is an extended outage or equipment failure or damage at TelesourceInternational’s power plant for which it is inadequately insured or subject toa coverage exclusion, and Telesource International is unable to defend againstthese claims successfully or obtain indemnification or warranty recoveries,Telesource International may be required to pay substantial amounts, whichcould have a materially adverse effect on its financial condition. Although theequipment is covered under its insurance, the Company is liable for thedeductible of 1,250,000 FJD (approximately $806,750 USD at December 31,2007).

 

Telesource Internationaloffers warranties on its construction services and power generating plants.Telesource International does not maintain any material warranty reservesbecause these warranties are usually backed by warranties from its vendors.Should Telesource International be required to cover the cost of repairs notcovered by the warranties of Telesource International’s vendors or should oneof Telesource International’s major vendors be unable to cover future warrantyclaims, Telesource International could be required to outlay substantial funds,which could harm its financial condition.

 

The Company has anagreement with the Commonwealth of the Northern Mariana Islands to manage oneof their power plants. In accordance with Change Order No. 3 of thisagreement, the Company is required to upgrade the power distribution system incertain areas of the Tinian Island. The Company is responsible for the costs ofthe upgrade which include labor and material. The Company has incurredapproximately $1,250,176 in costs associated with this upgrade through December 31,2007. The Company will be seeking a final certification for the upgrade fromthe client. Such certification includes certain negotiating issues that mayhave a minor effect on the remaining cost to complete the upgrade. Generally,TCNMI has been diligent in completing work outlined in the specifications on aline-by-line basis and has received acceptance from CUC for on-going work inthe same manner.  The Company projectsthe completion of the upgrade in 2008 and estimates the additional costs to beapproximately in the range of $15,000 to $25,000.

 

During November 2006,the Company revised its credit facility agreement with Australia and NewZealand Banking Group Limited (“ANZBGL”). The revised credit facility is in theamount of FJD $200,000 (approximately $129,080 USD at December 31, 2007).This credit facility is primarily for the purchase or lease of vehicles.Interest is charged at the rate of 11.5% per annum.

 

The Company operates apower plant on the island of Tinian. The power plant requires a permit with theDepartment of Environmental Quality. The Company currently has a temporarypermit and expects to receive a permanent permit. However, substantialconsequences could occur if the Company does not receive a permanent permit.

 

42

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**(17)    BusinessSegment Information**

 

Telesource has threeoperating segments: power generation and construction of power plants, trading,and construction services. The power generation and construction of powerplants segment includes sales-type lease revenues recognized. There were nomaterial amounts of transfers between segments. Any inter segment revenues havebeen eliminated. The following table sets forth certain segment information forthe periods indicated:

 
| ** **                    | ** ** | **December 31, 2007**                                 | ** ** |
|-------------------------------|------------|------------------------------------------------------------|------------|
| ** **                    | ** ** | **Power  generation  and  construction  of power  plants** | ** ** | **Trading** | ** ** | **Construction** | ** ** | **Total** | ** ** |
| Revenue                       |       | $                                                          | 4,757,267  |   | $ | 5,962 |   | $ | 11,918,054 |   | $ | 16,681,283 |   |
| Interest expense, net         |       | 849,743                                                    |       | — |   | 64,915 |   | 914,658 |   |
| Depreciation and amortization |       | 157,712                                                    |       | — |   | 102,489 |   | 260,201 |   |
| Income tax expense (benefit)  |       | 226,827                                                    |       | — |   | 74,508 |   | 301,335 |   |
| Net income (loss)             |       | (4,142,688                                                 | )          | (21,598 | ) | 1,255,006 |   | (2,909,280 | ) |
| Total capital expenditures    |       | 59,722                                                     |       | — |   | 251,558 |   | 311,280 |   |
| Total assets                  |       | 6,868,355                                                  |       | 6,801 |   | 6,173,455 |   | 13,048,611 |   |
|                               |            |                                                            |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                    | ** ** | **December 31, 2006**                                 | ** ** |
|-------------------------------|------------|------------------------------------------------------------|------------|
| ** **                    | ** ** | **Power  generation  and  construction  of power  plants** | ** ** | **Trading** | ** ** | **Construction** | ** ** | **Total** | ** ** |
| Revenue                       |       | $                                                          | 5,454,240  |   | $ | 9,544 |   | $ | 46,000 |   | $ | 5,509,784 |   |
| Interest expense, net         |       | 1,304,840                                                  |       | — |   | — |   | 1,304,840 |   |
| Depreciation and amortization |       | 203,735                                                    |       | — |   | — |   | 203,735 |   |
| Income tax expense (benefit)  |       | 464,565                                                    |       | — |   |   |   | 464,565 |   |
| Net income (loss)             |       | (3,459,502                                                 | )          | (58,317 | ) | 46,000 |   | (3,471,819 | ) |
| Total capital expenditures    |       | 397,166                                                    |       | — |   | — |   | 397,166 |   |
| Total assets                  |       | 11,059,447                                                 |       | 8,182 |   | 3,670 |   | 11,071,299 |   |
|                               |            |                                                            |            |  |  |  |  |  |  |  |  |  |  |

 

The basis used toattribute revenues to individual countries is based upon where the services areprovided.

 

Revenues from theConstruction segment in 2007 were directly attributed to the U.S. EmbassyProject.

 

The power generationsegment includes revenues from the Company’s power station on Tinian,Commonwealth of the Northern Mariana Islands, as well as from interest incomeon sales-type lease totaling $1,334,170 and $1,596,938 for 2007 and 2006,respectively. Also included in power generation revenues are billings from thetwo power plants in Fiji, and from the transmission distribution and Butoniwind farm projects, totaling $3,423,097 and $3,857,303 for 2007 and 2006,respectively.

 

Revenues from theCompany’s related party, SHBC, were $5,962 and $9,544 for 2007 and 2006,respectively.

 

Revenues recognizedwithin the construction segment derived from the IBB Project in 2006.

 

Long-term assets locatedin the Commonwealth of the Northern Mariana Islands were $0.5 million and $3.1million  as of December 31, 2007 and2006, respectively. Fixed assets located at TFL in Fiji were $409,038 and$449,054 as of December 31, 2007 and 2006, respectively.

 

**(18)****             ****Subsequent Events**

 

The Company issuedunregistered securities to SHBC in the following transactions subsequent to December 31,2007:

 

 ·      On January 7, 2008 we issued 2,950,000 shares ofcommon stock for $1,475,000.

 

 

43

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·                On February 6, 2008 we issued 600,000 shares ofcommon stock  for $300,000.

 

**(19)****             ****Supplementary Disclosure of Cash FlowInformation**

 

During the fourth quarterof 2006, the Company converted short term debt payable due to SHBC in theamount of $4,139,760 at a conversion price of $0.50 per share into 827,951shares of common stock.

 

During 2006, the Company purchased vehicles in Fijifor $126,472 in exchange for long term debt.

 

**(20)****             ****Changein Accounting Estimate**

 

In 2006, the Companychanged the estimated useful life that is the basis for calculatingdepreciation expense on certain of its assets. This change was required as aresult of evaluating these assets and their estimated future benefit. Theestimated life of these assets was previously 120 months or 10 years and theseassets had been purchased between 1997 and 2003. As of January 1, 2006,the remaining useful life of these assets was determined to be one year.

 

The Company determinedthe net book value of these affected assets as of January 1, 2006 anddepreciated this balance over the next 12 months ended December 31, 2006.The effect of this change resulted in an increase in the operating loss fromcontinuing operations in the amount of approximately $55,875 during the twelvemonth period ended December 31, 2006.

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

 

None

 

**ITEM 8A.     CONTROLS AND PROCEDURES**

 

Telesource iscommitted to maintaining disclosure controls and procedures that are designedto ensure that information required to be disclosed in its Exchange Act reportsis recorded, processed, summarized and reported within the time periodsspecified in the Commission’s rules and forms, and that such informationis accumulated and communicated to its management, including its ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow fortimely decisions regarding required disclosure. In designing and evaluating thedisclosure controls and procedures, management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives and aresubject to certain limitations, including the exercise of judgment byindividuals, the difficulty in identifying unlikely future events, and thedifficulty to eliminate misconduct completely. As a result, there can be noassurance that our disclosure controls and procedures will prevent all errorsor fraud or ensure that all material information will be made known tomanagement in a timely manner.

 

**Evalutionof Disclosure Controls and Procedures**

 

Under thesupervision and with the participation of management, including the ChiefExecutive Officer (“CEO”) and Chief Financial Officer (“CFO”), the Companyconducted an evaluation of its disclosure controls and procedures, as such termis defined under Rule 13a-15(e) promulgated under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”) as of December 31,2007. Based on this evaluation, its CEO and CFO concluded the Company’sdisclosure controls and procedures are not effective to ensure that informationwe are required to disclose in our reports filed or submitted under theSecurites Exchange Act of 1934, as amended, is accumulated and communicated tomanagement as appropriate to allow timely decisions regarding requireddisclosures.

 

**Changesin Internal Control over Financial Reporting**

 

The followingrepresent either changes to internal controls or other factors that couldsignificantly affect internal controls during the quarter ended December 31,2007:

 

There were nochanges in our internal control in the fourth quarter.

 

44

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**(b) Management’s Report on Internal Controlover Financial Reporting**

 

**Management** is responsible for establishing andmaintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and15d-15(f) promulgated under the Exchange Act).

 

Internal control overfinancial reporting is a process, designed by, or under the supervision of, anentity’s principal executive and principal financial officers, and effected byan entity’s board of directors, M**anagement** andother personnel, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of consolidated financial statementsfor external purposes in accordance with generally accepted accountingprinciples. Internal control over financial reporting includes those policiesand procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions and thedispositions of the assets of the entity; (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the entity are being made only in accordancewith authorizations of the management and directors of the entity; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the entity’s assets that could have amaterial effect on its consolidated financial statements.

 

Because of its inherentlimitations, internal control over reporting may not prevent or detect allmisstatements. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

Under the supervision andwith the participation of **Management** theCompany conducted an assessment of the effectiveness of its internal controlover financial reporting based on the criteria set forth in the InternalControl — Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

 

A material weakness is adeficiency, or combination of deficiencies, in internal control over financialreporting such that there is a reasonable possibility that a materialmisstatement of the Company’s annual or interim Financial Statements will notbe prevented or detected on a timely basis.

 

As of the end of theperiod covered by this report and prior to remediation efforts, **Managemen**t concluded that its internal control overfinancial reporting was not effective because of the material weaknessesdescribed below:

 

I.                 We did not establish adequate controls tomaintain an appropriate environment relating to Integrity and Ethical Values asdefined in the Internal Control-Integrated Framework published by COSO.  Specifically, we identified the followingdeficiencies that in aggregate constituted a material weakness:

 

·                  We did not communicate or reinforce theCode of Ethics on a regular basis with all employees. Personnel in Fiji werenot given employee handbooks or the Code of Ethics upon employment.

 

·                  We did not establish sufficientcommunications channels for internal reports of potential fraud and violationsof the Code of Ethics.  The Company didnot have a “Whistleblower Hotline” in operation to serve as a separatecommunications channel for employees at all locations to report violations anda process for the Board of Directors to receive such reports.

 

·                  We did not establish sufficientcommunication channels for external parties to report suspected fraud orviolations of the Code of Ethics.  TheCompany’s public website does not communicate our corporate governance policiesor the Code of Ethics.  Contactinformation contained in the website is not up to date and does not provide aclear channel for external parties to report potential violations of ourpolicies.

 

II.             We did not establish adequate controls tomaintain an effective control environment related to Human Resources as definedin the Internal Control-Integrated Framework published by COSO.  Specifically, we identified the followingdeficiencies that in aggregate constituted a material weakness:

 

·                  We did not establish sufficient controlsover personnel records at all locations.

 

 

45

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·                  We did not establish sufficient formalpolicies and procedures governing HR processes.

 

III.         We did not establish adequate controls tomaintain an effective Information Technology (IT) control environment asdefined in the Internal Control-Integrated Framework published by COSO.  Specifically, we identified the followingdeficiencies that in aggregate constituted a material weakness:

 

·                  We did not establish sufficient ITsystems and infrastructure in Fiji to support effective financial reportingobjectives.

 

·                  We did not establish comprehensive ITpolicies and procedures across all locations. Controls over areas such as IT Entity Level Controls and IT GeneralControls were not implemented, therefore, we lacked the necessary controls overapplication change management, application access and security,  operating systems, computer operations, andnetwork security.

 

**(c) Remediation of Material Weaknesses inInternal Control Over Financial Reporting**

 

The Company retained theservices of a third-party internal control consulting firm, SC&H, during2007 to assist management, on an ongoing basis, with annual evaluations ofinternal controls over financial reporting. To address the material weaknesses identified above, management hastaken or is in the process of taking the following remediation steps to addressthe material weaknesses identified and toenhance internal control over financial reporting before the next annualfinancial report:

 

I.                 Control Environment - Integrity andEthical Values

 

·                  We are in the process of reinforcing ourCode of Ethics by developing an annual certification process for all employeesto certify that they have received a copy, read and understood the Code ofEthics, and have signed and returned the signature page to HumanResources.

 

·                  We are in the process of developinginternal communications channels in order to communicate suspected fraud orviolations of the Code of Ethics by our Board of Directors, key managers,and/or others involved with governance. Handbooks are being dispensed in March, 2008 to all employees.  A third party vendor has been selected toservice the Whistleblower Hotline.

 

·                  We are in the process of enhancingexternal communication channels by updating our website to include corporategovernance policies and to provide current contact information to allinterested parties.  The Company hashired a third-party web-developer to complete this work.

 

II.             Control Environment - Human Resources

 

·                  We retained a third party HR serviceprovider in December 2007 to assist with establishing HR operations,policies, and procedures as well as to conduct independent reviews of HRoperations on a periodic basis at the Company’s headquarters (USA).

 

·                  We are in the process of updating ourdocumented policies and procedures governing HR processes including theemployee handbook for all operating units.

 

·                  We assigned new HR roles andresponsibilities to key personnel at all locations and to ensure sufficientinternal controls and segregation of duties at all operating units.

 

·                  We are in the process of retaining athird party internal audit services provider to provide regular internal auditsof the financial and HR functions for our operations in Fiji.

 

III.         Control Environment - InformationTechnology

 

·                  We are in the process of implementing ITEntity Level Controls and IT General Controls to ensure the accuracy andvalidity of financial data and operations for all operating units.

 

46

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·                  We are in the process of acquiring andinstalling new IT hardware, software, and backup systems for financial andaccounting operations in order to support the efficient and accuratepreparation of financial statements for our operations in Fiji.  A new server has been ordered and will beinstalled by Pacific Limited at the Fijian Headquarters in Vinod Patel.

 

·                  We have retained a third party IT serviceprovider, Pacific Limited, to provide on-site IT service and support in Fiji.

 

·                  We have retained Pacific Limited toconduct regular audits of IT operations in Fiji.

 

**Management** has concluded that as of December 31,2007 our internal control over financial reporting was not effective.

 

This annual report doesnot include an attestation report of the Company’s registered public accountingfirm regarding internal control over financial reporting. Management’s reportwas not subject to attestation by the Company’s registered public accountingfirm pursuant to temporary rules of the Securities and Exchange Commissionthat permit the Company to provide only managemts report in this annual report.

 

Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any,within a company have been detected. These inherent limitations include therealities that judgments in decision making can be faulty and that breakdownscan occur because of simple error or mistake. Additionally, controls can becircumvented by the individual acts of some persons, by collusion of two ormore people, or by **Management**override of the control. The design of any system of controls also is based inpart upon certain assumptions about the likelihood of future events, and therecan be no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions. Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand may not be detected. Notwithstanding these limitations, with the changesreferenced above, we believe that our disclosure controls and procedures aredesigned to provide reasonable assurance of achieving their objectives.

 

**ITEM 8B.       OTHER INFORMATION**

 

**NONE**

 

47

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#  

# **PART III**

#  

**ITEM 9.        DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT**

 

Directors are electedfor one-year terms and are elected at each annual meeting of stockholders. Asof the date of this report Telesource’s Board of Directors and executiveofficers are:

 
| **Name and Age;  Years Served as Director**                                      | ** ** | **Principal Occupation for Past Five Years;  Other Directorships**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Ralph Beck  Age 68   Chairman of the Board  Director since 1999                  |       | Mr. Beck is a principal of Global Construction  Solutions, L.L.C. From 1994 to 1998, Mr. Beck served as the President of  Kajima Construction 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Nidal Zayed   Age 46   Director Since 1998   Chief Executive Officer  since 2005 |       | Nidal Zayed, President & Chief Executive  Officer, joined Telesource International in January 1996. He is 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                                             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Jeffery Adams   Age 64   Director Since 1999                                     |       | Mr. Adams is an Electrical Engineer trained in  the United Kingdom. From 1978 to 1986, Mr. Adams 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   Age 57   Director Since 1997                                        |       | From 1988 to present Mr. Engler has been an  independent Financial Consultant and is also on 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   Age 65   Director Since 1999                                |       | Mr. Ibrahim is now with the Al Ahli Bank of  Kuwait in the commercial lending area since 2002 and has 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.                                                                                                                                                                                              |
|                                                                             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Trudy Clark   Age 58   Director Since 2007                                       |       | General Clark has over twenty years of experience in  innovative delivery of support services at worldwide locations in units of  60-2000 members and budgets from $1M-2.9B. General Clark is an experienced  leader with exceptional organizational and facilities management skills; she  has served as the Deputy Director for the Defense Threat Reduction Agency,  working to direct approximately 4,000 government and contractor personnel at  30 locations worldwide and conducting international and homeland security  exercises for the Department of Defense. Additionally while serving as the  Chief Information Officer and Director for Command, Control, Communications  and Computers, US Strategic Command, General Clark supported the Government  and Contractors to develop software, lifecycle management and strategic  planning for modernization of over $5B of nuclear decision support systems.  General Clark has a Masters in Guidance and Counseling from Troy State  University in Alabama. |

 

48

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|                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Carl Smith   Age 59   Director Since 2007                              |   | Mr. Smith, a graduate of the University of  Hawaii obtained his Juris Doctorate at University of California Law School  and has over thirty years of experience in government contracting, defense  acquisition, international agreements, telecommunication regulations,  information security and is an expert when it comes to Cyber Law/Information  Assurance, Fiscal Law, FOIA, Privacy Act and Ethics in Government Act.  Mr. Smith served as the General Counsel for the Defense Information  Systems Agency, offering advice and guidance to the Agency Director and the  Senior Executive Team on a full spectrum of legal issues, including  government contracting. While serving as the Chief Regulatory  Counsel-Telecommunications for the Department of Defense, Mr. Smith was  responsible for advising the Office of Science and Technology Policy and the  Assistant Secretary of Defense in Telecommunication Regulatory matters that  affected national security, emergency preparedness as well as the Department  of Defense’s commercial interests. He is a member of the Hawaiian and D.C.  Bar Association. |
|                                                                   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| Greg Grosvenor   Age 56   Chief Financial Officer   Since August, 2005 |   | Mr. Grosvenor has been a Chief Financial  Officer with several companies including publicly traded companies such as  AMCH. In addition, Mr. Grosvenor worked with William Blair Capital to  restructure and sell one of their portfolio companies named Smith  Bucklin & Associates. In addition, he completed a multi-million debt  restructuring and funding for the Metropolitan Pier and Exposition Authority.  He also worked at the parent holding company of Hyatt Corporation responsible  for the reporting of multiple companies. He was a member of the team that  spun off Galileo from United Airlines and worked at Anixter Bros. in various  financial and accounting roles. He began his career working with the  international audit firm of PriceWaterhouse Coopers. He is a CPA and  graduated from Loyola University in 1976 with a B.A.                                                                                                                                                                                                                                                                          |

 

**ITEM 10.        EXECUTIVE COMPENSATION**

 

**SUMMARYCOMPENSATION TABLE**

 
| **Name and  Principal Position** | ** ** | **Year** | ** ** | **Salary (1)** | ** ** | **Bonus** | ** ** | **All Other Annual  Compensation(2)** | ** ** |
|----------------------------------|------------|----------|------------|----------------|------------|-----------|------------|---------------------------------------|------------|
|                             |       |     |       |           |       |      |       |                                  |       |
| Nidal Zayed                      |       | 2007     |       | $              | 215,000    |      | $          | —                                |       | $ | 23,072 |   |
| Chief Executive  Officer         |       | 2006     |       | $              | 168,000    |      | $          | —                                |       | $ | 21,340 |   |
|                             |       |     |       |           |       |      |       |                                  |       |
| Greg Grosvenor                   |       | 2007     |       | $              | 160,000    |      | $          | —                                |       | $ | 20,009 |   |
| Chief Financial  Officer         |       | 2006     |       | 135,000        |       | 20,000    |       | $                                     | 17,502     |   |

----

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

 

(2)             Telesource provided a vehicle to Mr. Zayed at acost of $11,080 in 2007 and $ 11,080 in 2006. Telesource provided Mr. Zayedwith health insurance for him and his family at a cost of $11,992 in 2007 and$10,258 in 2006. The Company provided health insurance to Mr. Grosvenorand his family of $20,009 in 2007 and $17,502 in 2006.

 

**StockOptions**

 

As of December 31,2007 there were no stock options outstanding to any persons other thannonemployee directors.

 

**DirectorsCompensation**

 

The Company paidan annual fee to each Director (except for Nidal Zayed) in the amount of$20,000 in both 2007 and 2006, respectively. Such fees are paid in cash.

 

 

49

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**ITEM 11.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT**

 

The followingtable contains information as of December 31, 2007 regarding the ownershipof the Common Stock of the Company by: (i) all persons who, to theknowledge of the Company, were the beneficial owners of 5% or more of theoutstanding shares of Common Stock of the Company, (ii) each director anddirector nominee of the Company, (iii) the Chief Executive Officer and thetwo other most highly compensated executive officers of the Company whosesalary and bonus for the fiscal year ended December 31, 2007 exceeded$100,000, and (iv) all executive officers and directors of the Company asa group:

 
| **Name**                                                     | ** ** | **Amount and  Nature  of Beneficial  Ownership (1)** | ** ** | **Percent of  Common Stock  Outstanding (2)** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                   | ** ** | ** **                                           | ** ** | ** **                                    | ** ** |
| SHBC and Affiliated Companies                                |       | 120,949,661                                          |       | 96.5                                          | %          |
| Max Engler(3)                                                |       | 95,000                                               |       | *                                             |       |
| Ibrahim Ibrahim                                              |       | 55,000                                               |       | *                                             |       |
| Jeff Adams                                                   |       | 46,000                                               |       | *                                             |       |
| Ralph Beck                                                   |       | 45,000                                               |       | *                                             |       |
| Trudy Clark                                                  |       | —                                               |       | *                                             |       |
| Carl Smith                                                   |       | —                                               |       | *                                             |       |
| Nidal Z. Zayed                                               |       | —                                               |       | *                                             |       |
| Greg Grosvenor                                               |       | —                                               |       | *                                             |       |
| All Executive Officers and Directors as a Group (7  Persons) |       | 241,000                                              |       | 0.2                                           | %          |

----

*                          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 withrespect to all shares of Common Stock shown as beneficially owned by them,subject to community property laws where applicable. Amounts include 45,000options for non-employee directors.

 

(2)                   Calculated on the basis of 125,335,661 shares ofCommon Stock outstanding as of December 31, 2007. Excludes 45,000 optionsthat were exercisable within 60 days of December 31, 2006 held bynon-employee directors. None of the options were exercised and the Company didnot incur any expenses associated with these options.

 

(3)                   Max Engler serves as a director for LitraHolding AG. Litra Holding AG owns directly 495,000 shares of TelesourceInternational’s common stock. Based upon information provided to TelesourceInternational, Telesource International does not consider these shares to bebeneficially owned by Mr. Engler.

 

Shown below is information as of December 31,2007 with respect to the shares of Common Stock that may be issued underTelesource’s equity compensation plans.

 
| ** **                                         | ** ** | **Number of shares to be  issued upon exercise  of outstanding options** | ** ** | **Weighted average  exercise price of   outstanding options** | ** ** | **Number of shares  remaining available  for future issuance  under equity  compensation plans** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|
| ** **                                         | ** ** | ** **                                                               | ** ** | ** **                                                    | ** ** | ** **                                                                                       | ** ** |
| Equity compensation plans approved by shareholders |       | 180,000                                                                  | (1)        | 1.25                                                          |       | 975,000                                                                                          | (2)        |

----

(1)             Includes the number of shares that may be issued uponthe exercise of outstanding options to purchase shares of Telesource CommonStock under Telesource’s stock option plans.

 

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

 

 

50

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**ITEM 12.****                      ****CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

Certain of theCompany’s executive officers, directors, and major stockholders are alsoowners, officers, and/or directors of SHBC located in Kuwait. SHBC is a civil,electrical, and mechanical engineering firm and construction contractor with750 employees and over 30 years of experience. SHBC and its affiliates were thesole stockholder of Telesource International prior to July 1999 and nowown approximately 96.5% of the common stock outstanding. SHBC and TelesourceInternational bid and compete within the same industries; however, SHBC hasagreed, in writing, not to bid on projects within the United States and itspossessions. Additionally, SHBC and its majority stockholders, Fouad Behbehaniand Nasrallah Behbehani, have signed as guarantors on Telesource CNMI’spromissory note with the Commercial Bank of Kuwait, and as guarantors on a$7,500,000 credit facility for Telesource with the Arab Banking Corporation ofBahrain. SHBC and its majority stockholders have also signed as guarantors on a$625,000 letter of credit issued to the Bank of Hawaii to secure a $625,000credit facility.  It should be noted thatthe loans with the Arab Banking Corporation and Bank of Hawaii were paid offduring 2007.

 

These creditfacilities were used to finance the construction activities on the power plant,the West Tinian Airport expansion project, and to provide financing for otherprojects. See note 8.

 

Additionally, fromtime to time the Company may hire, on a part time or temporary basis,individuals employed by SHBC to provide assistance to Telesource on certainprojects in the Northern Mariana Islands.

 

The Company paidComputhink, Inc. $62,819 in 2007 for rent, and computer support. TheCompany shares office space with Computhink in its Lombard office.

 

**DirectorIndependence**

 

The Company is a“Controlled Company” as that term is defined by the Listing Requirements ofNASDAQ. As such, if the Company were a company listed on the NASDAQ tradingmarket, it would not be required to comply with the director independenceguidelines established thereby.

 

51

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**ITEM 13.        EXHIBITS**

 
| **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**                                                                                                                                                    |
|                |       |                                                                                                                                                                                     |   |   |
| 3.03                |       | Amendment to Certificate of Incorporation**                                                                                                                                              |
|                |       |                                                                                                                                                                                     |   |   |
| 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**                  |
|                |       |                                                                                                                                                                                     |   |   |
| 10.05               |       | Memorandum of Understanding between Sayed Hamid  Behbehani & Sons, Co. W.L.L. and Telesource International, Inc.  regarding right of first refusal for certain areas**     |
|                |       |                                                                                                                                                                                     |   |   |
| 10.06               |       | Memorandum of Understanding between Sayed Hamid  Behbehani & Sons, Co. W.L.L. and Telesource International, Inc.  regarding commission fees**                              |
|                |       |                                                                                                                                                                                     |   |   |
| 10.07               |       | Note Agreement between the Commercial Bank of  Kuwait, New York Branch, and Telesource International CNMI, Inc. dated  August 20, 1998**                                       |
|                |       |                                                                                                                                                                                     |   |   |
| 10.08               |       | Note Agreement between the Commercial Bank of  Kuwait, New York Branch, and Telesource CNMI, Inc. dated  December 11, 2001**                                                   |
|                |       |                                                                                                                                                                                     |   |   |
| 10.09               |       | Term Loan Agreement between the Kuwait Real Estate  Bank and Telesource International CNMI, Inc. dated May 2, 1999**                                                           |
|                |       |                                                                                                                                                                                     |   |   |
| 10.10               |       | Line of Credit Agreement between the Bank of Hawaii  and Telesource International CNMI, Inc.**                                                                                      |
|                |       |                                                                                                                                                                                     |   |   |
| 10.11               |       | Lease of Tinian Land between the Commonwealth  Utilities Corporation and Telesource International CNMI, Inc.**                                                                      |
|                |       |                                                                                                                                                                                     |   |   |
| 10.12               |       | Loan Facility Agreement between Arab Banking  Corporation and Telesource International Inc. dated March 22, 2005**                                                                  |
|                |       |                                                                                                                                                                                     |   |   |
| 10.13               |       | Telesource International, Inc. 2000 Incentive  Stock Option Plan**                                                                                                                  |
|                |       |                                                                                                                                                                                     |   |   |
| 10.14               |       | Telesource International, Inc. 2000  Non-Qualified Stock Options Plan**                                                                                                             |
|                |       |                                                                                                                                                                                     |   |   |
| 10.15               |       | Telesource International, Inc. 2000  Non-Employee Director Stock Option Plan**                                                                                                      |

 

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|   |   |                                                                                                                                          |   |   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 10.16  |   | Warrant to Purchase 1,000,000 Shares of Common Stock  between SHBC and Telesource International, Inc.**                                  |
|   |   |                                                                                                                                          |   |   |
| 10.17  |   | Telesource International, Inc. Sayed Hamid  Behbehani & Sons Co., Joint Venture, L.P. Agreement**                               |
|   |   |                                                                                                                                          |   |   |
| 10.18  |   | Common Stock Purchase Agreement between Telesource  International, Inc. and Ernil Continental S.A., BVI dated  February 26, 2007.** |
|   |   |                                                                                                                                          |   |   |
| 10.19  |   | Common Stock Purchase Agreement between Telesource  International, Inc. and Halbarad Group, LTD., BVI dated  February 26, 2007**    |
|   |   |                                                                                                                                          |   |   |
| 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*                                                                                     |
|   |   |                                                                                                                                          |   |   |
| 99.1   |   | Code of Ethics**                                                                                                                              |

----

*              Filed herewith

 

**       Previously filed

 

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

 

The AuditCommittee pre-approves all audit services and permitted non-audit services(including the fees and terms thereof) to be performed for the Corporation byits independent registered accountants, L J Soldinger Associates LLC. Thefollowing table presents fees for professional services rendered by L JSoldinger Associates LLC for the respective periods indicated:

 
| **SERVICES PERFORMED** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
|                        |       |     |       |     |       |
| Audit Fees (Note 1)         |       | $248,000 |       | $210,000 |       |
| Audit-Related Fees (Note 2) |       | 23,000   |       | 0        |       |
| Tax Fees (Note 3)           |       | 19,000   |       | 23,000   |       |
|                        |       |     |       |     |       |
| Total Fees                  |       | $290,000 |       | $233,000 |       |

 

NOTES TO PRECEDINGTABLE

 

1.               Audit fees represent fees billed for professionalservices provided in connection with the audit of our annual financialstatements, reviews of our quarterly financial statements, audit servicesprovided in connection with statutory and regulatory filings for those yearsand audit services provided in connection with securities registration and/orother issues resulting from that process.

 

2.               Audit-related fees represent fees billed primarily forassurance and related services reasonably related to the performance of theaudit or reviews of our financial statements.

 

3.               Tax fees principally represent fees billed for taxpreparation.

 

53

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**SIGNATURES**

 

PURSUANT TO THEREQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BYTHE UNDERSIGNED THEREUNTO DULY AUTHORIZED.

 

**TELESOURCE INTERNATIONAL, INC.**

(Registrant)

 
| Dated: March 31, 2008 | /s/ Nidal Zayed                       |   |
|----------------------------|---------------------------------------|--------|
|                       | Nidal Zayed                           |   |
|                       | President and Chief Executive Officer |   |

 

 

PURSUANT TO THEREQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEENSIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THECAPACITIES INDICATED ON March 31, 2008.

 
|   |   | /s/ Ralph Beck      |   | Chairman of the Board of Directors   |
|--------|--------|---------------------|--------|--------------------------------------|
|   |   | Ralph Beck          |   |                                 |
|   |   |                |   |                                 |
|   |   | /s/ Nidal Z. Zayed  |   | Director and Chief Executive Officer |
|   |   | Nidal Z. Zayed      |   |                                 |
|   |   |                |   |                                 |
|   |   | /s/ Max Engler      |   | Director                             |
|   |   | Max Engler          |   |                                 |
|   |   |                |   |                                 |
|   |   | /s/ Jeffery Adams   |   | Director                             |
|   |   | Jeffery Adams       |   |                                 |
|   |   |                |   |                                 |
|   |   | /s/ Trudy Clark     |   | Director                             |
|   |   | Trudy Clark         |   |                                 |
|   |   |                |   |                                 |
|   |   | /s/ Carl Smith      |   | Director                             |
|   |   | Carl Smith          |   |                                 |
|   |   |                |   |                                 |
|   |   | /s/ Ibrahim Ibrahim |   | Director                             |
|   |   | Ibrahim Ibrahim     |   |                                 |
|   |   |                |   |                                 |
|   |   | /s/ Greg Grosvenor  |   | Chief Financial Officer              |
|   |   | Greg Grosvenor      |   |                                 |

 

 

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