Table of Contents

 

 

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM 10-K**

 

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

 

**FOR THE FISCAL YEAR ENDED DECEMBER31, 2008**

 

**COMMISSIONFILE NUMBER 0-2564**

 

**TELESOURCEINTERNATIONAL, INC.**

(EXACT NAME OF REGISTRANT ASSPECIFIED 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 theissuer is a well-known seasoned issuer, as defined in Rule 405 of the ExchangeAct Yes  o  No  x

 

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-Kor any amendment to the Form 10-K. x

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer”and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| 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 mark whether the registrant is a shell company (asdefined in Rule12b-2 of the Exchange Act). Yes  o    No  x

 

Issuer’s revenues for its most recent fiscal year: $29,081,840

 

State the aggregate market value of the voting and non-voting commonequity held by non-affiliates computed by reference to the price at which thecommon equity was sold, or the average bid and asked prices of such commonequity, as of a specified date within the past 60 days. The Registrant’svoting stock held by non-affiliates of the Registrant on March 12, 2009was approximately $4,386,000.

 

Number of shares of Common Stock outstanding as of the close of businesson March 12, 2009: 136,640,567 shares.

 

**Documents Incorporated byReference**

 

None

 

 

 

 

 

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# **TABLE OF CONTENTS**

 

 
| ** ** | ** **                                                                                                                              | **Page**   |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** ** | **PART I**                                                                                                                         | 3          |
| ** ** | ** **                                                                                                                              | ** ** |
| Item 1.    | Description  of Business                                                                                                                | 3          |
|       |                                                                                                                                    |       |
| Item 2.    | Properties                                                                                                                              | 8          |
|       |                                                                                                                                    |       |
| Item 3.    | Legal  Proceedings                                                                                                                      | 8          |
|       |                                                                                                                                    |       |
| Item 4.    | Submission of  Matters to a Vote of Security Holders                                                                                    | 8          |
|       |                                                                                                                                    |       |
| ** ** | **PART II**                                                                                                                        | 9          |
|       |                                                                                                                                    |       |
| Item 5.    | Market for the  Registrant’s Common Equity, Related Stockholder Matters, and Small Business  Issuer Purchase of Equity securities  | 9          |
|       |                                                                                                                                    |       |
| Item 6.    | Selected  Financial Data                                                                                                                | 10         |
|       |                                                                                                                                    |       |
| Item 7.    | Management’s  Discussion and Analysis                                                                                              | 10         |
|       |                                                                                                                                    |       |
| Item 8.    | Financial Statements                                                                                                                    | 14         |
|       |                                                                                                                                    |       |
| Item 9.    | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                                                   | 36         |
|       |                                                                                                                                    |       |
| Item 9A.   | Controls  and Procedures                                                                                                                | 36         |
|       |                                                                                                                                    |       |
| Item 9B.   | Other Information                                                                                                                       | 37         |
|       |                                                                                                                                    |       |
| ** ** | **PART III**                                                                                                                       | 38         |
|       |                                                                                                                                    |       |
| Item 10.   | Directors  Executive Officers, Promoters, Control Persons and Corporate Governance;  Compliance with section 16(a) of Exchange Act | 38         |
|       |                                                                                                                                    |       |
| Item 11.   | Executive  Compensation                                                                                                                 | 39         |
|       |                                                                                                                                    |       |
| Item 12.   | Security Ownership of  Certain Beneficial Owners and Management and Related matters                                                     | 40         |
|       |                                                                                                                                    |       |
| Item 13.   | Certain Relationships  and Related Transactions, and Directors Independence                                                             | 40         |
|       |                                                                                                                                    |       |
| Item 14.   | Principal  Accountant Fees and Services                                                                                                 | 41         |
|       |                                                                                                                                    |       |
| Item 15.   | Exhibits                                                                                                                                | 42         |

 

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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 & Sons Co., W.L.L.

 

You are cautioned that the Form 10-Kcontains “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. When the words “believes,” “plans,” “anticipates,”“will likely result,” “will continue,” “projects,” “expects,” and similarexpressions are used in the Form 10-K, they are intended to identify “forward-lookingstatements,” and such statements are subject to certain risks and uncertaintieswhich could cause actual results to differ materially from those projected.Furthermore, the Company strategizes and objectively plans based upon certaincurrent expectations and intentions which are subject to change at any time atthe discretion of management and the Board. These forward-looking statementsspeak only as of the date this report is filed. The Company does not intend toupdate the forward-looking statements contained in this report, so as toreflect events or circumstances after the date hereof or to reflect theoccurrence of unanticipated events, except as may occur as part of its ongoingperiodic reports 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.Telesource does not have in-house design capabilities so we rely onlongstanding relationships with world-class design firms to ensure that ourprojects and customers have the benefit of the best design services availablein the United States.  As a generalcontractor Telesource pursues U.S. government contracts with a focus on expandingour presence in the continental U.S. Our international construction experiencehas primarily been on US territories abroad and the vast majority of our futuretargeted market will be projects located on U.S. soil.

 

The Company’s energybusiness is generally predicated on executing bankable contracts with creditworthy customers on a project financing basis without recourse to theCompany.  The Company has experience asan Independent Power Producer (IPP) and with Build Own Operate Transfer (BOOT)projects. Our energy projects have been in the North and South Pacific; howeverwe are always reviewing opportunities throughout the world including NorthAmerica.

 

Telesource conducts its operations through its three subsidiarieslocated in four geographic locations. Telesource was formed in November 1996 and its headquarters are at860 Parkview Blvd., Lombard, Illinois U.S.A., 60148.

 

The Company has a subsidiary located in Fiji, Telesource(Fiji), Ltd. (TFL).  TFL has a 20-yearcontract with the Fiji Electricity Authority to operate and maintain twoseparate diesel-fired power generation plants, with a total output of 78 Mwh.  The power produced at the power plants isconnected 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 forover eight years and is attempting to develop and expand its services in thecountry and the South Pacific region.

 

The Company maintains a second wholly-owned subsidiary inthe Commonwealth of Northern Mariana Islands (CNMI).  This Mariana subsidiary, Telesource CNMI, Inc.(TCNMI) is located on the Island of Saipan with operations on the Island ofTinian, both islands being part of the CNMI which is a U.S. Commonwealth.  Since its incorporation in 1997 TCNMI hasexecuted over $80 million worth of construction work in the CNMI.  TCNMI also designed and built a 20 Mwh powerplant on the Island of Tinian on a 20 year BOOT basis. The contract for thisproject will expire in 2020.  Ouragreement with the Commonwealth Utility Corporation stipulates that we willsell into the grid at wholesale.  Allmarketing and business development activities in the North Pacific and theOceania regions are directed through TCNMI’s Saipan office.

 

The Company has re-established its construction businessand implemented effective project management tools and systems. We haveextensive references from projects executed during the past 10 years and areleveraging these credentials and experiences for future growth. Our pastexperience includes: airport and runway expansion; adult correctional facility;museum; shortwave radio relay station with high-power transmitters andantennas; and single-family development projects.

 

The Company seeks to conduct its construction business both on its ownand through strategic joint ventures and other alliances.

 

 

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In 2006, the Company entered into a joint venture with SHBC, calledTelesource International, Inc. / Sayed Behbehani & Sons Company,Joint Venture, L.P. (“TSI/SHBC JV”). This JV operates out of the Company’sLombard, Illinois office. TSI/SHBC JV is a limited partnership with an equitysplit of 51% for Telesource and 49% for SHBC. Telesource International, Inc.is the general and controlling partner of the TSI/SHBC JV and it earns 99% ofthe JV profits.  TSI/SHBC JV was formedfor the purpose of bidding U.S. government construction and infrastructuredevelopment projects.   In January 2007the JV received a final award and notice to proceed with a $42.5 millioncontract to design and build a new embassy compound for the United StatesDepartment of State in Suva, Fiji. To execute the local works the JV formed awholly owned subsidiary in Fiji called Telesource SHBC (Fiji), Ltd. (“TSF”).

 

The Company plans to become a major provider of construction servicesto the U.S. government. In furtherance of this strategic objective and with thesponsorship of the US Department of State, the Company was granted aSecret-level facility security clearancein 2008.  Key Company managers andpersonnel also have 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 TSI/SHBC JV as well as other potential joint ventures.  When bidding with SHBC, the Company will havethe benefit of SHBC’s experienced personnel and success in the constructionindustry. In both cases the Company will be employing its new systems forproject management and controls, all designed to heighten the likelihood ofsuccess and profitability on our projects. Telesource has augmented itsmanagement team by hiring prominent construction industry professionals whohave a proven track record of strong operational and financial management onconstruction projects. Our future growth will be built on a solid foundation oftransparency, customer satisfaction, state of the art technology and a fairprofit.

 

As stated above, theTSI/SHBC JV has been awarded the contract to build a United States Embassy inSuva, Fiji. The Company has extensive experience in Fiji, primarily from buildingand operating power plants in the country. Through this experience it hasdeveloped a strong understanding of the economic and business climate and hasdeveloped strong relations with local businesses. The Department of Stateintends to build approximately 70 new embassies in the next 8 years andTSI/SHBC JV will continue to bid embassy work. As noted above, the Company recently received a Secret-level facilityclearance from U.S. government, which expands its market opportunities toinclude bids on and execution of certain classified projects.  All classified projects will be bid by theCompany and not the TSI/SHBC JV.

 

Telesource has worked extensively with the United States InformationAgency (previously known as Voice of America). Along with our recent experience on the U.S. Embassy project in Suvawith the State Department’s Overseas Buildings Office (OBO) the Company is nowpoised to take advantage of our ability to work with, understand and respond tocomplex U.S. government contractual and regulatory requirements. Theseexperiences have tremendously improved our identification of potential projectsand the technical proposalresponses. The ability to competently and competitively respond togovernment-issued requests for proposals and to execute projects when awardedto the satisfaction of government contracting officers is a skill set thatTelesource has now demonstrated on numerous projects.

 

The Company is employing state of the art management tools andtechnology to ensure that all risks inherent with the construction of complexbuildings and structures is controlled and mitigated. It is the Company’sintention to continue to employ state-of-the art management practices and toemploy the best project managers and superintendents resulting in producing themost value possible on our customer’sprojects.

 

Telesource may pursue opportunities at the municipal and state levels.We may consider international projects but we will be extremely selective andonly do so when the customer is very creditworthy and meets certainCompany-established criteria. The Companymay also bid on U.S. based non-government projects if the customers arecreditworthy and the projects meet the Company’s financial pre-requisites andconditions.

 

Although our focus over the past years has been on the internationalmarkets, the Company intends to pursue U.S. government projects located in the continental UnitedStates. In furtherance of this effort the Company is developing a strategy tosecure and expand its bonding capacity.

 

Energy Business

 

Telesource’s energy business has historically been focused on buildingand operating fossil fuel power generation plants. We have designed, built andnow operate and maintain, on a 20 year contract, a 20 MW diesel fired powerplant on the Island of Tinian in the CNMI. We also built power plants in Fijiand currently operate and maintain, on a 20 year contract basis, two separateplants with a total output of 78 MW. Looking forward, there is no doubt thatthe world needs less fossil fuel based power output and more 

 

 

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renewable andclean energy. As an IPP, Telesource may well expand on its fossil fuelportfolio, when customer demand dictates, but we are committed to pursuingclean and renewable energy projects.

 

The Company is uniquely situated to bring state of the art constructionand design capabilities to its power generation/utility customers. As a potential stake holder in BOOT or IPP powercontracts, Telesource would be involved not only on the operations andfinancial side of projects, but also in constructing the power plants therebygiving us a vested interest to ensure that the power facilities are built underthe most stringent and highest international standards.  We believe that this approach will be veryappealing to our customers and will give Telesource a competitive advantage.

 

Telesource has had longstanding financialrelationships with many international banks and equity investors. We feelconfident in our ability to raise the required equity and project financing necessary topursue financially sound and bankable energy projects.

 

Current EnergyBusiness

 

In March 2003, Telesource was awarded a 20-year, multi-milliondollar, energy conversion agreement with the Fiji Electric Authority for theoperation and maintenance of two diesel power plants with generation capacityof 78 MW. The two power plants are located in Kinoya and Vuda, Fiji. In 2006,the Company negotiated a revised contract to manage a new power plant in Kinoyaand is responsible for managing the new Caterpillar engines in the power plantand will receive additional fees for providing these services.  In addition, the Company also negotiated to receive increased fees forthe conversion of certain engines to Heavy Fuel Oil (HFO).  Furthermore, the Company has expanded itsoperations and receives fees for the maintenance on transmission and distributionlines in certain regions of Fiji.  Thiswork has been discontinued during 2008 as Fiji Electric Authority had decidedto self-perform this work rather than outsource to independent firms.

 

Our agreement with the governmental agency inthe Commonwealth of the Northern Mariana Islands is for the management of oneof their power plants. Under the terms of this agreement, Telesource designed,financed and built the power plant. Telesource obtained financing for theproject through a $25,000,000 line of credit from the Commercial Bank ofKuwait, New York branch. This loan was paid in full during 2008.  For the construction of the first phase ofthis power plant, Telesource is paid $180,000 per month for ten years by thegovernmental agency. Each monthly payment is secured by a promissory note inthe amount of $180,000 issued by the Commonwealth Utilities Corporation.

 

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

 

In the first phase of the project, thegovernmental agency also pays Telesource a production fee based upon a fixedfee per kilowatt-hour for each kilowatt-hour produced on its behalf. In thesecond phase, which added 10-megawatts of capacity, the governmental agency hasagreed to pay Telesource an additional production fee per kilowatt-hour. Inaddition, the governmental agency pays Telesource a monthly service fee foroperating and maintaining the power plant.

 

In May 2001, the governmental agency andTelesource executed Change Order No. 3 to the Tinian Power Plant Contract.Change Order No. 3 provides a suspension in the escalator on the variablepayments from January 1, 2001 to December 31, 2005. This Change Orderextends the term of the contract from an expiration of 10 years followingcommissioning of the last constructed phase (Phase II was commissioned in March 2000and therefore the contract was to have expired in March 2010) to a newexpiration date of March 31, 2020. Change Order No. 3 does notinclude an expansion of the power generation capacity of the power plant. Thepower plant will continue to operate at its current maximum generation capacityof 20 MW. Effectively; the contract was extended for an additional 10 years.Power rates agreed to under the original contract and Change Order No. 1remain unchanged. Change Order No. 3 does provide the customer with anearly termination option related to the extended agreement beginning on March 31,2010 and available annually thereafter; however, the customer is required togive a six-month notice and to pay an early termination fee of $6,000,000.Change Order No. 3 prohibits the customer from purchasing power from anysource other than Telesource for the first 30 MW. The expanded agreementexecuted under Change Order No. 3 only extends the power generationcontract term and does not require additional performance by Telesource withrespect to building additional power generation capacity.

 

Change Order No. 3 requires Telesourceto upgrade the power distribution system in certain areas of the TinianIsland. The Company is responsible for certain costs of the upgrade whichinclude labor and material. The Company has incurred approximately $1,250,176in costs associated with this upgrade through December 31, 2008.  The Company will be seeking a finalcertification for the upgrade from the client. Such certification includes certainnegotiating issues that will have an immaterial effect on the remaining cost tocomplete the upgrade. The Company completed the upgrade in 2007; however, someminor additional costs in the range of $15,000 not to exceed $25,000 may beincurred.

 

 

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Future EnergyOpportunities

 

Based on previous experience, extensive research and basic knowledge ofthe energy markets, management believes there will be a growing demand for power around the world whilecompetition, deregulation and current economic conditions could limit themarket potential and opportunities for Telesource.  However, future demand for these services isexpected to grow due to supplementing or replacement of aging equipment as wellas expansion where these applications provide a lower cost. In the U.S.,two-thirds of the country’s installed plants are 25 or more years old and needto be replaced and re-powered, principally with new combustion turbines. Theworld’s use of electricity is projected to increase by two-thirds over theforecast horizon, from 13 trillion kilowatt hours in 1999 to 22 trillionkilowatt-hours in 2020. The strongest growth rates in electricity consumptionare projected for the developing world. Our focus will be on small power plantswith generating capacity of less than 50 MW. This will ensure that regulatoryand environmental risks associated with larger plants are mitigated andcontrolled.

 

Sales andMarketing Strategies

 

The Company is primarily interested in government-funded andgovernment-sponsored construction and 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 expand.  Telesource’s research also includes analyzingnumerous government documents and reviewing previous and current internationaltenders and requests for proposals.

 

·                  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 for Telesource’sservices. Much of this effort is informational and intelligence gathering,learning the specific needs of each governmental agency while at the same timeexplaining 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 and compositionof the competition has created a fragmented market. Aggregators and brokers ofelectric power and natural gas seek profits from that portion of the commodityprice structure that can be brokered. Utilities with an interest in maintainingtheir customer base will often discount to large customers such as oilrefiners. Equipment suppliers bring innovative lease financing that supportssales of their equipment. Creating a complete development package thataddresses this fragmentation of revenue and profit is challenging.

 

Competition in this industry is primarilybased on price, with competitors discovering lower cost alternatives forproviding electricity. The electric industry is also characterized by rapidchanges in regulations, which Telesource expects could continue to increasecompetition. Telesource does not believe the Tinian power plant would besignificantly impacted by competition in the wholesale energy market since itsrevenues are subject to contracted rates which are substantially fixed forseveral years.

 

Competition for attractive development opportunities is expected to beintense as there are a number of competitors in the industry. Many of thecompanies competing in this market have substantially greater resources.Telesource believes its project development experience and its experience increating strategic alignments with other development firms with greaterfinancial and technical resources could enable Telesource to continue tocompete effectively in the development market if and when opportunities arise.Presently, Telesource believes there are a number of opportunities for projectdevelopment similar to those previously developed by Telesource.

 

From time to time, Telesource may consider merger, acquisition andjoint venturing proposals when they appear to present an opportunity to enhancestockholder value.  Telesource is not involved in any of thesediscussions or negotiations at this time and there can be no assurance that anyopportunities will develop.

 

 

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CustomerDependence

 

Telesource depends on two customers, CUC andFEA, for power-generation revenues. The loss of either single customer wouldhave a material adverse impact on the Company’s financial performance.Together, CUC and FEA represent 15.7% of Telesource’s total revenues of $29.1million. Revenues from CUC totaled $897,610 or 19.7% of combined powergeneration revenues whereas FEA totaled $3,667,009 or 80.3% of combined powergeneration revenues.

 

Since March 1999, Telesource beganderiving a portion of its revenues from the sale of electric power. UnderTelesource’s agreement with a governmental agency, the electrical powergenerated 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.

 

Telesource operates two additional powerplants for a period of 20 years within Fiji for one customer, the Fiji ElectricAuthority. Telesource isto operate the two power plants in Fiji by converting fuel provided by thecustomer into electricity for which Telesource receives a fee. The FijiElectric Authority in turn sells the power produced to various users in Fiji.If the end-user customer defaults or increases in power use do not materializeas anticipated, Telesource’s revenue base may not grow to support otheroperations.

 

Energy Regulation

 

Telesource’s projects are subject to regulation under federal and localenergy laws and regulations. Telesource is subject to the requirements established by its permittingauthorities, i.e. the Department of Environmental Quality (“DEQ”) and theEnvironmental Protection Agency (“EPA”).

 

Presently, neither the Customer Choice Act norproposed legislation dealing with U.S. energy policies directly impactsTelesource because the legislation and restructuring plan pertain to the retailmarket or new contracts in the wholesale market. However, as discussed above,Telesource could be impacted in the future by, among other things, increases incompetition as a result of deregulation. Telesource is actively monitoringthese developments in energy proceedings in order to evaluate the impact onexisting projects andalso to evaluate new business opportunities created by the restructuring of theelectric industry.

 

EnvironmentalRegulation

 

Telesource’s projects are subject to regulation under federal, foreignand local environmental laws and regulations and must also comply with theapplicable laws pertaining to the protection of the environment, primarily inthe areas of water and air pollution. These laws and regulations in many casesrequire a lengthy and complex process of obtaining and maintaining licenses,permits and approvals from federal and local agencies. As regulations areenacted or adopted in any of these jurisdictions, Telesource cannot predict theeffect of compliance therewithon 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

 

Telesource maintains general and excess liability, constructionequipment, and workers’ compensation insurance all in amounts consistent withindustry practices. Telesource believesits insurance programs are adequate subject to deductibles some of which areapproximately $700,000.

 

TSI/SHBC JV was required to obtain twostand-by letters of credit representing performance and payment bonds on itsmost recent construction project, the United States Embassy in Fiji. TheCompany was able to obtain these stand-by letters of  credit with Al Ahli Bank of Kuwait and confirmed by the Bank of New York. Thetotal of these stand-by letters of credit are $21.5 million.

 

Employees

 

As of December 31, 2008, Telesource employed 131 people,consisting of 14 managers, 14 engineers and technicians, 24 support staff and79 hourly employees. All of Telesource’s employees are non-union workers,although Telesource may employ union subcontractors from time to time.

 

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Telesource’s non-engineering level employees are hourly workers, whileits engineering and supervisory staffs are full-time employees on monthlysalaries.

 

Sources andAvailability of Raw Materials

 

Telesource relies on third parties forimportant raw materials and technical expertise. Telesource’s ability to enterinto new engagements or to conduct the business in a profitable manner will beharmed if its access to these important resources is limited or becomes toocostly.

 

Telesource relies on third-party suppliers for raw materials like wood,steel and concrete; for fabrication of technical equipment subsystems includingdiesel generation and technical expertise. Telesource’s ability to obtaincost-effective raw materials, fabrication services and technical assistance issubject to a number of external factors which are outside of its control,including:

 

·                  Third parties may increase the price of the rawmaterials, 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**

 

Telesource maintains leased office space and leases land for storage ofconstruction equipment. In the corporate offices in Lombard, Illinois,Telesource has leased space through April 30, 2011. Telesource’s Marianasubsidiary’s head office in the Commonwealth of the Northern Mariana Islandswas leased for a term that expired in December 2004 and is currently on amonth-to-month renewal. In Fiji, Telesource’s power generation subsidiary isleasing office space 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 ordinary course of its business Telesource becomes involved fromtime to time in legal proceedings and claims asserted by and againstTelesource. It is the opinion of management that the ultimate disposition ofthese routine pending matters will not have a materially adverse impact on theCompany.

 

In 1999, the Company was awarded a contract to build 45 housing unitsfor the Northern Mariana Housing Agency, a government unit of the CNMI. Thehouses were built and subsequently occupied. The Northern Marianas HousingCorporation has filed a lawsuit against Telesource and two other parties forapproximately $3.0 million in damages related to this project. These claimsinvolve allegations of various construction, design and other defects.  Subsequently, homeowners in the project filedtheir own and/or joined into this action. The Company and other defendants also have filed counter- andcross-claims.  The Company estimatesthat, if the claims against it are successful, the Company may have an estimatedliability in the range of $500,000 to $1,200,000. The Company recorded a $300,000estimated loss during 2004, $200,000 during 2006, and an additional $609,000during 2007 with respect to these claims. In 2007, the Company paid $139,000 to claimants resulting in an accrualof $970,000 at December 31, 2007. In 2008 the Company paid an additional $92,817 to claimants reducing theaccrual to $877,183 at December 31, 2008. Telesource has denied any liability and will aggressively defend itselfto mitigate and/or dismiss the claims against it..

 

**ITEM 4.****                            ****SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

None

 

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**PART II**

 

**ITEM 5.****                            ****MARKET FOR THEREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

MARKET INFORMATION. On November 1, 2001, Telesource’s common stockbegan trading on the Over-the-Counter Bulletin Board under the symbol “TSCI”and currently is traded in the Pink Sheets. Prior to that time, Telesource’scommon stock was not listed for trading.

 

The following table sets forth high and low sales prices for the commonstock for the periods indicated as reported on Pink Sheets:

 

| ** **     | ** ** | **HIGH**   | ** ** | **LOW**    | ** ** |
|----------------|------------|------------|------------|------------|------------|
| 2008           |       |       |       |       |       |
| First Quarter  |       | 0.51       |       | 0.51       |       |
| Second Quarter |       | 0.51       |       | 0.51       |       |
| Third Quarter  |       | 0.51       |       | 0.51       |       |
| Fourth Quarter |       | 0.51       |       | 0.25       |       |
| ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| 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       |       |

 

On the most recent trade date of February 23, 2009, the stocktraded at $0.10 per share for 5,000 shares. The Company did not declare anydividends in 2007 or 2008.

 

HOLDERS. As of December 31, 2008, there were 182 shareholders ofrecord.

 

EquityCompensation Plans

 

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

 

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

 

| ** **                                            | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **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 |       | 105,000                         |       |                            |       | 105,000 |   |   |   |
|                                                       |            |                                 |            |                                 |            |  |  |  |  |  |  |

 

**2000 Incentive Stock Option Plan**

 

In January 2001, the Company’s board of directors adopted the 2000Incentive Stock Option Plan that provides for the issuance of qualified stockoptions to employees. Under the terms of this plan, under which 888,000 sharesof common stock were reserved for issuance, options to purchase common stockare granted at not less than fair market value, become exercisable over a3 year period from the date of grant (vesting occurs annually onanniversaries of the grant date at 33.3% of the grant), and expire 10 yearsfrom the date of grant. As of December 31, 2008, no options had beenawarded under this plan.

 

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**UNREGISTEREDSALES OF SECURITIES**.

 

We issued unregistered securities to SHBC in the following transactionsduring 2008:

 

·                  On January 7, 2008 we issued 2,950,000 shares ofcommon stock pursuant to an exemption under Regulation S of the Securities Actfor $1,475,000.

 

·                  On February 7, 2008 we issued 600,000 shares ofcommon stock pursuant to an exemption under Regulation S of the Securities Actfor $300,000.

 

·                  On May 7, 2008 we issued 2,000,000 shares ofcommon stock pursuant to an exemption under Regulation S of the Securities Actfor $1,000,000.

 

·                  On July 7, 2008 we issued 950,000 shares ofcommon stock pursuant to an exemption under Regulation S of the Securities Actfor $475,000.

 

·                  On October 24, 2008 we issued 4,440,000 shares ofcommon stock pursuant to an exemption under Regulation S of the Securities Actfor $2,220,000.

 

·                  On December 22, 2008 we issued 364,906 shares ofcommon stock pursuant to an exemption under Regulation S of the Securities Actfor $182,453.

 

The funds received from these sales were used to reduce short-termdebt, vendor payables and support on-going operations.

 
| **ITEM 6.** | **SELECTED FINANCIAL DATA** |
|-------------|-----------------------------|

 

None

 
| **ITEM 7.** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION** |
|-------------|-------------------------------------------------------------------------------------------------|

 

The following discussion of our financial condition and plan ofoperation should be read in conjunction with our financial statements and therelated notes included elsewhere in this annual report on Form 10-K.

 

**HIGHLIGHTS**

 

Revenues for the year ended December 31, 2008 were $ 29.1 millioncompared to $16.7 million for the year ended December 31, 2007.  Net loss to common stockholders was $4.8million for 2008 compared to $2.9 million for 2007, an increase of $1.9 millionor 165.5%.  Basic and diluted net loss to common stockholders per sharewas $0.04 for 2008 compared to $0.03 per share for 2007.

 

**Liquidity**

 

As of December 31, 2008, the Company’s total assets exceeded totalliabilities by $3.1 million.  This was a $0.4 million improvement over2007.  As of December 31, 2008 theCompany had no outstanding debt. As of December 31, 2008 the Company hadan accumulated deficit of $70.7 million and total stockholders’ equity of $2.0million.

 

The Company incurred operating losses of $3.1 million and $2.2 millionfor the years ended December 31, 2008 and 2007, respectively.  As noted above, the Company incurred netlosses to common stockholders of $4.8 million and $2.9 million for the yearsended December 31, 2008 and 2007, respectively.

 

Cash provided by operating activities was $1.6 million and $0.8 millionfor the years ended December 31, 2008 and 2007, respectively.  Funds provided through financing activitiesrepresenting either debt or common stock issuance amounted to $1.0 million and$1.2 million for the years ended December 31, 2008 and 2007, respectively.

 

During 2008 management addressed operating and working capital deficitsby working with its key investor, SHBC. As reported in Item 5, herein, management raised $5.7 million in 2008and $10.1 million in 2007 through issuance of common stock.   

 

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The sales of commonstock were made through private, unregistered sales of the Company’ssecurities.  The additional equity raised during 2008 was used to pay downdebt and fund continuing operations. Much of the debt obligations coming due during 2008 wereproject-financing-based and the Company repaid a portion of these obligationswith cash generated from the collection of billings.  These collectionsalong with the additional equity were sufficient to cover Telesource’s 2008obligations.  Beyond the cash expected to be generated by the U.S. EmbassyProject in Fiji the Company expects to seek support from its principalstockholder, SHBC, on an as-needed basis only.  The Company believes that its 2009 cash requirements will be met fromcurrent cash balances as well as cash generated from on-going operations.  The current forecasts suggest a consolidatedcash shortfall of approximately $300,000. However, the Company’s forecast includes approximately $900,000 in newdevelopment expenditures that could be curtailed or eliminated ifnecessary.  In addition, the Company hasnot forecasted any new projects or associated revenues.  Therefore, the Company expects to eitherreduce spending or if required will request funding from SHBC.  SHBC has verbally committed to investadditional funds in the Company if required.

 

**OPERATING SEGMENTS**

 

Telesource’s business consists of the following operating segments:Construction, power generation and trading. Revenue of the power generation segmentincludes sales-type lease revenues. The construction segment represents revenuefrom building a U.S. Embassy in Suva, Fiji. The power generation activitiesoccurred in Fiji and the Commonwealth of Northern Mariana Islands, a U.S.commonwealth (“CNMI”).  While tradingactivities occurred in the United States, Telesource is responsible for certainwarranty work associated with the Adult Correctional Facility located inSaipan.

 

**OVERVIEW**

 

During 2008, total assets decreased from 2007 by $634,667 due primarilyto a decrease in the net investment in sales-type lease ($2.6 million) and adecrease in prepaid expenses and other current assets ($1.4 million), partiallyoffset by higher cash ($2.3 million), accounts receivable ($1.2 million) andinventories ($.2 million).  Changes inproperty, plant and equipment and other assets made up the remaining portion ofthe decrease.  On a subsidiary level theU.S. Embassy Project generated the majority of the increase in cash ($2.0million), accounts receivable ($1.1 million) and a decrease in prepaid expensesand other current assets ($1.1 million), while the Corporate Office was a netuser of cash.  TCNMI reduced itsreceivable balance due to collections on delinquent balances from theCommonwealth Utility Corporation.  Netinvestment in sales-type lease was reduced through the normal amortization ofthe sale/leaseback amount related to the construction agreement of the Tinianpower plant.

 

The Company’s vendor and related party payables decreased by $0.4million primarily due to CNMI ($0.4 million) and the Corporate Office ($0.2million).  This was partially offset byan increase in the U.S. Embassy project’s vendor payables ($0.2 million).  The Company reduced total debt by $4.6million by extinguishing the loan with the Commercial Bank of Kuwait ($4.5million) and the loans with the Australia and New Zealand Bank ($0.1 million).

 

Total revenues increased in 2008 by $12.4 million.  This was due to the U.S. Embassy Project($12.2 million) and TFL ($0.4 million), partially offset by a $0.3 milliondecrease in power generation revenues and finance lease revenues at TCNMI.  The cost of revenues increased by $13.3million from 2007 levels attributed to the U.S. Embassy Project ($14.2 million),partially offset by lower power generation costs ($0.8 million) and servicecosts ($0.1 million).

 

Operating expenses increased slightly by $0.01 million in 2008.

 

**RESULTSOF OPERATIONS**

 

**Comparisonof the twelve months ended December 31, 2008 and 2007**

 

*Construction Revenues* — Construction revenues increased to$24.2 million in 2008 from $11.9 million in 2007 due to the Company’s U.S.Embassy Project in Fiji, which began in January 2007 and is expected to becompleted by the end of April 2009. The $44.7 million revenue from this project is recorded on thePercentage of Completion method. Approximately eighty one (81%) percent of the project’s revenue has beenreported through December 2008.  In2007 twenty seven (27%) percent of the total project revenue was recognized andwas a result of mobilization, temporary facilities, minimal concrete work andsite preparation.  The constructionrevenue increase of fifty four (54%) percent of the total project revenueduring 2008 was due to the large amount of site, concrete, steel, metal,waterproofing, HVAC, plumbing and electrical work completed on the mainbuildings and perimeter walls of the new embassy compound.

 

*Service Fees — Power GenerationPlant*. Servicefees — power generation plant revenue increased 13.0 % to $4.6 million in 2008from $4.0 million in 2007. The $524K increase in service fees — powergeneration plant is attributed to an increase in the 

 

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consumer price indexin Fiji as well as an increase in generation due to lower water levels and lesshydro dam production in the fourth quarter of 2008, This combined with anincrease in heavy fuel oil generation which allows TFL to bill an additional 5cents per KWH produced higher revenues.

 

*Service Fees —*decreased to $144K in 2008 from $307K in2007.  This was a direct result of thediscontinued transmission and distribution ($98K) and Butoni Wind Farm ($66K)contracts in Fiji.

 

*Service Fees — related party —* Service fees increased to $36,571 in2008 from $5,962 in 2007.  The increasewas due to a higher demand for TSI’s purchasing services in locating productsto be used by SHBC, our primary customer for this line of revenue.

 

*Other Income* — represents rental income, whichdecreased to $510 in 2008 from $2,103 in 2007 from lower power generationequipment rentals.  This business is veryerratic and is offered only to supplement our services to our major customers.

 

*Finance Lease Revenues*. Finance lease revenues decreased 56.7%to $0.2 million in 2008 from $0.4 million in 2007. Finance lease revenue forthe Tinian power plant will decrease each year until the investment insales-type-lease is fully amortized in March, 2009.

 

***Expenses***

 

*Construction Costs (includingConstruction Costs — Related Party). *Total construction costs increased to$24.9 million in 2008 from $10.7 million in 2007.  The increase was due to on-going constructionactivities of the U.S. Embassy Project in Fiji. The project was 81% complete at December 31, 2008 and 27% completeas of December 31, 2008, respectively. Therefore, construction expenses increased due to the normal increase inactivity to build the Embassy.  Inaddition, a revised estimated cost to complete was developed during the firstquarter of 2008.  The revised estimatedcost to complete was primarily a result of increases in costs associated withthe subcontractor and, to a lesser degree, other Embassy-related constructioncosts.

 

*Operation and Maintenance Costs — PowerGeneration Plant* —Operation and maintenance costs — power generation plant decreased 21.9% to$2.8 million in 2008 from $3.6 million in 2007. The decrease was attributed to lower expenditures for building repair,machine electricals and scheduled engine maintenance costs at TCNMI.  Fiji also experienced lower enginemaintenance costs.   Engine maintenanceis performed by the Company in strict compliance with the engine manufacturer’srecommended intervals and specifications. Therefore, maintenance costs will vary depending upon several factorsincluding, but not limited to the number of hours the machines are operating aswell as the manufacturer’s specifications.

 

*Service Fee Costs —*Service feecosts decreased 29.1% to $0.3 million in 2008 from $0.4 million in 2007.  The decrease was due to the discontinuationof transmission and distribution and Butoni Wind Farm contracts in Fiji and thereduction in size of the transmission and distribution staff in TCNMI.  The latter due to less work orders as well ascontractual issues with the customer.

 

*Provision for Uncollectible Accounts—*Provision foruncollectible accounts increased to $51,697 in 2008 from $29,496 in 2007. Theincrease in the 2008 expense was wholly related to TCNMI receivables from our primarycustomer the Commonwealth Utility Corporation.

 

*Salaries and Employee Benefits* — Salaries and employee benefitsincreased by $484K due to the combination of two factors.  First, additional staff was hired at varioustimes during 2007 and the affect of a full year’s salary expense for thoseindividuals was recognized during 2008. In addition, a, Senior Vice President of Business Development was hiredin 2008.

 

*Occupancy and Equipment* — Occupancy and equipment expensesincreased $8K to $227K in 2008 from $219K in 2007. The increase resulted from afull 12 months of lease expenses in 2008 plus a monthly rent increase versusonly 8 months of lease expenses in 2007 at the Corporate Office in Lombard,Illinois.

 

*General and Administrative Expenses* — General and administrative expensesdecreased 17.7% to $2.2 million in 2008 from $2.7 million in 2007, due to theaccrual for the housing litigation pending in the CNMI in 2007 ($609K),  lesser bank fees ($85K), office supplies andprinting ($24K) and recruitment and repatriation ($39K) expenses, partiallyoffset by increases in board meeting and travel expenses ($77K) and inprofessional fees ($285K).  The increasein professional fees can be attributed mainly to the use of several outsideresources to expand the business development operations in 2008 combined withthe completion of the Sarbanes Oxley compliance work during the first quarterof 2008.

 

*Other income/ (expense)* — Net other expense increased to $1.1million in 2008 from $400K in 2007 due primarily to the foreign exchange lossof $1.0 million in 2008 resulting from $.7 million loss on the forward exchangecontracts and another $.3 million loss in conversion of our foreign operationscurrency into USD.  This loss waspartially offset by a decrease in interest expense of $600K due to thedecreasing debt in 2008.

 

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*Income Tax Expense* — Telesource recognized an income taxprovision of $614,942 in 2008 up from $301,335 in 2007, the result of income inthe Company’s Fijian operations. Telesource had net operating loss carry forwards for U.S. purposes ofapproximately $22.6 million and $20.1 million at December 31, 2008 and2007, respectively.  The Company has approximately $46.2 million of netoperating loss carry forwards for the Commonwealth of Northern Mariana Islands.

 

**SUBSEQUENTEVENTS**

 

None

 

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** **

**ITEM 8.          FINANCIALSTATEMENTS AND SUPPLEMENTARYDATA**

 

**TELESOURCE INTERNATIONAL,INC. AND SUBSIDIARIES**

** **

Consolidated Financial Statements

 

December 31, 2008 and 2007

 

**Table of Contents**

 
| Report  of Independent Registered Public Accounting Firm                     | 15     |
|------------------------------------------------------------------------------|--------|
|                                                                         |   |
| Consolidated Balance  Sheets                                                 | 16     |
|                                                                         |   |
| Consolidated  Statements of Operations                                       | 17     |
|                                                                         |   |
| Consolidated Statements of Stockholders’ Equity and  Comprehensive Loss | 18     |
|                                                                         |   |
| Consolidated Statements of Cash Flows                                        | 19     |
|                                                                         |   |
| Notes to Consolidated Financial Statements                                   | 20     |

 

**14**

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** **

** **

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

** **

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, 2008 and 2007, 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, 2008. 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 the company’sinternal control over financial reporting. Accordingly, we express no suchopinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting 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, 2008 and 2007, andthe results of its operations and its cash flows for each of the years in thetwo-year period ended December 31, 2008 in conformity with accountingprinciples generally accepted in the United States of America.

 

L J Soldinger Associates, LLC

 

DeerPark, IllinoisMarch 25, 2009

 

 

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**TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES**Consolidated Balance SheetsDecember 31, 2008 and 2007

 

 
| ** **                                                                                                                                                          | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **Assets**                                                                                                                                                          | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Current assets:                                                                                                                                                     |       |                       |       |                       |       |
| Cash and cash equivalents                                                                                                                                           |       | $                          | 6,313,886  |                       | $          | 4,032,631 |   |
| Accounts receivable less allowance for doubtful accounts of $142,235  at December 31, 2008 and $91,841 at December 31, 2007                               |       | 3,299,625                  |       | 2,129,419                  |       |
| Accounts receivable - related party                                                                                                                                 |       | —                     |       | —                     |       |
| Current portion of net investment in sales-type lease                                                                                                               |       | 454,651                    |       | 2,583,819                  |       |
| Inventories                                                                                                                                                         |       | 1,335,387                  |       | 1,091,870                  |       |
| Prepaid expenses and other current assets                                                                                                                           |       | 601,443                    |       | 2,021,013                  |       |
|                                                                                                                                                                |       |                       |       |                       |       |
| Total current assets                                                                                                                                                |       | 12,004,992                 |       | 11,858,752                 |       |
|                                                                                                                                                                |       |                       |       |                       |       |
| Net investment in sales-type lease — long term                                                                                                                 |       | —                     |       | 454,651                    |       |
| Property, plant, and equipment, net                                                                                                                                 |       | 320,263                    |       | 623,304                    |       |
| Other assets                                                                                                                                                        |       | 88,689                     |       | 111,904                    |       |
|                                                                                                                                                                |       |                       |       |                       |       |
| Total assets                                                                                                                                                        |       | $                          | 12,413,944 |                       | $          | 13,048,611 |   |
|                                                                                                                                                                |       |                       |       |                       |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                      | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Current liabilities:                                                                                                                                                |       |                       |       |                       |       |
| Current portion of long-term debt                                                                                                                                   |       | $                          | —     |                       | $          | 2,197,497 |   |
| Accounts payable                                                                                                                                                    |       | 2,053,172                  |       | 1,952,349                  |       |
| Accounts payable — related party                                                                                                                               |       | 14,530                     |       | 504,332                    |       |
| Accrued expenses                                                                                                                                                    |       | 1,823,004                  |       | 1,910,397                  |       |
| Interest payable — related party                                                                                                                               |       | 138,680                    |       | 64,915                     |       |
| Other current liabilities                                                                                                                                           |       | 698,957                    |       | —                     |       |
| Billings in excess of costs and estimated earnings                                                                                                                  |       | 4,629,941                  |       | 1,325,384                  |       |
| Total current liabilities                                                                                                                                           |       | 9,358,284                  |       | 7,954,874                  |       |
|                                                                                                                                                                |       |                       |       |                       |       |
| Long-term debt                                                                                                                                                      |       | —                     |       | 2,424,994                  |       |
| Total liabilities                                                                                                                                                   |       | 9,358,284                  |       | 10,379,868                 |       |
|                                                                                                                                                                |       |                       |       |                       |       |
| Minority interest                                                                                                                                                   |       | 1,091,870                  |       | 1,112,757                  |       |
|                                                                                                                                                                |       |                       |       |                       |       |
| Commitments and Contingencies                                                                                                                                       |       |                       |       |                       |       |
|                                                                                                                                                                |       |                       |       |                       |       |
| Stockholders’ equity:                                                                                                                                          |       |                       |       |                       |       |
| Convertible Preferred Stock, $0.01 par value authorized 50,000,000  shares, none issued and outstanding at December 31, 2008 and  December 31, 2007.      |       |                       |       |                       |       |
| Common stock, $0.01 par value. Authorized 200,000,000 shares, 136,640,567  issued at December 31, 2008 and 125,335,661 issued at  December 31, 2007. |       | 1,366,406                  |       | 1,253,357                  |       |
| Additional paid-in capital                                                                                                                                          |       | 71,521,369                 |       | 65,981,965                 |       |
| Accumulated deficit                                                                                                                                                 |       | (70,663,993                | )          | (65,829,850                | )          |
| Accumulated comprehensive income (loss)                                                                                                                             |       | (259,992                   | )          | 150,514                    |       |
| Total stockholders’ equity                                                                                                                                     |       | 1,963,790                  |       | 1,555,986                  |       |
|                                                                                                                                                                |       |                       |       |                       |       |
| Total liabilities, minority interest and stockholders’ equity                                                                                                  |       | $                          | 12,413,944 |                       | $          | 13,048,611 |   |

See accompanying notes to consolidated financial statements

 

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**TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES**Consolidated Statements of OperationsYears ended December 31, 2008 and 2007

 

 

 
| ** **                                               | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|----------------------------------------------------------|------------|-------------|------------|-------------|------------|
| Revenues:                                                |       |        |       |        |       |
| Construction revenues                                    |       | $           | 24,159,865 |        | $          | 11,918,054 |   |
| Service fees                                             |       | 144,094     |       | 307,172     |       |
| Service fees — power generation plant               |       | 4,564,619   |       | 4,040,856   |       |
| Service fees — related party                        |       | 36,571      |       | 5,962       |       |
| Finance lease revenue                                    |       | 176,181     |       | 407,136     |       |
| Other revenue                                            |       | 510         |       | 2,103       |       |
| Gross revenues                                           |       | 29,081,840  |       | 16,681,283  |       |
| Costs and expenses:                                      |       |        |       |        |       |
| Construction costs                                       |       | 24,590,312  |       | 10,398,833  |       |
| Construction costs - related party                       |       | 312,000     |       | 311,269     |       |
| Operation and maintenance costs - power generation plant |       | 2,776,407   |       | 3,552,955   |       |
| Costs of service                                         |       | 286,444     |       | 404,258     |       |
| Provision for unbilled and uncollected accounts          |       | 51,697      |       | 29,496      |       |
| Cost of revenues                                         |       | 28,016,860  |       | 14,696,811  |       |
| Gross profit                                             |       | 1,064,980   |       | 1,984,472   |       |
| Operating expenses:                                      |       |        |       |        |       |
| Salaries and employee benefits                           |       | 1,739,141   |       | 1,255,324   |       |
| Occupancy and equipment                                  |       | 61,632      |       | 82,544      |       |
| Occupancy — related party                           |       | 165,603     |       | 136,423     |       |
| General and administrative                               |       | 2,222,474   |       | 2,700,322   |       |
| Total operating expenses                                 |       | 4,188,850   |       | 4,174,613   |       |
| Operating income/(loss)                                  |       | (3,123,870  | )          | (2,190,141  | )          |
| Other income (expense):                                  |       |        |       |        |       |
| Interest expense, net                                    |       | (150,189    | )          | (773,712    | )          |
| Interest expense - related party                         |       | (73,764     | )          | (64,915     | )          |
| Foreign exchange gain/(loss)                             |       | (996,241    | )          | 243,178     |       |
| Other income/(expense), net                              |       | 103,976     |       | 190,322     |       |
| Total other expense                                      |       | (1,116,218  | )          | (405,127    | )          |
|                                                     |       |        |       |        |       |
| Loss before income taxes and minority interest           |       | (4,240,088  | )          | (2,595,268  | )          |
| Income tax expense                                       |       | 614,942     |       | 301,335     |       |
|                                                     |       |        |       |        |       |
| Net loss to common stockholders before minority interest |       | (4,855,030  | )          | (2,896,603  | )          |
| Minority interest                                        |       | (20,887     | )          | 12,677      |       |
|                                                     |       |        |       |        |       |
| Net loss to common stockholders after minority interest  |       | $           | (4,834,143 | )           | $          | (2,909,280 | ) |
|                                                     |       |        |       |        |       |
| Basic and diluted net loss per share                     |       | $           | (0.04      | )           | $          | (0.03 | ) |
| Weighted average shares outstanding                      |       | 131,360,809 |       | 111,801,721 |       |

 

Seeaccompanying notes to consolidated financial statements.

 

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** **

**TELESOURCE INTERNATIONAL, INC.**

** **

**AND SUBSIDIARIES**

 

Consolidated Statements of Stockholders’ Equity (Deficit) andComprehensive Loss

 

Yearsended December 31, 2008 and 2007

 
| ** **                                                     | ** ** | **Shares**  | ** ** | **value** | ** ** | **capital** | ** ** | **deficit** | ** ** | **loss**   | ** **  | **income (loss)** | ** ** | **equity  (deficit)** | ** ** |
|----------------------------------------------------------------|------------|-------------|------------|-----------|------------|-------------|------------|-------------|------------|------------|-------------|-------------------|------------|-----------------------|------------|
| Balance at  December 31, 2006                             |       | 105,067,661 |       | $         | 1,050,677  |        | $          | 56,050,645  |       | $          | (62,920,570 | )                 |       |                  | $          | 8,284 |   | $ | (5,810,964 | ) |
|                                                           |       |        |       |      |       |        |       |        |       |       |        |              |       |                  |       |
| Stockholders’  equity                                     |       |        |       |      |       |        |       |        |       |       |        |              |       |                  |       |
| Controlling  interests                                         |       |        |       |      |       |        |       |        |       |       |        |              |       |                  |       |
| Sale of common  stock -   20,268,000 shares 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            | )          |
| Dividend                                                       |       | —      |       | —    |       | —      |       | —      |       | —     |        | —            |       | —                |       |
| 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 |   |
|                                                           |       |        |       |      |       |        |       |        |       |       |        |              |       |                  |       |
| Stockholders’  equity                                     |       |        |       |      |       |        |       |        |       |       |        |              |       |                  |       |
| Controlling  interests                                         |       |        |       |      |       |        |       |        |       |       |        |              |       |                  |       |
| Sale of common  stock -  11,304,906 shares at $0.50 per share  |       | 11,304,906  |       | 113,049   |       | 5,539,404   |       | —      |       | —     |        | —            |       | 5,652,453             |       |
| Net loss                                                       |       | —      |       | —    |       | —      |       | (4,834,143  | )          | (4,834,143 | )           | —            |       | (4,834,143            | )          |
| Foreign currency  translation adjustment                       |       |        |       |      |       |        |       |        |       | (410,506   | )           | (410,506          | )          | (410,506              | )          |
| Comprehensive  loss                                            |       | —      |       | —    |       | —      |       | —      |       | $          | (5,244,649  | )                 | —     |                  | —     |   |
| Total                                                          |       | 11,304,906  |       | 113,049   |       | 5,539,404   |       | (4,834,143  | )          |       |        | (410,506          | )          | 407,804               |       |
|                                                           |       |        |       |      |       |        |       |        |       |       |        |              |       |                  |       |
| Balance at  December 31, 2008                             |       | 136,640,567 |       | $         | 1,366,406  |        | $          | 71,521,369  |       | $          | (70,663,993 | )                 |       |                  | $          | (259,992 | ) | $ | 1,963,790 |   |

 

See accompanying notes to consolidated financial statements

 

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**TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES**Consolidated Statements of Cash Flows

Yearsended December 31, 2008 and 2007

 

 

| ** **                                                                                                      | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Cash flows from operating activities:                                                                           |       |       |       |       |       |
| Net loss                                                                                                        |       | $          | (4,834,143 | )          | $          | (2,909,280 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: cash used in operating activities: |       |       |       |       |       |
| Depreciation                                                                                                    |       | 269,020    |       | 260,201    |       |
| Gain on sale or disposal of fixed assets                                                                        |       | 33,059     |       | (37,404    | )          |
| Provision for unbilled and uncollected accounts                                                                 |       | 50,394     |       | 29,496     |       |
| Minority interest                                                                                               |       | (20,887    | )          | 12,677     |       |
| Changes in assets and liabilities:                                                                              |       |       |       |       |       |
| Accounts Receivable                                                                                             |       | (1,287,171 | )          | (906,095   | )          |
| Accounts Receivable - related party                                                                             |       | —     |       | 2,582      |       |
| Prepaid expenses and other current assets                                                                       |       | 986,269    |       | (1,351,596 | )          |
| Net investment in sales-type lease                                                                              |       | 2,583,819  |       | 2,352,864  |       |
| Other assets                                                                                                    |       | 15,651     |       | (70,288    | )          |
| Accounts payable                                                                                                |       | 249,153    |       | 1,424,355  |       |
| Accounts payable - related party                                                                                |       | (489,802   | )          | 291,358    |       |
| Accrued expenses                                                                                                |       | (22,061    | )          | 332,705    |       |
| Interest payable - related party                                                                                |       | 73,764     |       | 64,915     |       |
| Billings in excess of cost and estimated earnings                                                               |       | 3,304,557  |       | 1,325,384  |       |
| Other liabilities                                                                                               |       | 697,781    |       | (10,110    | )          |
| Net cash provided by operating activities                                                                       |       | 1,609,403  |       | 811,764    |       |
|                                                                                                            |       |       |       |       |       |
| Proceeds from sale of equipment                                                                                 |       | 66,839     |       | 44,500     |       |
| Capital expenditures                                                                                            |       | (97,637    | )          | (311,280   | )          |
| Net cash (used in) investing activities                                                                         |       | (30,798    | )          | (266,780   | )          |
| Cash flows from financing activities:                                                                           |       |       |       |       |       |
| Payments of short-term debt                                                                                     |       | (4,617,730 | )          | (398,123   | )          |
| Payments of long-term debt                                                                                      |       | —     |       | (9,616,413 | )          |
| Proceeds from sale of common stock                                                                              |       | 5,652,453  |       | 10,134,000 |       |
| Capital contributions from minority interest holders                                                            |       | —     |       | 1,100,080  |       |
| Net cash provided by financing activities                                                                       |       | 1,034,723  |       | 1,219,544  |       |
|                                                                                                            |       |       |       |       |       |
| Effect of exchange rate changes on cash                                                                         |       | (332,073   | )          | 73,896     |       |
|                                                                                                            |       |       |       |       |       |
| Net increase in cash and cash equivalents                                                                       |       | 2,281,255  |       | 1,838,424  |       |
| Cash and cash equivalents at beginning of period                                                                |       | 4,032,631  |       | 2,194,207  |       |
| Cash and cash equivalents at end of period                                                                      |       | $          | 6,313,886  |       | $          | 4,032,631 |   |
| Supplemental disclosure:                                                                                        |       |       |       |       |       |
| Cash paid during the year for interest                                                                          |       | $          | 899,256    |       | $          | 873,970 |   |
| Cash paid during the year for income taxes                                                                      |       | 440,290    |       | 423,580    |       |

 

See accompanying notes tocondensed consolidated financial statements.

 

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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 and subsequent approved change orders in the amount of $2.1 millionto build a United States Embassy in Suva, Fiji. Construction is anticipated tobe completed in 2009.

 

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 wholly-owned subsidiary, Telesource (Fiji), Ltd., handles theCompany’s power generation 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 received $3.4 and $2.6 million in equity infusion foroperations from SHBC related companies in 2008 and 2007, respectively. Duringthe latter part of 2005, a new management team was promoted and hired todevelop a plan to improve operations. The new management team has implementednew marketing and sales plans as well as improvements in the systems andcontrols.  Management plans to improveprofitability and cash flow by reducing costs and securing additional projects.However, no assurance can be given that such increased revenues will beachieved. The Company has and expects to continue to seek support from itsprincipal stockholder, SHBC, for its operations, and for working capital needs,and business expansion as may be required. SHBC has continued its support of theCompany.

 

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.

 

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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 31,2008, the Company’s total assets exceeded its total liabilities by $3.1million. The Company relies heavily on financing its principal investors, SHBCto support its operations. As of December 31, 2008 the Company had nooutstanding debt. As of December 31, 2008 the Company had an accumulateddeficit of $70.7 million and total stockholders’ equity of $2.0 million.

 

The Company incurred anet loss to common stockholders of $4,834,143 and $2,909,280 for the yearsended December 31, 2008 and 2007, respectively.

 

**Net cashprovided by financing activities was $1,034,723 and $1,219,544 for the yearsended December 31, 2008 and 2007, 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.

 

The financial position andresults of operations of the Company’s TSI/SHBC JV operations are recordedusing the local currency (Fijian dollars) however; the Company’s functionalcurrency is U.S. dollars.  The financialstatements 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 the U.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, 2008, 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 atnumerous financial institutions. Certain of these financial institutions arelocated in foreign countries which do not have Federal Deposit InsuranceCorporation, “FDIC” insurance. Those accounts covered by the FDIC are insuredup to $250,000 per institution. As of December 31, 2008, the amount ofbank deposits that exceeded or are not covered by the FDIC insurance was$5,983,850.

 

***(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 includes provisionsof termination for convenience by the party contracting with us; suchprovisions also allow payment to us for the work performed through the date oftermination.  Revenues recognized underthe Percentage of Completion methodology, require applying a percentage (actualcosts incurred through the reporting date divided by the total estimated coststo complete the project) 

 

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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 costsrequires judgment of the value and timing of material, labor, scheduling,product deliveries, contractual performance standards, liability claims, impactof change 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 andsubcontractors for costs that we believe were not our responsibility or may bebeyond our scope of work.  The companywill include costs associated with these claims in their financial informationwhen such costs can be reliably identified and estimated.  Similarly, the company will include inrevenue amounts equal to costs for claims, where the outcome is probable thatthe claim will be found in the favor of the company.   The Company will record a provision forlosses 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 is probablethat 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 servicesprovided, the Company recognizes such contingent payments as additional financelease revenue as they are earned.

 

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

 

***(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.

 

 

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***(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 2008 and 2007 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 acorporation tax return for this commonwealth. Telesource Fiji, Ltd. is a Fijiancorporation and 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 and liabilitiesof a change in tax rates is recognized in income in the period that includesthe 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 January 1, 1985, 95% of any income tax due on the CNMI sourceincome is rebated to the extent that it exceeds local business gross receiptstaxes. In 1995, the rebate percent was decreased and currently ranges from 90%decreasing to 50% depending upon the amount of taxable income. The amounts paidfor the gross receipts tax amounted to $74,108 and $79,677 in 2008 and 2007,respectively, and are included in general and administrative expenses on theaccompanying consolidated statements of operations.

 

On January 1,2007 the Company adopted FASB Interpretation No. 48 (“FIN 48”), “Accountingfor Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,”which seeks to reduce the diversity in practice associated with the accountingand reporting for uncertainty in income tax positions. This Interpretationprescribes a comprehensive model for the financial statement recognition,measurement, presentation and disclosure of uncertain tax positions taken orexpected to be taken in income tax returns.

 

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

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting 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 

 

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value as the notes havebeen 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 Company adopted SFAS No. 123R, “Share-Based Payment,” as of January 1,2006, using the modified prospective application. Under this method, allequity-based compensation awarded after the adoption date will be determinedunder the fair value provision of SFAS No. 123R. Additionally, for allequity-based compensation awarded prior to the adoption date, compensation forthe portion of awards for which the requisite service is performed after theadoption date is recognized as service is rendered.

 

There was no stock basedcompensation granted in 2008 or 2007.

 

***(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***

 

On January 1, 2008,the Company adopted SFAS No. 157,*FairValue Measurements* (“SFAS 157”), for financial assets and financialliabilities. SFAS 157 defines fair value, establishes a framework for measuringfair value under GAAP, and expands disclosures about fair value measurements.The Company does not believe that the partial adoption of SFAS 157 has had orwill have a material impact on the Company’s financial statements. In February 2008,the FASB issued a FASB Staff Position (“FSP”), FSP SFAS 157-2,*  EffectiveDate of FASB Statement No. 157* , to defer the effective date ofSFAS 157 for nonfinancial assets and nonfinancial liabilities, except for itemsthat are recognized or disclosed at fair value in the financial statements on arecurring basis. The FSP defers the effective date of SFAS 157 to fiscal yearsbeginning after November 15, 2008. The Company does not expect theadoption of FSP SFAS 157-2 to have a significant impact on the financialstatements

 

On January 1, 2008,the Company adopted SFAS No. 159,*TheFair Value Option for Financial Assets and FinancialLiabilities — Including an Amendment of FASB Statement No. 115*  (“SFAS 159”). This Statement providescompanies with an option to measure, at specified election dates, manyfinancial instruments and certain other items at fair value that are notcurrently measured at fair value. A company that adopts SFAS 159 will reportunrealized gains and losses on items for which the fair value option has beenelected in earnings at each subsequent reporting date. This Statement alsoestablishes presentation and disclosure requirements designed to facilitatecomparisons between entities that choose different measurement attributes forsimilar types of assets and liabilities. The adoption of SFAS 159 has not had amaterial impact on the Company’s financial statements.

 

In December 2007,the Financial Accounting Standards Board (FASB) issued SFAS No. 160,*Interests in Consolidated FinancialStatements — an amendment of ARB No. 51*  (“SFAS 160”), which impacts the accountingfor minority interest in the consolidated financial statements of filers. The statementrequires the reclassification of minority interest to the equity section of thebalance sheet and the results from operations attributed to minority interestto be included in net income. The related minority interest impact on earningswould then be disclosed in the summary of other comprehensive income. Thestatement is applicable for all fiscal years beginning on or after December 15,2008 and earlier adoption is prohibited. The adoption of this standard willrequire prospective treatment. The Company is currently evaluating the effectthat the adoption of SFAS 160 will have on its results of operations andfinancial position. However, the adoption of SFAS 160 is not expected to have amaterial impact on the Company’s financial statements.

 

In December 2007,FASB issued SFAS No. 141R,*BusinessCombinations* (“SFAS 141R”), which impacts the accounting forbusiness combinations. The statement requires changes in the measurement ofassets and liabilities required in favor of a fair value method consistent withthe guidance provided in SFAS 157 (see above). Additionally, the statementrequires a change in accounting for certain acquisition related expenses andbusiness adjustments which no longer are considered part of the purchase price.Adoption of this standard is required for fiscal years beginning after December 15,2008. Early adoption of this standard is not permitted. The statement requiresprospective application for 

 

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all acquisitions afterthe date of adoption. The Company is currently evaluating the effect that theadoption of SFAS 141R will have on its results of operations and financialposition. However, the adoption of SFAS 141R is not expected to have a materialimpact on the Company’s financial statements.

 

In March 2008, FASBissued SFAS No. 161,*Disclosures aboutDerivative Instruments and Hedging Activities an amendment to FASB Statement No. 133*  (“SFAS 161”). SFAS No. 161 is intendedto improve financial standards for derivative instruments and hedgingactivities by requiring enhanced disclosures to enable investors to betterunderstand their effects on an entity’s financial position, financialperformance, and cash flows. Entities are required to provide enhanceddisclosures about: (a) how and why an entity uses derivative instruments; (b) howderivative instruments and related hedged items are accounted for underStatement 133 and its related interpretations; and (c) how derivativeinstruments and related hedged items affect an entity’s financial position,financial performance, and cash flows. It is effective for financial statementsissued for fiscal years beginning after November 15, 2008, with earlyadoption encouraged. The Company does not expect the adoption of this statementto have a material effect on its financial statements

 

**(3)****                    ****CustomerConcentrations**

 

The Company has aconcentration of risk with two significant customers. The Company wascontracted by the Commonwealth Utilities Corporation (CUC) to construct andoperate a power generation facility. In March 1999, the power generationplant became operational. Power revenues from this plant began in March 1999and are earned under the terms of a long-term power energy conversion agreementwith this customer. Revenues from the CUC were approximately $0.9 million for2008 and 2007.

 

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 $0.4million and $2.5 million as of December 31, 2008 and 2007, respectively.The discounted value of the promissory notes was $0.4 million and $2.4 millionat December 31, 2008 and 2007, 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 $0.1million and $0.7 million at December 31, 2008 and 2007, 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 3.1% and 5.5% of the Company’s revenues for 2008 and 2007,respectively. Gross receivables for the investment in sales-type lease were$0.5 million and $3.2 million at December 31, 2008 and 2007, 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 $3.7 million and $3.1 million in 2008and 2007, respectively. Revenues from FEA were 13% and 19% of the Company’stotal revenues for 2008 and 2007, 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 aUnited States Embassy in Suva, Fiji. This project began in 2007. Revenue fromthis customer totaled $24.2 million and $11.9 million in 2008 and 2007,respectively.

 

 

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

 

Accountsreceivable consist of the following at December 31, 2008 and 2007:

 
| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2008**              | ** ** | **2007** | ** ** |
|                                             |       |                  |       |   |   |
| Construction contracts completed and in progress |       | $                     | 2,353,408  |   | $ | 1,262,635 |   |
| Trade and Other                                  |       | 1,088,452             |       | 958,625 |   |
|                                             |       | 3,441,860             |       | 2,221,260 |   |
| Less allowance for doubtful accounts             |       | 142,235               |       | 91,841 |   |
| Net accounts receivable                          |       | $                     | 3,299,625  |   | $ | 2,129,419 |   |

 

Direct write-offs ofuncollectible accounts were $0 in 2008 and 2007.

 

During the twelve monthperiod ended December 31, 2008 the accounts receivable balance ofCommonwealth Utilities Corporation (CUC), the major power production customerof TCNMI, decreased $103,097 or 20.5% to $400,359 from $503,456.

 

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

 
| ** **                                     | ** ** | **2008**  | ** ** | **2007**  | ** ** |
|------------------------------------------------|------------|-----------|------------|-----------|------------|
| Buildings/Leasehold improvements               |       | $         | 105,688    |      | $          | 90,208 |   |
| Transportation equipment                       |       | 342,969   |       | 525,702   |       |
| Construction machinery and equipment           |       | 147,409   |       | 148,724   |       |
| Office furniture and equipment                 |       | 494,807   |       | 486,630   |       |
| Computer and communication equipment           |       | 104,802   |       | 104,438   |       |
|                                           |       | 1,195,675 |       | 1,355,702 |       |
| Less accumulated depreciation and amortization |       | 875,412   |       | 732,398   |       |
| Net property, plant, and equipment             |       | $         | 320,263    |      | $          | 623,304 |   |

 

Total depreciation expensewas $269,020 and $260,201, in 2008 and 2007, respectively. Depreciation forconstruction machinery and equipment is recognized as a project expense whenappropriate.

 

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**(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 thefirst 5,140,000 Kwh produced each month. The variable payments are recognizedbased upon power produced and delivered to the customer as earned during eachaccounting period. Service fees earned in 2008 and 2007 were not in excess ofthe estimated fair value of the services performed.

 

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** | ** ** |
|-----------------------------------------|------------|----------------------|------------|------------------------|------------|
| ** **                              | ** ** | **2008**             | ** ** | **2007**               | ** ** | **inception** | ** ** |
| Guaranteed monthly payment              |       | $                    | 360,000    |                   | $          | 2,520,000 |   | $ | 21,600,000 |   |
| Minimum operation and maintenance fee   |       | 100,000              |       | 700,000                |       | 6,000,000 |   |
| Total minimum lease payments receivable |       | 460,000              |       | 3,220,000              |       | 27,600,000 |   |
| Less unearned income                    |       | 5,349                |       | 181,530                |       | 9,750,000 |   |
| Net investment in sales-type lease      |       | $                    | 454,651    |                   | $          | 3,038,470 |   | $ | 17,850,000 |   |
|                                    |       |                 |       |                   |       |   |   |
| Current portion                         |       | $                    | 454,651    |                   | $          | 2,583,819 |   |   |   |
| Long-term portion                       |       | 0                    |       | 454,651                |       |   |   |
|                                    |       |                 |       |                   |       |   |   |
|                                    |       | $                    | 454,651    |                   | $          | 3,038,470 |   |   |   |

 

The future minimum leasepayments to be collected by the Company are $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 $897,610 and $925,784 for the years ended December 31,2008 and 2007, respectively.

 

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

 

Long-term constructioncontracts in progress are accounted for using the percentage-of-completionmethod. In 2008 and 2007, respectively, balances for billings in excess of costand estimated earnings were $4,629,941 and $1,325,384. Total billings for theproject in 2008 and 2007 totaled $27,464,421 and $13,205,379 respectively.

 

 

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

 

Long-term debt consistsof the following at December 31, 2008 and 2007:

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **2008**              | ** ** | **2007**              | ** ** |
| 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 final  payment of $2.2 million was made in October 2008 and the remaining  $180,000 installments were also paid in full by December 15, 2008. |       | —                |       | 4,540,000             |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |       |                  |       |                  |       |
| 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. The three leases were paid in full by  September 2008.                                                                                                                                      |       | —                |       | 82,491                |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |       |                  |       |                  |       |
| Notes Payable                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | $                     | —     |                  | $          | 4,622,491 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |       |                  |       |                  |       |
| Less current portion                                                                                                                                                                                                                                                                                                                                                                                                                              |       | —                |       | 2,197,497             |       |
| Long term portion                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | $                     | —     |                  | $          | 2,424,994 |   |

 

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 $114,180 USD at December 31, 2008)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, 2008 the Company has not drawn upon the creditfacility.

 

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

 

The Company has a 401Knon-matching retirement plan named Telesource International, Inc.Retirement Plan (“Plan”). The Plan allows employees who elect to participate,to contribute up to the allowable maximum amount into a fund managed byPaychex. There was $104K in employee contributions to this plan in 2008 and nocontributions in 2007.

 

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

 

*PreferredStock*

 

The Company has 50 million shares of Series A CumulativeConvertible Preferred Stock (The Preferred Shares) authorized. None of thesePreferred Shares are issued nor outstanding as of December 31, 2008 or2007. Holders of the Preferred Shares are entitled to receive cumulative cashdividends at the annual rate of 6.5%. The Preferred Shares have no votingrights and rank senior as to dividends and upon liquidation to the commonstock.

 

Common Stock Offerings

 

As of December 31,2008, 136,640,567 shares of the Company’s common stock were issued andoutstanding compared to 125,335,661 shares at December 31, 2007.

 

During 2008 Telesourceissued 11,304,906 Common Shares to Ernil and Halbarad at a price of $0.50 pershare totaling $5,652,453.

 

 

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**(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:

 

| ** **                                                                                             | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| Numerator — basic and diluted loss per share Net loss                                             |       | $           | (4,834,143 | )           | $          | (2,909,280 | ) |
| Less: Preferred stock dividends                                                                        |       | —      |       | —      |       |
| Net loss available to common stockholders                                                              |       | $           | (4,834,143 | )           | $          | (2,909,280 | ) |
|                                                                                                   |       |        |       |        |       |
| Denominator — basic and diluted loss per share — weighted average  common shares outstanding |       | 131,360,809 |       | 111,801,721 |       |
| Basic and diluted earnings per share                                                                   |       | $           | (0.04      | )           | $          | (0.03 | ) |

 

Fully-vested options topurchase 180,000 shares of common stock granted under the 2000 non-employeedirector stock option plan, and 500,000 and 2,999,999 warrants were outstandingat December 31, 2008 and 2007, respectively.  These warrants were not included in thecomputation of diluted earnings per share as the effect of the conversion ofthese instruments would be anti-dilutive (i.e. reduce the loss per share).

 

These warrants wereissued at various dates during 2003 and 2004. 2,499,999 of these warrants expired in 2008 and the remaining 500,000warrants will expire in 2009.  Thesewarrants are exercisable at $0.50 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 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 a 3 yearperiod from the date of grant (vesting occurs annually on the grant date at33.3% of the grant), and expire 10 years from the date of grant.

 

Changes in optionsoutstanding are summarized as follows:

 
| ** **                                            | ** ** | **December 31, 2008**    | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| ** **                                            | ** ** | **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 |       | 105,000                       |       |                       |       | 105,000 |   |   |   |
|                                                       |            |                               |            |                            |            |  |  |  |  |  |  |

 

Participants of this plan have 90 days toexercise their options after separation of service.

 

***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, 2008, no optionshad been awarded under this plan.

 

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***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, 2008, nooptions had been awarded under this plan.

 

**(13)****             ****Financial Instruments WithOff-balance Sheet 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 31,2008, the Company had entered into foreign exchange contracts in Fijian dollarsamounting to $10.6 million and in U.S. dollars in the amount of $6.7million.  These contracts are fordelivery of Fijian dollars over a period of five months.  The Company has recorded $697K of foreignexchange losses in its consolidated statement of operations as of December 31,2008 relating to the net present value of these contracts.

 

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 zero and$4.6 million at December 31, 2008 and 2007, respectively. The Company’smanagement does not believe it is practicable to estimate the fair values ofthese financial instruments and does not expect any losses from theirresolution.

 

**(14)****             ****Fair Value Disclosures**

 

Effective January 1,2008, we adopted FAS 157 which requires disclosures about our assets andliabilities that are measured at fair value. Further information about suchassets and liabilities is presented below. We have not applied the provisionsof FAS 157 to non-financial assets, such as our property and equipment andcertain other assets, which are measured at a fair value for impairmentassessment. We will apply the provisions of FAS 157 to these assets andliabilities beginning January 1, 2009 in accordance with FASB StaffPosition No. 157-2, “Effective Date of FASB Statement No. 157”.

 

The Company’s mostsignificant financial asset that is affected by SFAS No. 157 is ourforeign exchange contracts as described in Footnote 8. The value of thesecontracts was reported in the financial statements as of December 31, 2008as a liability of $697K.

 

The foreign exchangecontracts are for the purchase of Fijian dollars at specific dates. The valueof the foreign exchange contracts are developed from an active quotationmarket. This market has significant volume, transactions and frequency toprovide pricing in formation on an ongoing (hourly) basis. Therefore, theCompany classifies the pricing of these transactions to be a Level 1 input asdescribed under SFAS No. 157.

 

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**(15)****             ****Related-party Transactions — Notdescribed elsewhere**

 

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 contractor withapproximately 1750 employees and over fifty (50) years of experience. SHBC andits affiliates were the sole stockholders of Telesource International prior to July 1999and now own approximately 96.8% of the common stock outstanding. SHBC andTelesource International bid and compete within the same industries; however,SHBC has agreed, in writing, not to bid projects within the United States andits possessions. Additionally, SHBC and its majority stockholders, FouadBehbehani and Nasrallah Behbehani, had signed as guarantors on Telesource CNMI’spromissory note with the Commercial Bank of Kuwait, New York Branch.  Such promissory note was paid in full as of December 15,2008.   See note 8. Furthermore, as notedabove SHBC and Telesource International, Inc. have formed a joint venture(TSI/SHBC JV) to bid on future construction projects.

 

Additionally, from time totime 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 2008 and 2007.

 

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

 
| ** **                   | ** ** | **December 31,** | ** ** |
|------------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Sales                        |       | $                     | 36,571     |   | $ | 5,962 |   |
| Total related party revenues |       |                  |       |   |   |
|                              |            |                       |            |  |  |  |  |

 

The following tablesummarizes all balances related to transactions with SHBC as of December 31,2008 and 2007:

 
| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Accounts payable to SHBC |       | $                     | 12,000     |   | $ | 493,626 |   |
|                          |            |                       |            |  |  |  |  |

 

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

 
| ** **                         | ** ** | **Twelve Months Ended  December 31, 2008** | ** ** | **Twelve Months Ended  December 31, 2007** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| Consulting Fees                    |       | $                                               | 300,000    |                                            | $          | 300,000 |   |
| Costs on standby letters of credit |       | 12,000                                          |       | 99,369                                          |       |
| Interest (on unreturned capital)   |       | 73,764                                          |       | 66,915                                          |       |
|                               |       |                                            |       |                                            |       |
| Total                              |       | $                                               | 385,764    |                                            | $          | 466,284 |   |

 

SHBC has an agreementwith the joint venture to provide consulting services for $25,000 per monththrough January of 2009 for the U.S. Embassy project in Fiji. The jointventure limited partnership agreement between SHBC and Telesource also requiresa payment to SHBC of 6.5% per annum on the unreturned capital.

 

The Company shares officespace, certain office services, maintenance fee for ViewWise software as wellas personnel in support of their operations with Computhink.  The Company paid Computhink, Inc. atotal of $69,626 in 2008 and $ 62,819 in 2007. The Company incurred expenses from Computhink, Inc. of $108K in2008 and $80K in 2007 for office rent and related costs.  In addition, the Company also incurredexpenses from Computhink, Inc. of $45K in 2008 and $6K in 2007 forpersonnel services.   In turn, theCompany has received credits against the billings from Computhink in the amountof $90K in 2008 and $28K in 2007 for personnel consulting services and otherincidental expenses.  The Company owedComputhink $2,530 and $9,701, respectively, at December 31, 2008 and 2007.See note 17.

 

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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 $73,905 and $83,932 in 2008and 2007, respectively. The following table summarizes balances payable toRetsa as of December 31, 2008 and 2007:

 

| ** **                | ** ** | **December 31,** | ** ** |
|---------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Accounts payable to Retsa |       | $                     | —     |   | $ | 1,005 |   |
|                           |            |                       |            |  |  |  |  |

 

Total related partyaccounts payable are summarized as follows:

 

| ** **                     | ** ** | **December 31** | ** ** |
|--------------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2008**             | ** ** | **2007** | ** ** |
| Accounts payable to SHBC       |       | $                    | 12,000     |   | $ | 493,626 |   |
| Accounts payable to Computhink |       | 2,530                |       | 9,701 |   |
| Accounts payable to Retsa      |       | 0                    |       | 1,005 |   |
|                           |       | $                    | 14,530     |   | $ | 504,332 |   |

 

**(16)    IncomeTaxes**

 

Income tax expense(benefit) consists of:

 

| ** **                         | ** ** | **Current** | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|------------------------------------|------------|-------------|------------|--------------|------------|-----------|------------|
| Year ended December 31, 2008: |       |        |       |         |       |      |       |
| U.S. Federal                       |       | $           | —     |         | $          | —    |       | $ | — |   |
| State and local                    |       | —      |       | —       |       | —    |       |
| U.S. possession                    |       | —      |       | —       |       | —    |       |
| Foreign                            |       | 614,942     |       | —       |       | 614,942   |       |
|                               |       | 614,942     |       | —       |       | 614,942   |       |
| Year ended December 31, 2007: |       |        |       |         |       |      |       |
| U.S. Federal                       |       | $           | —     |         | $          | —    |       | $ | — |   |
| State and local                    |       | —      |       | —       |       | —    |       |
| U.S. possession                    |       | —      |       | —       |       | —    |       |
| Foreign                            |       | 301,335     |       | —       |       | 301,335   |       |
|                               |       | $           | 301,335    |         | $          | —    |       | $ | 301,335 |   |

 

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 $1,285,262 in2008, while the construction business had pre-tax income of $566,635.

 

In 2008 and 2007 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, 2008 and 2007 arepresented below:

 

| ** **                       | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|
| Deferred tax assets:             |       |       |       |       |       |
| Net operating loss carryforwards |       | $          | 22,600,000 |       | $          | 20,100,000 |   |
| Accrued expenses                 |       | 190,000    |       | 300,000    |       |
| Total gross deferred tax assets  |       | 22,790,000 |       | 20,400,000 |       |
| Less valuation allowance         |       | 22,790,000 |       | 20,400,000 |       |
| Net deferred tax asset           |       | $          | —     |       | $          | — |   |

 

The valuation allowancefor deferred tax assets as of December 31, 2008 and 2007 was $22,790,000and $20,400,000, respectively. The net change in the total valuation allowancefor the years ended December 31, 2008 and 2007 was an increase of$2,390,000 and an increase of $1,400,000, respectively. In assessing therealizability of deferred tax assets, management considers whether it is morelikely than not that some portion or all of the deferred tax assets will not berealized. The ultimate realization of deferred tax assets is dependent upon thegeneration of future taxable income during the periods in which those temporarydifferences become deductible. Management believes that the valuation allowancereduces the recognition of 

 

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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 31,2008, the Company has total net operating loss carryforwards from U.S.operations of approximately $18.0 million and approximately $46.2 million from its operations in theCommonwealth of Northern Mariana Islands. The net operating loss carryforwardsexpire in the years 2017 through 2028. Certain of these net operating lossesmay be subject to a limitation on future utilization due to ownership changesor 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,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                    | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Income tax (benefit) at statutory rate                        |       | $                                | (1,441,630 | ) | $ | (882,391 | ) |
| Difference between U.S. tax rate and Fiji tax rate            |       | (55,554                          | )          | (34,642 | ) |
| Adjustment of prior year’s deferred tax estimate         |       | (318,759                         | )          | (124,984 | ) |
| Other                                                         |       | 40,885                           |       | (56,628 | ) |
| Provision/(benefit) not recognized due to valuation allowance |       | 2,390,000                        |       | 1,400,000 |   |
|                                                          |       |                             |       |   |   |
| Provision (benefit) for income taxes                          |       | $                                | 614,942    |   | $ | 301,355 |   |

 

**                                   **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 uncertainty 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.

 

**(17)    Commitmentsand Contingencies**

 

Minimum rentalcommitments under all noncancelable-operating leases, primarily related toproperty, vehicles, and construction equipment, in effect at December 31,2008 are:

 

| **Years ending December 31,** | ** ** |
|------------------------------------|------------|
| 2009                               |       | 114,145 |   |
| 2010                               |       | 92,449 |   |
| 2011                               |       | 32,058 |   |
| 2012                               |       | 0 |   |
| TOTAL                              |       | $ | 238,652 |   |
|                                    |            |  |  |  |

 

Lease expense was$192,142 and $165,555 for the years ended December 31, 2008 and 2007,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.  Thesublease calls for a base rental payment of $6,791 per month in the first yearwith a 3.0% escalation in the monthly rate in each of the three subsequentyears.  The base monthly amount includesrent and reception services.

 

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.

 

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 is successful,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 in2006 and an additional $609,000 during 2007. In 2007, the Company paid $139,000 to claimants resulting in an accrualof 

 

 

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$970,000 at December 31,2007.  In 2008, the Company paid $92,817to claimants resulting in an accrual of $877,183 at December 31, 2008.These amounts are reflected under accrued expenses as of December 31,2008. Telesource has denied any liability and will aggressively defend itselfto mitigate and/or dismiss these claims.

 

Telesource International’spower generation activities involve significant risks of environmental damage,equipment damage and failures, personal injury and fines and costs imposed byregulatory agencies. Though management believes its insurance programs areadequate, if a liability claim is made against it, or if there is an extendedoutage or equipment failure or damage at Telesource International’s power plantfor which it is inadequately insured or subject to a coverage exclusion, andTelesource International is unable to defend against these claims successfullyor obtain indemnification or warranty recoveries, Telesource International maybe required to pay substantial amounts, which could have a materially adverseeffect on its financial condition. Although the equipment is covered under itsinsurance, the Company is liable for the deductible of 1,250,000 FJD(approximately $713,625 USD at December 31, 2008).

 

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 31,2008. 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 completedthe upgrade in 2007 however some minor additional costs in the range of $15,000not to exceed $25,000 may be incurred.

 

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 $114,180 USD at December 31, 2008).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.

 

 

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**(18)    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, 2008**                                 | ** ** |
|-------------------------------|------------|------------------------------------------------------------|------------|
| ** **                    | ** ** | **Power  generation  and  construction  of power  plants** | ** ** | **Trading** | ** ** | **Construction** | ** ** | **Total** | ** ** |
| Revenue                       |       | $                                                          | 4,885,404  |   | $ | 36,571 |   | $ | 24,159,865 |   | $ | 29,081,840 |   |
| Interest expense, net         |       | 216,577                                                    |       | — |   | 22,371 |   | 238,948 |   |
| Depreciation and amortization |       | 134,596                                                    |       | 177 |   | 134,247 |   | 269,020 |   |
| Income tax expense (benefit)  |       | 403,225                                                    |       | — |   | 211,717 |   | 614,942 |   |
| Net income (loss)             |       | (2,775,073                                                 | )          | 8773 |   | (2,067,843 | ) | (4,834,143 | ) |
| Total capital expenditures    |       | 86,546                                                     |       | — |   | 11,091 |   | 97,637 |   |
| Total assets                  |       | 4,438,604                                                  |       | 289 |   | 7,975,051 |   | 12,413,944 |   |
|                               |            |                                                            |            |  |  |  |  |  |  |  |  |  |  |

 

| ** **                    | ** ** | **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         |       | 849,746                                                    |       | — |   | 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 |   |
|                               |            |                                                            |            |  |  |  |  |  |  |  |  |  |  |

 

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

 

Revenues from theConstruction segment in 2008 and 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 $1,074,302 and $1,334,170 for 2008 and 2007,respectively. Also included in power generation revenues are billings from thetwo power plants in Fiji, and from the transmission distribution and Butoniwind farm (2007 only) projects, totaling $3,811,103 and $3,423,097 for 2008 and2007, respectively.

 

Revenues from the Company’srelated party, SHBC, were $36,571 and $5,962 for 2008 and 2007, respectively.

 

Long-term assets locatedin the Commonwealth of the Northern Mariana Islands were zero and $0.5 millionas of December 31, 2008 and 2007, respectively. Fixed assets located atTFL in Fiji were $246,583 and $409,038 as of December 31, 2008 and 2007,respectively.

 

**(19)                 SupplementaryDisclosure of Cash Flow Information**

 

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

 

The Company became aware of several revisions to theestimated cost to complete the Embassy project. During 2008, the

 

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Company identified these changes and developed arevised estimated cost to complete the Embassy project. These revisions wereprimarily due to changes in costs attributed to the primary subcontractor whois performing the work on the Embassy project.

 

Inaccordance with FASB 154, the Company accounted for the change in estimatedcost by applying the cumulative catch-up method. Such application of thismethod resulted in a decrease of revenues recognized for the Embassy project byapproximately $3.5 million through December 31, 2008. This change alsodecreased the cumulative profit recognized on the project which has beenreflected in the December 31, 2008 financial statements.

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

 

None**                     **

 
| **ITEM  9A.** | **CONTROLS AND PROCEDURES** |
|---------------|-----------------------------|

 

Telesource is committed to maintaining disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in its Exchange Act reports is recorded, processed, summarized andreported within the time periods specified in the Commission’s rules andforms, and that such information is accumulated and communicated to itsmanagement, including its Chief Executive Officer and Chief Financial Officer,as appropriate, to allow for timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives and are subject to certain limitations, including theexercise of judgment by individuals, the difficulty in identifying unlikelyfuture events, and the difficulty to eliminate misconduct completely. As aresult, there can be no assurance that our disclosure controls and procedureswill prevent all errors or fraud or ensure that all material information willbe made known to management in a timely manner.

 

Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within a company have been detected. Theseinherent limitations include the realities that judgments in decision makingcan be faulty and that breakdowns can occur because of simple error or mistake.Additionally, controls can be circumvented by the individual acts of somepersons, by collusion of two or more people, or by Management override of thecontrol. The design of any system of controls also is based in part upon certainassumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential 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.

 

**Evaluationof Disclosure Controls and Procedures**

 

Under the supervision and with the participation of management,including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”),the Company conducted an evaluation of its disclosure controls and procedures,as such term is defined under Rule 13a-15(e) promulgated under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), as of December 31,2008. Based on this evaluation, its CEO and CFO concluded the Company’s disclosurecontrols and procedures are not effective to ensure that information we arerequired to disclose in our reports filed or submitted under the SecuritiesExchange Act of 1934, as amended, is accumulated and communicated to managementas appropriate to allow timely decisions regarding required disclosures.

 

**Management’s Report on Internal Control overFinancial Reporting**

 

Management is responsible for establishing and maintaining adequateinternal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) promulgated under the Exchange Act).

 

Internal control over financial reporting is a process, designed by, orunder the supervision of, an entity’s principal executive and principalfinancial officers, and effected by an entity’s board of directors, Managementand other personnel, to provide reasonable assurance regarding the reliabilityof financial 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) provide

 

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reasonableassurance regarding prevention or timely detection of unauthorized acquisition,use, or disposition of the entity’s assets that could have a material effect onits consolidated financial statements.

 

Because of its inherent limitations, internal control over reportingmay not prevent or detect all misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

Under the supervision and with 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).

 

**Changesin Internal Control over Financial Reporting**

 

The following represent either changes to internal controls or otherfactors that could significantly affect internal controls during the quarterended December 31, 2008:

 

There were no changes in our internal control in the fourth quarter.

 

This annual report does not include an attestation report of theCompany’s registered public accounting firm regarding internal control overfinancial reporting. Management’s report was not subject to attestation by theCompany’s registered public accounting firm pursuant to temporary rules ofthe Securities and Exchange Commission that permit the Company to provide onlymanagement’s report in this annual report.

 

**ITEM 9B.****                   ****OTHER INFORMATION**

 

**NONE**

 

 

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# **PART III**

#  

**ITEM 10.**                      **DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

Directors are elected for one-year terms and are elected at each annualmeeting of stockholders. As of the date of this report Telesource’s Board ofDirectors and executive officers are:

 
| **Name and Age;  Years Served as Director**                                   | ** ** | **Principal  Occupation for Past Five Years; Other Directorships**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|-------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Ralph Beck   Age 69  Chairman of the Board  Director since 1999               |       | Mr. Beck was a principal of Global Construction  Solutions, L.L.C. From 1994 to 1998, Mr. Beck served as the President of  Kajima Construction Services, Inc., the North American the general  building construction subsidiary of Kajima Corporation the Japanese 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 47  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 65  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 58  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 66  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 59  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. |

 

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| Carl Smith  Age 60  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 57  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 11.****                     ****EXECUTIVE COMPENSATION**

 

**SUMMARYCOMPENSATION TABLE**

 
| **Name and  Principal Position** | ** ** | **Year** | ** ** | **Salary (1)** | ** ** | **Bonus** | ** ** | **All Other Annual  Compensation(2)** | ** ** |
|----------------------------------|------------|----------|------------|----------------|------------|-----------|------------|---------------------------------------|------------|
|                             |       |     |       |           |       |      |       |                                  |       |
| Nidal Zayed                      |       | 2008     |       | $              | 275,000    |      | $          | —                                |       | $ | 24,756 |   |
| Chief Executive Officer          |       | 2007     |       | $              | 215,000    |      | $          | —                                |       | $ | 23,072 |   |
|                             |       |     |       |           |       |      |       |                                  |       |
| Greg Grosvenor                   |       | 2008     |       | $              | 170,000    |      | $          | —                                |       | $ | 19,307 |   |
| Chief Financial Officer          |       | 2007     |       | 160,000        |       | —    |       | $                                     | 20,009     |   |

----

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

 

(2)             Telesource provided a vehicle to Mr. Zayed at acost of $11,502 in 2008 and $ 11,080 in 2007. Telesource provided Mr. Zayedwith health insurance for him and his family at a cost of $13,254 in 2008 and$11,992 in 2007. The Company provided health insurance to Mr. Grosvenorand his family of $19,307 in 2008 and $20,009 in 2007.

 

**StockOptions**

 

As of December 31, 2008 there were no stock options outstanding toany persons other than nonemployee directors.

 

**DirectorsCompensation**

 

The Company paid an annual fee to each Director (except for NidalZayed) in the amount of $20,000 in both 2008 and 2007, respectively with theexception of Trudy Clark and Carl Smith whom were each paid a fee of $5,883 in2007.  Ralph Beck, Trudy Clark, and CarlSmith each receive an additional $1,500 for their participation in theGovernment Security Committee.  Such feesare paid in cash.

 

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**ITEM 12.****                     ****SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT**

 

The following table contains information as of December 31, 2008regarding the ownership of the Common Stock of the Company by: (i) allpersons who, to the knowledge of the Company, were the beneficial owners of 5%or more of the outstanding shares of Common Stock of the Company, (ii) eachdirector and director nominee of the Company, (iii) the Chief ExecutiveOfficer and the two other most highly compensated executive officers of theCompany whose salary and bonus for the fiscal year ended December 31, 2008exceeded $100,000, and (iv) all executive officers and directors of theCompany as a group:

 
| **Name**                                                    | ** ** | **Amount and  Nature  of Beneficial  Ownership (1)** | ** ** | **Percent of  Common Stock  Outstanding (2)** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                  | ** ** | ** **                                           | ** ** | ** **                                    | ** ** |
| SHBC and Affiliated Companies                               |       | 132,254,567                                          |       | 96.8                                          | %          |
| 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 (8 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 held by each non-employee director.

 

(2)                   Calculated on the basis of 136,640,567 shares ofCommon Stock outstanding as of December 31, 2008.  Excludes 45,000 options that were exercisablewithin 60 days of December 31, 2006 held by each non-employee director,for a total of 180,000 options. None of the options were exercised and theCompany did not 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, 2008 with respect tothe shares of Common Stock that may be issued under Telesource’s equitycompensation 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.

 

**ITEM 13.****                     ****CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, ANDDIRECTOR INDEPENDENCE**

 

Certain of the Company’s executive officers, directors, and majorstockholders are also owners, officers, and/or directors of SHBC located inKuwait. SHBC is a civil, electrical, and mechanical engineering firm andconstruction contractor with approximately 1750 employees and over 50 years ofexperience. SHBC and its affiliates were the sole stockholder of TelesourceInternational prior to July 1999 and now own approximately 96.8% of thecommon stock outstanding. SHBC and Telesource International bid and competewithin the same industries; however, SHBC has agreed, in writing, not to bid onprojects within the United States and its possessions.

 

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Additionally, from time to time the Company may hire, on a part time ortemporary basis, individuals employed by SHBC to provide assistance toTelesource on certain projects in the Northern Mariana Islands.

 

The Company paid Computhink, Inc. $69,626 in 2008 for rent, andcertain office services.  The Companyshares office space with Computhink in its Lombard office.  Director Max Engler is also a director ofComputhink.

 

**DirectorIndependence**

 

The Company is a “Controlled Company” as that term is defined by theListing Requirements of NASDAQ. As such, if the Company were a company listedon the NASDAQ trading market, it would not be required to comply with thedirector independence guidelines established thereby.

 

**ITEM 14.****                     ****PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 

The Audit Committee pre-approves all audit services and permittednon-audit services (including the fees and terms thereof) to be performed forthe Corporation by its independent registered accountants, L J SoldingerAssociates LLC. The following table presents fees for professional servicesrendered by L J Soldinger Associates LLC for the respective periods indicated:

 
| **SERVICES PERFORMED** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
|                        |       |     |       |     |       |
| Audit Fees (Note 1)         |       | $        | 235,000    |     | $          | 248,000 |   |
| Audit-Related Fees (Note 2) |       | 5,000    |       | 23,000   |       |
| Tax Fees (Note 3)           |       | 17,000   |       | 19,000   |       |
| All Other Fees              |       | 0        |       | 0        |       |
|                        |       |     |       |     |       |
| Total Fees                  |       | $        | 257,000    |     | $          | 290,000 |   |

----

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.

 

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**ITEM 15.        EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 

See the audited financialstatements for the year ended December 31, 2008, presented in Item 8above.

 
| **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**                                                                                                       |
|                |       |                                                                                                                                                                                      |
| 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**                                                                          |

 

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| 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**    |
|   |   |                                                                                                                                          |
| 10.20  |   | Common  Stock Purchase Agreement between Telesource International, Inc and Ernil  Continental S.A., BVI dated January 4, 2008**          |
|   |   |                                                                                                                                          |
| 10.21  |   | Common  Stock Purchase Agreement between Telesource International, Inc and Halbarad  Group, LTD., BVI dated January 4, 2008**            |
|   |   |                                                                                                                                          |
| 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

 

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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 27, 2009 | /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 27, 2009.

 

| /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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