UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-KSB/A
 Amendment No.
2
  (Mark
One)
 
 [X]
              ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For the
fiscal year ended December 31, 2007
 
 [   ]
              TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
transition period from ___________ to __________
  Commission
file number: 000-32885
 
 XA, INC.
 (Exact
name of small business issuer as specified in its charter)
 
 NEVADA
              88-0471263(State
      or other jurisdiction of
              (IRS
      Employer Identification No.)incorporation
      or organization)
 
 875
NORTH MICHIGAN AVENUE, SUITE 2626
 CHICAGO, ILLINOIS
60611
 (Address
of principal executive offices)
 
 (312)
397-9100
 (Registrant's
telephone number)
 
 Securities
registered under Section 12(b) of the Exchange Act:
 
 NONE
 
 Securities
registered under Section 12(g) of the Exchange Act:
 
 COMMON
STOCK, $.001 PAR VALUE PER SHARE
 
 Check
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [
 ]
 
 Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [  ]
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [  ] No [X].
 
 The
issuer's revenues for the most recent fiscal year ended December 31, 2007 were
$8,433,848.
 
 The
aggregate market value of the issuer's voting and non-voting common equity held
by non-affiliates computed by reference to the average bid and ask price of such
common equity as of April 14, 2008, was approximately $305,645.
 
 As of
April 11, 2008 the issuer had 3,977,252 shares of common stock, $.001 par value
per share outstanding ("Common Stock").
 
 Documents
Incorporated by Reference: NONE
 
 Transitional
Small Business Disclosure Format: Yes [  ] No [X]
  The
Registrant is filing this Amendment No. 2 to its Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2007, to correct the results of the
Registrant’s assessment of its disclosure controls and procedures under “Item
8A. Controls and Procedures,” below, as of December 31, 2007.  The
Registrant originally reported that its disclosure controls and procedures were
effective as of December 31, 2007; however, due to the fact that the Registrant
did not conduct and/or include a “Management’s Report on Internal Control Over
Financial Reporting” in its original Annual Report filing on Form 10-KSB, the
Registrant now believes that its disclosure controls and procedures were not
effective as of December 31, 2007, and the revised “Item 8A. Controls and
Procedures,” below reflects such change.  Other than the section
entitled “Item 8A. Controls and Procedures”, all of the other sections of this
Form 10-KSB/A remain the same as originally filed by the Registrant on April 15,
2008, and investors should review the Registrant's most recent periodic and
current report filings for updated information on the operations and financial
condition of the Registrant.
  
 XA,
INC.
 FORM
10-KSB/A
 
 YEAR
ENDED
 December
31, 2007
 INDEX
 
 Part
I
 
 
 Item
      1
              Description
      of Business
              3Item
      2.
              Description
      of Property
              17Item
      3.
              Legal
      Proceedings
              18Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              19
 
 Part
      II
 
 Item
      5.
              Market
      for Common Equity and Related Stockholder Matters
              20Item
      6.
              Management's
      Discussion and Analysis or Plan of Operation
              21Item
      7.
              Financial
      Statements
              F-1Item
      8.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              38Item
      8A.
              Controls
      and Procedures
              38Item
      8B
              Other
      Information
              38
 
 Part
      III
 
 Item
      9.
              Directors,
      Executive Officers, Promoters and Control Persons; Compliance with Section
      16(a) of the Exchange Act
              39Item
      10.
              Executive
      Compensation
              44Item
      11.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              50Item
      12.
              Certain
      Relationships and Related Transactions
              54Item
      13.
              Exhibits
      and Reports on Form 8-K
              56Item
      14.
              Principal
      Accountant Fees and Services Signatures
              62
 
  
 PART
I
 
 ITEM
1. DESCRIPTION
OF BUSINESS
 
 SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
 CERTAIN
STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-KSB/A (THIS "FORM 10 KSB"),
INCLUDING STATEMENTS UNDER "ITEM 1. DESCRIPTION OF BUSINESS," AND "ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS", CONSTITUTE "FORWARD LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1934, AS AMENDED, AND
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (COLLECTIVELY, THE "REFORM
ACT"). CERTAIN, BUT NOT NECESSARILY ALL, OF SUCH FORWARD-LOOKING STATEMENTS CAN
BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES",
"EXPECTS", "MAY", "SHOULD", OR "ANTICIPATES", OR THE NEGATIVE THEREOF OR OTHER
VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY THAT
INVOLVE RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN
AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF XA, INC., AND/OR ITS WHOLLY OWNED
SUBSIDIARIES, THE EXPERIENTIAL AGENCY, INC., AN ILLINOIS CORPORATION AND FIORI
XA, INC., XA SCENES, INC. AND XA INTERACTIVE, INC., NEVADA CORPORATIONS
(COLLECTIVELY "XA", "THE COMPANY", "WE", "US" OR "OUR") TO BE MATERIALLY
DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-KSB/A,
UNLESS ANOTHER DATE IS STATED, ARE TO DECEMBER 31, 2007.
 
 BUSINESS
HISTORY
 
 XA, Inc.
was originally incorporated in Nevada as Synreal Services Corp. ("Synreal") on
August 28, 2000. The Company's business plan was to engage in the business of
providing due diligence and administrative services for real estate
syndications. Prior to entering into an Exchange Agreement, discussed below, and
the consummation of the transactions thereunder, the Company was considered a
development stage enterprise, as defined in Financial Accounting Standards Board
No. 7. Our principal executive offices are located at 875 North Michigan Avenue,
Suite 2626, Chicago, Illinois 60611. Our telephone number is (312) 397-9100 and
our fax number is (312) 573-1515.
 
 On
December 4, 2003, Synreal, The Experiential Agency, Inc., formerly G/M
Productions, Inc., an Illinois corporation ("Experiential") and the former
Experiential shareholders entered into an Exchange Agreement (the "Exchange" or
"Acquisition") whereby Experiential became a wholly-owned subsidiary of the
Company and control of the Company shifted to the former Experiential
shareholders. In addition, Frank Goldstin, the Company's former Chief Executive
Officer and a former director of the Company, entered into a stock purchase
agreement with the Company's former officers and directors, Brian Chelin and
Jennifer Wallace. Synreal was considered a "shell" at the time of the
Acquisition; therefore, the transaction was treated as a reverse
merger.
  Effective
February 2, 2004, the Company declared a 13 to 1 forward stock split. Effective
December 9, 2004, the Company declared a 1 for 20 reverse stock split. The
effects of the stock splits have been retroactively reflected in this Form
10-QSB unless otherwise stated.
 
 In June
2004, the Company entered into a Subscription Agreement with Alpha Capital
Aktiengesellschaft, Stonestreet Limited Partnership, Whalehaven Funds Limited,
Greenwich Growth Fund Limited and Genesis Microcap Inc. (collectively the "6%
Note Purchasers") to purchase convertible promissory notes having an aggregate
principal amount of $2,500,000, $1,250,000 of which was sold on June 30, 2006
(the "First Tranche" and $1,250,000 which was sold on September 13, 2006 (the
"Second Tranche"), which had a 6% annual interest rate, and a conversion price
of $0.25 per share (the " 6% Notes"). Following the reverse stock split on
December 9, 2004, the conversion price of the 6% Notes would have been $5.00 per
share, however, the Company agreed to change the conversion price of the 6%
Notes to $2.00 per share. The Subscription Agreement also provided for the
issuance of warrants to purchase up to an aggregate of 250,000 shares of Common
Stock, with an exercise price of $9.60 per share (the "Class A Warrants"), and
warrants to purchase up to an aggregate of 500,000 shares of Common Stock, with
an exercise price of $5.00 per share (the "Class B Warrants"). The Company did
not agree to change the exercise price of the Class A Warrants or the exercise
price of the Class B Warrants. The Class A Warrants expire Four (4) years from
the date they were issued. The Class B Warrants have expired and no Class B
Warrants were ever exercised by the 6% Note Purchasers.  The Class A
Warrants were automatically re-priced in connection with the Follow On Funding,
described below, and as such currently have an exercise price of $0.30 per
share.
 
 -3-
 Of the
$2,500,000 in Convertible 6% Notes issued to the Note Holders, $467,500 in
principal and $4,555.67 in interest were converted into a total of 94,412 post
split shares, leaving $2,032,500 (not including any accrued interest) of
principal remaining under the 6% Notes as of June 30, 2006, when the First
Tranche was due. We used $1,047,000 of the funds raised through the August 2006
Funding (as defined below) to repay the First Tranche and used $1,030,575 of the
funds raised through the September and October 2006 Fundings (as defined below)
to repay the amount we owed under the Second Tranche. As such, as of the date of
this filing, we have repaid all of the amounts due to the 6% Note Purchasers
under the 6% Notes.
 
 On August
8, 2006 (the "Closing"), we entered into a Securities Purchase Agreement (the
"Purchase Agreement") with Sands Brothers Venture Capital LLC, Sands Brothers
Venture Capital II LLC, Sands Brothers Venture Capital III LLC, Sands Brothers
Venture Capital IV LLC, and Katie & Adam Bridge Partners, L.P. (each a "The
Sands Brothers Purchasers"), pursuant to which we sold the Sands Brothers
Purchasers 11% Senior Subordinated Secured Convertible Promissory Notes in the
aggregate principal amount of $1,250,000 (collectively the "Senior Notes") and
five (5) year warrants to purchase an aggregate of one hundred and seventy-five
thousand (175,000) shares of our common stock at an exercise price of $1.10 per
share (the "Warrants" and collectively with the Senior Notes, the "Securities"
and the entire transaction is defined herein as the "August 2006
Funding").
 
 On
September 13, 2006, we entered into a Waiver of Rights Agreement (the "Second
Waiver Agreement"), with the 6% Note Purchasers, whereby the 6% Note Purchasers
agreed to extend the due date of the Second Tranche and agreed to waive all
reset, anti-dilution and re-pricing rights they may have had in connection with
the September and October Fundings (as defined below), as well as certain shares
and warrants contained in the August 2006 Funding Waiver Agreement.
 
 On
September 26, 2006, we entered into Securities Purchase Agreements with G. Chris
Andersen and Paul M. Higbee, two individuals ("Andersen" and "Higbee"). Pursuant
to the Securities Purchase Agreements, we sold each of Andersen and Higbee
$100,000 in fifteen month, 11% Senior Subordinated Secured Convertible
Promissory Notes (the "Andersen and Higbee Notes"), and granted each of them
fifteen thousand (15,000) five year warrants to purchase shares of our common
stock at an exercise price of $1.10 per share (the "Andersen and Higbee
Warrants," and collectively the entire September 26, 2006 funding transaction,
the "September 2006 Funding").
 
 On
October 23, 2006, we entered into a Securities Purchase Agreement with Vision
Opportunity Master Fund, Ltd. ("Vision," and collectively with Andersen and
Higbee, the "Second Funding Purchasers"). Pursuant to the Securities Purchase
Agreement with Vision (collectively with the Andersen and Higbee Securities
Purchase Agreements, the "Second Funding Purchase Agreements"), we sold Vision
$1,250,000 in fifteen month, 11% Senior Subordinated Secured Convertible
Promissory Notes (the "Vision Notes," and collectively with the Andersen and
Higbee Notes, the "Second Funding Notes" or the "Second Funding Senior Notes")
and granted Vision one hundred thousand (100,000) five year warrants to purchase
shares of our common stock at $0.30 per share, and one hundred and eighty seven
thousand five hundred (187,500) five year warrants to purchase shares of our
common stock at an exercise price of $1.10 per share (collectively the "Vision
Warrants" and with the Andersen and Higbee Warrants, the "Second Funding
Warrants"). Collectively referred to herein as the "October 2006 Funding," and
collectively with the September 2006 Funding, the "September and October 2006
Fundings".
 
 -4-
 Although
as originally executed, the Higbee and Andersen Notes had similar provisions to
the August 2006 Funding Notes (which did not have an Optional Conversion Right
as defined and described below, among other less material differences not
discussed herein), we later agreed to conform both the Higbee and Andersen
closing documents to the Vision Notes and documents described herein and may
conform the closing documents for the August 2006 Funding Notes in the future.
As such, the Higbee Notes and the Andersen Notes have substantially similar
terms as those described below (other than the dates contained therein and the
amount of each Purchaser's investment).
 
 In
addition to the Warrants we granted to Vision in connection with the funding,
Mastodon Ventures, Inc. ("MVI"), which was issued 666,667 warrants to purchase
shares of our common stock at $0.30 per share, assigned 100,000 of such warrants
to Vision, and the August 2006 Second Funding Purchasers, who were granted an
aggregate of 333,333 warrants to purchase shares of our common stock at $0.30
per share, assigned 133,000 of such warrants to Vision.
 
 Follow
On Funding
  On or
about June 11, 2007, we entered into Securities Purchase Agreements with
Andersen and Higbee (the “Follow On Andersen and Higbee Purchase Agreements”),
two individuals ("Andersen" and "Higbee"). Pursuant to the Andersen and Higbee
Securities Purchase Agreements, we sold Andersen and Higbee $25,000 in twelve
(12) month, 11% Senior Subordinated Secured Convertible Promissory Notes each
(the "Follow On Andersen and Higbee Notes"), and granted each of them
twenty-five thousand (25,000) five year warrants to purchase shares of our
common stock at an exercise price of $0.30 per share (the "Follow On Andersen
and Higbee Warrants," and collectively the “Andersen and Higbee Follow On
Funding”).
 
 On or
about June 22, 2007, we entered into a Securities Purchase Agreement (the
"Follow On Sands Brothers Purchase Agreement") with The Sands Brothers
Purchasers, pursuant to which we sold such Sands Brothers Purchasers twelve (12)
month, 11% Senior Subordinated Secured Convertible Promissory Notes in the
aggregate principal amount of $200,000 (collectively the "Follow On Sands
Brothers Notes") and five (5) year warrants to purchase an aggregate of two
hundred thousand (200,000) shares of our common stock at an exercise price of
$0.30 per share (the "The Follow On Sands Brothers Warrants," and collectively
the “Sands Brothers Follow On Funding”).
 
 On or
about June 29, 2007, we entered into a Securities Purchase Agreement with
Vision, and collectively with Andersen and Higbee and the Sands Brothers
Purchasers, the "Purchasers”. Pursuant to the Securities Purchase Agreement with
Vision (collectively with the Andersen and Higbee Purchase Agreements and the
Sands Brothers Purchase Agreement, the "Follow On Funding Purchase Agreements"),
we sold Vision $200,000 in twelve (12) month, 11% Senior Subordinated Secured
Convertible Promissory Notes (the "Follow On Vision Note," and collectively with
the Follow On Andersen and Higbee Notes and the Follow On Sands Brothers Notes,
the "Follow On Notes") and granted Vision two hundred thousand (200,000) five
year warrants to purchase shares of our common stock at $0.30 per share (the
“Follow On Visions Warrants,” and collectively the Follow On Andersen and Higbee
Warrants, and the Follow On Sands Brothers Warrants, the “Follow On Warrants,”
and the “Follow On Vision Funding,” and collectively with the Andersen and
Higbee Follow On Funding and the Sands Brothers Follow On Funding, the “Follow
On Funding”).
 
 Although
as originally executed, the Andersen and Higbee Follow On Funding agreements had
slightly different terms and provisions than the Sands Brothers Follow On
Funding and the Vision Follow On Funding documents, we subsequently agreed to
conform the Andersen and Higbee Follow On Funding documents to the Sands
Brothers Follow On Funding and Vision Follow On Funding documents, as described
herein, and as a result, Andersen and Higbee, the Sands Brothers Purchasers and
Vision all are parties to substantially identical Follow On Funding documents,
varying only in connection with the dates of such documents and the accompanying
Maturity Date of such Follow On Notes.
  -5-
 The
Senior Notes, Second Funding Senior Notes, Follow On Notes, Warrants, Second
Funding Warrants (as well as the MVI and Venture Warrants), and the Follow On
Notes contain certain anti-dilution provisions, which provide that if we issue
or sell any additional shares of common stock (including convertible shares of
common stock and/or options or warrants to purchase shares of common stock)
other than as a dividend or other distribution (a "Dilutive Issuance") at less
than the Conversion Price or Exercise Price then in effect, the Conversion Price
or Exercise Price shall be automatically reduced to the lower Effective Price
(as defined in the Senior Notes, Second Funding Senior Notes, Follow On Notes,
Warrants, Second Funding Warrants and Follow On Warrants) of the issuance and/or
sale. However, Purchasers have agreed to waive such anti-dilution provision in
connection with the issuance of up to 250,000 shares for professional services,
which have been fully issued to date ( the "Excepted Issuances").  As
a result, we have used up all of the Excepted Issuances.  However,
because the issuance of the Follow On Warrants were not included in the Excepted
Issuances as provided in the Prior $1.10 Warrants, the exercise price of such
Prior $1.10 Warrants was automatically reset to $0.30 in connection with the
grant of the Follow On Warrants (the “Purchaser Re-pricing”). Additionally,
because the issuance of the Follow On Warrants was not waived by the holders of
our Class A Warrants, exercisable for $9.60 per share, which were granted on
June 30, 2004 in connection with a sale of 6% Convertible Notes on that date,
such Class A Warrants were automatically re-priced, pursuant to their
anti-dilution provisions to $0.30 per share (the “Class A Re-pricing” and
collectively with the Purchaser Re-pricing, the “Re-pricings”).
 
 Our
repayment of the Senior Notes, Second Funding Senior Notes and Follow On Notes
and any accrued interest thereon is secured by a security interest in
substantially all of our assets, which we granted to the Purchasers pursuant to
a Security Agreement (the "Security Agreement"), which we entered into with the
Purchasers, Second Funding Purchasers and Follow On Funding Purchasers at the
closings. Additionally in September 2006, the Sands Brothers Purchasers entered
into an Acknowledgment of Rights Agreement with us, whereby they agreed that
their security interest rights in our assets would be pari passu with the rights
of Higbee, Andersen and Vision.
 
 We also
granted the Purchasers, Venture and MVI (as defined below) registration rights
in connection with the shares of common stock issuable in connection with the
conversion of the Senior Notes, Second Funding Senior Notes, and Follow On Notes
and the exercise of the Warrants, the Second Funding Warrants, the MVI Warrants,
the Venture Warrants (as defined below), and the Follow On Warrants collectively
the "Underlying Shares"), pursuant to our entry into Registration Rights
Agreements, which we entered into at the closings, which were later superseded
by Registration Rights agreements entered into with the Purchasers in June 2007
(the "Registration Rights Agreements").
 
 Furthermore,
pursuant to the Purchase Agreement, we agreed to grant the Purchasers the right
to appoint one Director to our Board of Directors (or a Board Advisory Seat to
observe at all board meetings). In the event such purchasers desire to exercise
such right to appoint a Director, our Board of Directors will be increased to
five (5) members.
 
 Prior to
our entry into the Purchase Agreement and the Second Funding Purchase
Agreements, and the consummation of the funding, we received waivers from
LaSalle Bank National Association to approve the fundings and a construction
loan with LaSalle Bank National Association, as described below. Additionally,
we received the waiver of the 6% Note Purchasers, ,who purchased the 6%
Convertible Notes in June and September 2004, to approve the funding and waive
our previous default under the 6% Convertible Notes (described in greater detail
below) pursuant to our entry into a Waiver of Rights Agreement with the 6% Note
Purchasers on July 17, 2006, with an effective date of June 30, 2006, which
Waiver of Rights Agreement was later extended by the 6% Note Purchasers until
August 9, 2006 in connection with the August 2006 Funding, and our entry into
two additional Waiver of Rights Agreements with the 6% Note Purchasers, the
Second Waiver Agreement and the Third Waiver Agreement (as described
herein).  However, the 6% Note Purchasers did not consent to the
issuance of convertible notes and warrants in connection with the Follow On
Funding, and as such, the exercise price of the Class A Warrants held by the 6%
Note Purchasers has automatically reset to $0.30 per share in connection with
the issuance of the Follow On Warrants.
 
 -6-
 We also
agreed to issue an aggregate of 333,333 warrants to purchase shares of our
common stock at an exercise price of $0.30 per share to Sands Brothers Venture
Capital Funds ("Venture" and the "Venture Warrants") and 666,667 warrants to
purchase shares of our common stock at an exercise price of $0.30 per share to
MVI Ventures, Inc. ("MVI" and the "MVI Warrants") in consulting fees in
connection with the August 2006 Funding. Both the Venture Warrants and the MVI
Warrants are exercisable for five (5) years from the date of the August 2006
Closing.
  The
Senior Notes, warrants, closing and related agreements are described in greater
detail in our Form 8-K filing, which we filed with the Commission on August 15,
2006, and the Second Funding Senior Notes, Second Funding Warrants and related
agreements are described in greater detail in our Form 8-K filing, which we
filed with the Commission on November 1, 2006.  The Follow On Notes
are described in greater detail in our Form 8-K filing which we filed with the
Commission on July 12, 2007.
 
 In
connection with each of the Follow On Funding transactions, we entered into
Registration Rights Agreements with each of the Purchasers, which replaced and
superseded the prior Registration Rights Agreements entered into between the
Purchasers and us in August, September and October 2006.  The
Registration Rights Agreements were subsequently replaced and superseded by the
Registration Rights Agreements entered into with the Purchasers in connection
with the Second Follow on Funding, described below.
 
 Waiver
of Rights Agreement
 
 We
entered into a Waiver of Rights Agreement with the Purchasers, Mastodon
Ventures, Inc. and its assigns, dated on or around June 22, 2007, pursuant to
which we and the Purchasers agreed to the Re-pricings; agreed that the
Conversion Price of the Prior Notes (as defined therein) would be equal to the
Conversion Price of the Follow On Notes; and the Purchasers agreed to waive any
defaults which may have occurred in connection with our failure to meet the
required date of effectiveness of our registration statement filing, as was
required under the prior Rights Agreements, which have since been superseded and
replaced in their entirety by the Follow On Rights Agreements.
 
 First
Amendments to Prior Notes
 
 A
required term of the Follow On Funding was that each of the Purchasers agree
that the maturity date of the Prior Notes (the August, September and October
2006 notes) which they hold would be extended to the maturity dates of the
Follow On Notes which they hold. The amendment and extension to each of the
Purchaser’s Prior Notes was accomplished by each of the Purchasers entry into a
First Amendment to the 11% Senior Secured Convertible Promissory Notes with us,
on or around the date of their purchases of the Follow On Notes (and in the case
of Andersen and Higbee, on or around the date they entered into conforming
documents with us, as described above, (the “Note Amendments”)). Pursuant to the
Note Amendments, each of the Purchasers agreed that the maturity date of the
Prior Notes which they hold would be extended to the maturity date of their
respective Follow On Notes. For example, the maturity date of Vision’s Prior
Note in the amount of $1,250,000, was extended until the maturity date of the
Follow On Vision Note, June 29, 2008.
 
 LaSalle
Bank Loans
 
 The
Company has a line of credit agreement which it entered into on August 12, 2004,
with LaSalle Bank National Association ("LaSalle") in the amount of
$750,000.  The line of credit was originally due August 12, 2005, and
the interest varied at 0.25% over the prime rate. The Company's assets secure
the line of credit. Prior to the expiration of the line of credit, the line of
credit was renewed for another year and increased to $800,000. On or around June
30, 2007, the Company entered into a promissory note evidencing amounts owed
under the line of credit, in the amount of $600,000, which promissory note
accrued interest at the rate of 2.25% above the prime rate then in affect, which
line of credit was later amended and replaced by the Line of Credit, defined and
described below.
 
 -7-
 On June
1, 2006, we entered into a business loan for a loan of up to $750,000 with
LaSalle, which loan accrued interest at the prime rate plus 0.25% until paid in
full.  The loan was originally due on June 30, 2007, but was extended
by the parties entry into a separate promissory note on or around June 30, 2007,
which increased the interest rate to the prime rate then in effect, plus an
additional 2.25% per annum, which provided for $66,666 to be paid on July 31,
2007; a payment of accrued interest under the promissory note on July 31, 2007;
and one payment of principal and interest of approximately $200,064 on July 31,
2007.  We failed to make the required payments due under the
promissory note pursuant to the payment schedule above, and as such, the
interest rate of the funds due under the promissory note increased by 2%;
however, this promissory note was subsequently amended and replaced by the
LaSalle Line of Credit defined and described below.
 
 On or
about August 27, 2007, we entered into a promissory note with LaSalle,
evidencing a line of credit (the “LaSalle Line of Credit”), which evidenced and
aggregated the amounts previously outstanding under the line of credit and
promissory note described above, in an amount equal to $867,000.  The
LaSalle Line of Credit bears interest at the rate of 2.25% above the prime rate
then in effect, which was equal to 10.5% per annum as of August 27, 2007,
adjustable as provided in the LaSalle Line of Credit, until paid.  We
were required to make monthly payments of interest under the LaSalle Line of
Credit, with the full outstanding balance of the LaSalle Line of Credit due on
December 1, 2007.  The agreement provides that, in the event of
default, the interest rate of the LaSalle Line of Credit will increase by 2%
over the interest rate then in effect.
 
 We failed
to make the required payment due under the promissory note on December 1, 2007,
which promissory note had a remaining balance of $844,485.03 as of December 11,
2007.  This unpaid balance consists of $837,904.00 in principle and
$6,581.03 in accrued and unpaid interest.  On December 3, 2007,
LaSalle notified the Company by letter that the promissory note was in default,
and beginning on December 4, 2007, interest will accrue on the unpaid balance of
the promissory note (and any accrued and unpaid interest thereon) at the default
annual rate of 11.75% (the prime rate plus 4.25% per year), based on the bank’s
prime rate of 7.5%.  Pursuant to LaSalle’s letter as of December 4,
2007, the Company had until December 31, 2007 to repay the remaining balance of
the promissory note, or LaSalle would seek alternatives to payment.
 
 Second
Follow On Funding
 
 On or
about December 21, 2007, the Company entered into a Securities Purchase
Agreement (the "Sands Brothers Purchase Agreement") with Sands Brothers Venture
Capital III LLC (the “Sands Brothers III”), pursuant to which we sold Sands
Brothers III a twelve (12) month, 11% Senior Subordinated Secured Convertible
Promissory Note in the aggregate principal amount of $200,000 (the "Second
Follow On Sands Brothers Note") and five (5) year warrants to purchase an
aggregate of two hundred thousand (200,000) shares of our common stock at an
exercise price of $0.30 per share (the "Sands Brothers Warrants," and
collectively the “Sands Brothers Second Follow On Funding”).
 
 On or
about December 21, 2007, we entered into a Securities Purchase Agreement with
Vision Opportunity Master Fund, Ltd. ("Vision," and collectively with Sands
Brothers, the "Second Follow On Purchasers”). Pursuant to the Securities
Purchase Agreement with Vision (collectively with the Sands Brothers Purchase
Agreement, the "Second Follow On Funding Purchase Agreements"), we sold Vision a
$200,000 twelve (12) month, 11% Senior Subordinated Secured Convertible
Promissory Note (the "Second Follow On Vision Note," and collectively with the
Second Follow On Sands Brothers Notes, the "Second Follow On Notes") and granted
Vision two hundred thousand (200,000) five year warrants to purchase shares of
our common stock at $0.30 per share (the “Second Follow On Vision Warrants,” and
collectively with the Second Follow On Sands Brothers Warrants, the “Second
Follow On Warrants,” and the “Second Follow On Vision Funding,” and collectively
with the Sands Brothers Second Follow On Funding, the “Second Follow On
Funding”).
 
 The
Company paid $100,000 from the Second Follow On Funding to LaSalle, to repay a
portion of the principal and interest owed to LaSalle through the LaSalle Line
of Credit and entered into a Forbearance Agreement with LaSalle, pursuant to
which LaSalle will forbear enforcement of its rights and remedies against us and
Experiential until June 1, 2008, conditioned on performance of certain terms and
conditions.  These terms and conditions include entering into a new
note in the amount of $738,000 with continuing interest and principal payments
of $10,000 due on March 1, 2008, April 1, 2008, and May 1,
2008.  Furthermore, the Forbearance Agreement requires the Company,
the Second Follow On Purchasers and the other junior lenders to enter into
Subordination Agreements and a General Release for the benefit of LaSalle (the
“Subordination Agreements”), as well as requiring us to agree to pay all legal
fees and expenses incurred by LaSalle in connection with the defaults and the
Forbearance Agreement.
  -8-
 Second
Follow On Funding Notes
 
 The
$400,000 in Second Follow On Notes bear interest at the rate of 11% per annum
until paid, and have a maturity date of the earlier of (i) December 21, 2008; or
upon the consummation by us of a merger, combination or sale of substantially
all of our assets or the purchase by a single entity or person or group of
affiliated entities or persons of more than fifty (50%) percent of our voting
stock, of which there are no current plans (a “Combination Event”).
 
 Interest
on the Second Follow On Notes is payable upon maturity, repayment or upon
conversion of the Notes into shares of our common stock as described below. The
Second Follow On Notes may not be prepaid prior to their maturity date. Any
amount not paid under the Notes when due will bear interest at the rate of
eighteen percent (18%) per annum until paid in full (the "Default
Interest").
 
 The
Second Follow On Notes are convertible, at the option of each of the Second
Follow On Purchasers, at any time, into shares of our common stock at a
conversion price equal to the lesser of $0.50 or 50% of the effective price per
share of shares of common stock sold in a Private Offering (as defined below,
provided that such conversion price will never be less than $0.25 per share
(unless the Private Offering price is less than $0.25 per share, in which case
the Conversion Price will be equal to such Private Offering price due to the
anti-dilution provisions of the notes as described below), the "Conversion
Price") if we complete a private offering of our securities in which we receive
gross proceeds of not less than $3,000,000 (the "Private
Offering").
 
 Our
repayment of the Second Follow On Notes and any accrued interest thereon is
secured by a security interest in substantially all of our assets, which the
Second Follow On Purchasers share pari passu, which we granted to the Second
Follow On Purchasers pursuant to Security Agreements (the "Security
Agreements"), which we entered into with the Second Follow On Purchasers at the
various closings.
 
 Pursuant
to the Second Follow On Notes, we agreed that we would not undertake certain
events, including those described below, without the prior written consent of
all of the Second Follow On Purchasers:
  o
              liquidate
      or dissolve, consolidate with, or merge into or with, any other
      corporation or other entity, except that any wholly-owned subsidiary may
      merge with another wholly-owned subsidiary or with us;o
              will
      not sell, transfer, lease or otherwise dispose of, or grant options,
      warrants or other rights with respect to, all or a substantial part of our
      properties or assets to any person or entity outside of the ordinary
      course of business, unless specifically excluded in the Purchase
      Agreement;o
              will
      not redeem or repurchase any of our outstanding securities;
      ando
              will
      not create, incur or assume any indebtedness other than in the ordinary
      course of business, and/or in connection with the Subsequent
      Funding.
  
 -9-
 "Events
of Default" under the Second Follow On Notes include but are not limited to the
following:
  o
              our
      failure to pay any amounts due under the Second Follow On Notes when due,
      and such failure continues for five (5) days;o
              our
      failure to comply with any covenants we made pursuant to the Purchase
      Agreements and such failure continues for a period of five (5) business
      days in connection with our affirmative covenants and two (2) business
      days in connection with our negative covenants;o
              our
      entry into bankruptcy or insolvency;o
              our
      default in the payment of any other obligation in connection with money
      borrowed in excess of $50,000, which default continues for three (3)
      business days;o
              if
      a judgment is rendered against us or any of our subsidiaries which exceeds
      in aggregate $50,000, which judgment is not vacated or satisfied within
      twenty (20) days; or
 
 o
              our
      violation of any material representation of any of the documents entered
      into in connection with the
Funding.
 
 If an
Event of Default occurs under the Second Follow On Notes, the Second Follow On
Purchasers may seek specific performance of any covenant or agreement contained
in the Second Follow On Notes and/or enforce their security interest over
substantially all of our assets.
 
 Furthermore,
pursuant to the Second Follow On Purchase Agreement, we agreed to grant the
Second Follow On Purchasers the right to appoint one Director to our Board of
Directors (or a Board Advisory Seat to observe at all board meetings). In the
event such Second Follow On Purchasers desire to exercise such right to appoint
a Director, our Board of Directors will be increased to five (5)
members.
 
 Pursuant
to the Second Follow On Notes, we agreed to provide the Second Follow On
Purchasers a right of first refusal to invest pro rata in any and all of our
future financings on identical terms as those offered to other potential
investors. Furthermore, we agreed to not create or incur, contingently or
otherwise, any indebtedness (other than indebtedness incurred in our historic
business and in the ordinary course of our business), which is not expressly
subordinated in right of payment and otherwise to the Second Follow On
Notes.
 
 Second
Follow On Funding Warrants
 
 The
Second Follow On Funding Warrants are exercisable at an exercise price of $0.30
per share (subject to adjustment in the Second Follow On Warrants), at any time
prior to 5:00 P.M. EST on: December 21, 2012.
 
 -10-
 The
Second Follow On Warrants are exercisable in connection with the payment of
cash, or if such Second Follow On Warrants are exercised on a date when a
registration statement covering the shares underlying the Second Follow On
Warrants has not been declared effective with the Securities and Exchange
Commission or such registration statement is no longer in effect, the Second
Follow On Warrants include a cashless feature, whereby if the exercise price of
the warrants is equal to or greater than the Fair Market Value of our common
stock (as defined in the Second Follow On Warrants), the number of shares of
common stock issuable to the Second Follow On Purchasers in connection with any
exercise is equal to the product of the number of shares to which the Second
Follow On Warrants are being exercised multiplied by a fraction, the numerator
of which is the exercise price then in effect and the denominator of which is
the Fair Market Value of our common stock.
 
 Additionally,
in connection with the Second Follow On Funding, the terms of all of the prior
warrants issued to Sands Brothers and Vision in 2006 and 2007, in connection
with prior fundings were amended to extend the exercise date of such warrants to
five (5) years from the date of the Second Following On
Funding.
 
 Second
Follow On Funding Registration Rights Agreements
 
 In
connection with each of the Second Follow On Funding transactions, we entered
into Registration Rights Agreements with each of the Second Follow On Purchasers
and Mastodon Ventures, Inc., which replaced and superseded the prior
Registration Rights Agreements entered into between the Second Follow On
Purchasers and us in August 2006, October 2006, and June 2007, in connection
with the previous sale of $3,150,000 in 11% Senior Secured Convertible Notes
(the “Prior Funding” and the “Prior Notes”) to such Second Follow On Purchasers
and additional purchasers not defined above, and the grant of an aggregate of
1,942,500 warrants to purchase shares of our common stock at an exercise price
of $0.30 per share (the “Prior Warrants”), to all such purchasers and Mastodon
Ventures, Inc. (“Mastodon”), as a consultant to us and the Second Follow On
Purchasers in connection with the Prior Funding (the “Second Follow On Rights
Agreements”). The Second Follow On Rights Agreements provided the Second Follow
On Purchasers and Mastodon  and its assigns, registration rights in
connection with the shares that the Prior Notes and the Second Follow On Notes
are convertible into, as well as an additional 350,000 warrants with identical
terms as the Second Follow On Warrants which were issued to Mastodon in
connection with the Second Follow On Funding, and which the Second Follow On
Warrants and Prior Warrants are exercisable for (the “Registrable
Securities”).
 
 Pursuant
to the Second Follow On Rights Agreements, we agreed to register the Registrable
Securities on a  registration statement with the Securities and
Exchange Commission (the "Commission" and the "Registration Statement") pursuant
to the deadlines discussed below. We agreed that in the event that the Private
Offering has not occurred within six (6) months of the date of the Second Follow
On Funding closing, December 21, 2007, which date is June 21, 2008, we would
file the Registration Statement with the Commission within forty-five days of
such six (6) month anniversary, August 5, 2008, and that we would obtain
effectiveness of the Registration Statement no more than ninety (90) days after
the date we are required to file such Registration Statement, or November 3,
2008 (the "Initial Registration Deadlines").
 
 In the
event that we are unable to register all of the Registrable Securities in one
Registration Statement because of the applicability of Rule 415, the Second
Follow On Purchasers, as well as Mastodon (collectively the “Registration Rights
Holders”), have agreed that the number of shares we can register at any one time
will be allocated pro rata to each of the Registration Rights
Holders.
 
 We and
the Second Follow On Purchasers also agreed pursuant to the Second Follow On
Rights Agreement, that in the event that we are not able to register all of the
Registrable Securities, that we would use our best efforts to file additional
Registration Statements to register the Registrable Securities that were not
registered in any initial Registration Statement as promptly as possible and in
a manner permitted by the Commission (each an “Additional Registration
Statement”). We agreed to file any Additional Registration Statement within the
earlier of (i) sixty (60) days following the sale of substantially all of the
Registrable Securities included in the initial Registration Statement or any
Additional Registration Statement and (ii) six (6) months following the
effective date of the initial Registration Statement or any Additional
Registration Statement, or such earlier date as permitted by the Commission. We
also agreed that if we are required to file any Additional Registration
Statement, that we would file such Additional Registration Statement within
thirty (30) days and use our best efforts to obtain effectiveness of such
Additional Registration Statement within ninety (90) days of such filing date
(the “Additional Registration Deadlines,” and collectively with the Initial
Registration Deadlines, the “Registration Deadlines”).
  If we
fail to obtain effectiveness of any required Registration Statement by the
applicable Registration Deadlines, or after such effectiveness the Second Follow
On Purchasers are unable to sell the Registrable Securities, due to any reason
other than the Commission’s application of Rule 415, we are obligated, pursuant
to the Second Follow On Rights Agreements, to pay the Second Follow On
Purchasers an amount in cash equal to two (2%) of the total principal amount of
the Prior Notes and the Second Follow On Notes ($71,000), for each thirty (30)
day period which the Registration Deadlines are not met or the Second Follow On
Purchasers are unable to sell the Underlying Shares. If we fail to pay such
damages within five (5) days of the date payable, we are required to pay
interest on the amount payable at the rate of eighteen percent (18%) per annum,
accruing daily until such amounts are paid in full.
 
 -11-
 Subsequent
Events:
 Sands
Brothers Line of Credit
 
 On or
about February 29, 2008, the Company and Experiential Agency, Inc., the
Company’s wholly owned subsidiary (“Experiential”) entered into a Revolving Line
of Credit Agreement (the “Sands Brothers Line of Credit”) with Sands Brothers
Venture Capital III LLC (“Sands Brothers”), pursuant to which Sands Brothers
extended a revolving line of credit to the Company for a period extending to
June 29, 2008 in the principal amount of up to two hundred thousand dollars
($200,000).  Any funds advanced to the Company through the Sands
Brothers Line of Credit will be used for operating expenses in connection with
the operations of Experiential, and will be immediately transferred to
Experiential as a capital contribution.  Such operating expenses may
include but are not limited to legal fees, vendor expenses, auditor fees,
payroll, rents, and financing expenses.
 
 In
connection with the Sands Brothers Line of Credit, the Company received an
initial advance on or around February 29, 2008, of one hundred thousand dollars
($100,000) and executed and delivered to Sands Brothers a Promissory Note (the
“First Advance Note”) in the initial amount of one hundred thousand dollars
($100,000), evidencing such advance.  Further, on March 27, 2008, the
Company received a second advance of one hundred thousand dollars ($100,000) and
executed and delivered to Sands Brothers a Promissory Note (the “Second Advance
Note”) in the amount of one hundred thousand dollars ($100,000), evidencing such
advance.  The second advance exhausted the funding Sands Brothers has
agreed to provide pursuant to the Sands Brothers Line of Credit. The First
Advance Note and the Second Advance Note bear interest until paid in full at the
rate of twelve percent (12%) per annum, with the interest on such notes payable
monthly in arrears commencing on April 1, 2008.  In the event any
payment is not made within three (3) days of the date such payment is due under
either note, both outstanding notes will bear interest at the rate of fifteen
percent (15%) per annum, and such failure to pay the required payment is defined
as an “Acceleration Event.” Any Acceleration Event or Event of Default gives
Sands Brothers the right to provide for the entire amount of unpaid principal
and interest on the outstanding notes to be immediately due and payable with
fifteen days prior notice in the event of an Acceleration Event and without
prior notice if an Event of Default occurs.  The principal and any
unpaid interest on the both notes is due and payable on June 29,
2008.
 
 Business
Operations:
 
 We,
referred to herein as “XA,” through our wholly-owned subsidiaries, The
Experiential Agency, Inc., an Illinois corporation (“Experiential”), XA Scenes,
Inc., Fiori XA, Inc. and XA Interactive, Inc., Nevada corporations are a
comprehensive event marketing, design and production services agency. With
full-service offices in Chicago and New York City as well as a sales office in
Los Angeles, and a venue in New York City, XA is a leading provider of event
services on an outsourced basis for corporations, associations and other
organizations in the United States and abroad. XA provides its clients with a
single source to their business communications and event planning
needs.
 
 In the
third quarter of 2005, XA formed a wholly owned Nevada subsidiary, XA Scenes,
Inc. ("XA Scenes"). XA Scenes was formed as a special events venue management
firm. XA’s senior management team believes that there is a significant
opportunity for XA Scenes to capitalize on the synergies that exist between XA’s
event marketing agency, Experiential, and selected joint venture
partners.
 
 For
eighteen (18) years, XA has worked with clients around the globe to design and
produce strategic multidimensional, highly stylized and integrated event
programs. During the year ended December 31, 2007, XA planned more than one
hundred events which were attended by more than 100,000 people, for clients
including Sports Illustrated, Moet Hennessey, McDonald's Corporation (NYSE:MCD),
Cookie Magazine, National Geographic, McGraw Hill, Walt Disney Company
(NYSE:DIS), Pepsi (NSYE:PBG), UNICEF, NBC Universal, Heitman,  Jet
Airways, Audi, LXR, New Yorker Magazine and Guinness Beer.
 
 In
January 2007, XA was awarded Special Event Magazine’s Gala Award in the category
of “Best Event Marketing Campaign” for Real Simple’s Holiday Solutions. The
annual award competition recognizes achievement in all areas of special events
and design. The winners are selected after 5 rounds of judging by members of
Special Event Magazine's Advisory Board. The award winning event produced and
designed by XA helped to recreate Real Simple magazine with a Holiday Solutions
five-week mall tour that targeted female consumers. To implement the vision, the
XA event team designed and constructed living rooms in high-traffic malls. The
rooms created an experience, idea or amenity to guests, while allowing
advertisers direct interaction with readers. Over 100,000 consumers visited the
events in addition to 330,000 TV viewers.
  -12-
 In March
2007, XA was awarded two BiZBash Event Style Awards in the categories of “Best
Lighting Design” and “Best Corporate Event Concept” both for the Sopranos cast
and crew screening after party. The BiZBash Event Style Awards of 2007 honored
the people behind New York's most innovative events of 2006. XA won the Best
Corporate Event Concept Award for an "innovative and effective theme for an
event planned by or for a corporation." The award winning event produced and
designed by XA celebrated the premiere of the 6th and final season of the HBO
show the Sopranos. The overall concept was inspired by a traditional Italian
Street Festival and XA successfully transformed a large ballroom into an
intimate affair for 1,000 members of the Soprano's extended family. A
comprehensive lighting design concept combined advanced technology such as
intelligent lighting with basic tools including 4,000 Italian string
lights.
 
 XA
focuses on strategic growth that includes, among other things, the acquisition
and development of targeted business communications and event management
companies in key regions throughout the United States. XA has developed a
vertically integrated infrastructure that it believes will enhance its ability
to continue to provide event services on a national basis. In order to provide
its clients with a single source solution to their event planning needs, XA
offers a wide range of services that encompass the event planning process
including general management, concept creation, content creation and execution.
XA believes that its vertically integrated organization, creative talent,
technological leadership and its willingness to commit capital to acquire or
develop proprietary exhibitions and special events are competitive advantages in
a fragmented industry in which most vendors provide a limited set of services on
a local basis.
 
 Industry
and Market Overview
 
 The
events industry in the United States is highly fragmented with several local and
regional vendors that provide a limited range of services in two main segments:
1) business communications and event management; and 2) meeting, conferences and
trade shows. The industry also consists of specialized vendors such as
production companies, meeting planning companies, and destination logistics
companies that may offer their services outside of the events
industry.
 
 According
to an event marketing study conducted by PROMO Magazine ("PROMO") in 2005, and
published in its April 1, 2006 edition, marketers spent $171 billion in event
marketing in 2005, up 3% from the previous year. Additionally, according to The
George P. Johnson Co.'s annual survey, EventView '05/'06, as reported by PROMO,
96% of marketing executives use events in their marketing mix. Because of these
trends, XA believes it is well positioned to gain a greater share of the market
for event production services and grow its operations moving
forward.
 
 Principal
Products and Services
 
 XA offers
a wide range of services that encompass the event planning process including
general management, concept creation, content creation, and execution. XA earns
most of its revenue from event services fees that it charges clients regarding
the following general service areas:
 
 *
              Event
      Marketing;*
              Design
      and production;*
              Meetings,
      Conferences and Trade Shows;*
              Entertainment
      and Show Production;*
              Business
      Theater & General Sessions;*
              Mobile
      Marketing;*
              Audio/Visual
      Production;*
              Public
      Relations;*
              Destination
      Management;*
              XA
      Interactive (Digital Marking); and*
              Venue
      Management.
 
 XA earns
a management fee when it provides general management services. XA earns fees on
a fee-for-services basis when it undertakes event marketing and business
communications projects.
 
 -13-
 General
Management Services
  XA offers
general management services that provide its clients with centralized
coordination and execution of the overall event. In connection with providing
general management services, XA utilizes an executive producer responsible for
overseeing the production of an event or exhibition. The executive producer
coordinates the services that XA provides for the client. XA provides the
following general management services:
 
 *
              Project
      oversight;*
              Budget
      oversight;*
              Quality
      assurance and control;*
              Project
      funding and sponsorship development;*
              Project
      control and accountability;*
              Event
      promotion and marketing creation;*
              Schedule
      management; and*
              Fulfillment
      provider management.
 
 Concept
Creation
 
 XA works
with a client to craft the client's message, identify the best means of
communicating that message, and develop cost-effective creative solutions. XA
provides the following concept creation services:
 
 *
              Joint
      determination of client needs and goals;*
              Market
      research to support message creation and communication;*
              Message
      content design;*
              Media
      selection; and*
              Initial
      project pricing and budgeting.
  Content
Creation
 
 After the
concept for an event is created, XA's professionals work to develop and produce
the client's message. XA provides the following content creation
services:
 
 *
              Speech
      composition;*
              Speaker
      support-graphics creation;*
              Audio/Video
      production;*
              Digital
      media creation;*
              Collateral
      materials design and distribution;*
              Entertainment
      and speaker scripting and booking; and*
              Theme
      and staging design.
  
 -14-
 Execution
 
 XA uses
internal resources to execute an event. As the clients' needs dictate, however,
XA can structure its role so that it is transparent to attendants at the event.
XA provides the following execution services:
 
 *
              On-site
      quality and logistics control;*
              Hotel
      and venue coordination and buying;*
              Transportation
      management;*
              Security
      coordination;*
              Telemarketing
      services for the sale of exhibition space;*
              Hospitality
      management;*
              Registration
      management;*
              Cash
      and credit card payment management;
 
 *
              Entertainment
      coordination;
 
 *
              Tour
      program design;*
              Permit
      and approval procurement; and*
              Food
      and beverage management.
 
 
 Fulfillment
 
 Fulfillment
is the last stage in the event process. It includes the actual provision of
services such as catering, registration, transportation rental, audio and visual
equipment rental, decoration rental and temporary on-site labor. XA offers
fulfillment services using either internal resources or third-party vendors as
determined on an event-by-event basis.
 
 Full
Service Offices
 
 XA
operates two full-service offices located in Chicago and New York City as well
as a sales office in Los Angeles and a venue in New York City. Chicago is home
to XA's headquarters, which serves as the centralized base for administration
and purchasing. XA opened the Los Angeles and New York City offices during 2003.
XA chose to open offices in New York City and Los Angeles to better serve its
national client base by providing existing clients with local offices and staff
to coordinate and provide ongoing integrated communication services. In
addition, by having local offices operating in New York City and Los Angeles, XA
is better able to acquire new clients and business opportunities through
aggressive local business development activities.
 
 In
December 2005, XA Scenes, entered into a lease on the ninth floor of 636-642
West 28th Street, New York, New York 10001, also known as the "Terminal
Warehouse". We plan to use the Property for office space, event and production
space and to host certain events in the future. Completed in June 2006, the
11,500 square foot multi-use facility consists of approximately 5,000 square
feet of design production/office space and 6,500 square feet of special event
space. The XA Scenes facility provides clients with spectacular views of the
Hudson River within a state of the art special events facility.
 
 -15-
 On March
6, 2006, The Experiential Agency, Inc., the Company's wholly owned subsidiary
("Experiential"), entered into a Lease on Unit No. 2B in Building No. 2 of 1435
51st Street, in North Bergen, New Jersey. The lease commenced on April 1, 2006,
and ends on March 31, 2009. The monthly rent on the lease is $4,037 from April
1, 2006 until March 31, 2007, $4,238 for the period from April 1, 2007 until
March 31, 2008, and $4,449 for the period from April 1, 2008 until March 31,
2009. Upon the expiration of the lease, Experiential has the option to renew the
lease for an additional three (3) year term. The monthly rental fees during the
additional three year term, will be $4,671 from April 1, 2009 and March 31,
2010, $4,904 from April 1, 2010 and March 31, 2011, and $5,149 from April 1,
2011 to March 31, 2012. The landlord has the right to terminate the lease at any
time after March 31, 2009, with six (6) months prior written notice to
Experiential. This space will be used by XA for production and fabrication of
décor elements for events and storage of production inventory.
 
 Creative Talent
 
 A primary
value that XA brings to its clients is the creative talent, energy and
commitment of its employees. XA seeks to attract and retain the best personnel
by developing attractive compensation, benefits and training programs and
providing long-term career opportunities that its smaller competitors cannot
duplicate. XA has approximately eighty-one (81) employees, of whom approximately
fifty (50) are part-time employees and thirty-one (31) are full-time
employees.
  XA
compliments its staff with a pool of over 100 professionals hired on a
project-by-project basis who have distinguished themselves through prior
experience with XA. XA is not a party to any collective bargaining agreement
with a union. From time to time, however, XA does independently contract with,
or hire, union personnel during the production of a particular meeting or event.
XA considers itself to have good relations with its employees and independent
contractors.
 
 Today,
corporations are searching for new ways to motivate, excite and impart a message
to their audience. XA is able to help them accomplish these goals by designing a
creative platform from which to communicate. For instance, most companies do not
realize they can afford to do a concert event with headline talent because it
has never been presented to them as a marketing tool. Most of XA's programs are
more in line with the standard format of events (i.e., meetings and business
theater).
 
 Breaking
the traditional mold can be a hard sell to a conservative client, but when XA's
team can demonstrate how hosting one large, memorable event can save $250,000
from the marketing budget, and, most importantly, have a greater impact on
attendees, the client understands the value of XA marketing.
 
 To
execute XA's expansion plans, XA has also recruited a number of senior
executives with broad and diverse experience managing rapidly growing national
and international businesses.
 
 Centralized
Administration and Purchasing
 
 XA has
centralized its administrative and purchasing functions to enhance cost
efficiency and quality control. The corporate headquarters in Chicago are the
center for administration, MIS, finance, accounting and human resources. XA has
a national client base. XA oftentimes plans and executes multiple events for
different national clients in a single geographic location. XA negotiates
through the Chicago office with local vendors in these geographic locations for
the provision of services to its national clients. XA repeatedly uses the same
vendors in these local markets. XA believes that it enjoys purchasing power and
economies of scale greater than that available to its local
competitors.
 
 -16-
 Technological
Capabilities
 
 XA
believes that it can invest more in technology than its local competitors and
thereby become a leader in utilizing advanced technologies. XA is able to
allocate its investment in technology over its large national event base,
whereas a local competitor that does not have a national event base may not be
willing to invest heavily in advanced technology.
  XA
currently uses advanced communications technologies such as digitized
presentations and multimedia applications to provide high quality customer
service. In addition, XA is creating business communication applications using
media, such as DVD technology, plasma screens, interactive video and the
satellite communications.
 
 Intellectual
Property
 
 The
Company is the owner of the proprietary trademark, "The Experiential Agency(R)"
(US Serial No: 78241557). Additionally, the Company has filed for a trademark
for "XA" and "XA Scenes," but has not as of the date of this filing received
approval of such trademarks.
 
 The
Company also owns the rights to the internet domain names,
including:
 
 *
www.gmproductions.com;
 *
www.gmproductions.net;
 *
www.expagency.com;
 *
www.experientialagency.com;
 *
www.theexperientialagency.com; and
 *www.musters.com.
 
 The
Company does not own any patents or licenses related to its products or
services.
 
 Competition
 
 Companies
in the events industry compete based on service breadth and quality, creativity,
responsiveness, geographic proximity to clients, and price. Most vendors of
outsourced event services are small, local companies that cannot provide the
wide range of services, international coverage, creative talent, purchasing
power and technological capabilities required by large corporations and
associations.
 
 XA
competes primarily with a large number of local and regional firms as well as
specialized vendors such as production companies meeting planning companies
(such as Carat Face-to-Face), entertainment & show production firms and
destination logistics companies. Most of these competitors and specialized
vendors provide a limited range of services relative to XA's service offerings.
As a vertically integrated service provider, we believe XA offers a
comprehensive solution to client organizations with the assurance of a high
quality of service and the opportunity to form a long-term relationship. At the
national level, XA faces larger competitors such as Jack Morton Worldwide - part
of the Interpublic Group of Companies (IPG: NYSE), and George P.
Johnson.
 
 We
believe that XA is positioning itself as the Event Marketing Partner with its
unique selling point being the ability to act as a single source for the
client's total event marketing needs. This would encompass the entire spectrum
of services associated with event marketing, right from strategizing and
defining an event portfolio, conceptualization of the event theme and content
creation to the final implementation / management of the event itself and post
event Return On Investment assessment.
 
  ITEM
2.DESCRIPTION
OF PROPERTY
 
 Our
corporate headquarters are located in Chicago, Illinois. In July 2004, we
entered into an eight-year lease for approximately 4,600 square feet of office
space for our corporate headquarters. Our current lease commitment is $10,069
per month.
 
 -17-
 In August
2003, we opened an office in New York City. We lease this office space from Thom
Filicia, Inc. pursuant to a five year sublease. Our lease commitment on our New
York Office space is $1,300 per month plus the obligation to pay
utilities.
 
 We also
have offices in Los Angeles, California. On January 15, 2004, we entered into a
four-year and seven-month lease for this office space from Gilmore North Market,
LLC. Our current lease commitment is $1,750 per month plus the obligation to pay
utilities.
 
 On
December 23, 2005, XA Scenes, Inc., our wholly owned subsidiary, entered into a
Lease, (the "Lease") on the ninth floor of 636-642 West 28th Street, New York,
New York 10001, also known as the "Terminal Warehouse" (the "Property") with
Waterfront NY Realty Corp. ("Landlord"). The Lease has a term of ten (10) years
(the "Term"), and commenced on June 1, 2006. We agreed to pay initial annual
rent under the Lease equal to $260,000 per year, which rent increases at the
rate of 3% per year (with the rate of rent for the 10th year of the Lease being
$350,000), payable monthly at the initial rate of $21,666.66 per
month.
 
 On March
6, 2006, The Experiential Agency, Inc., our wholly owned subsidiary
(“Experiential”), entered into a Lease on Unit No. 2B in Building No. 2 of 1435
51st Street, in North Bergen, New Jersey. The lease commenced on April 1, 2006,
and ends on March 31, 2009. The monthly rent on the lease is $4,037 from April
1, 2006 until March 31, 2007, $4,238 for the period from April 1, 2007 until
March 31, 2008, and $4,449 for the period from April 1, 2008 until March 31,
2009. Upon the expiration of the lease, Experiential has the option to renew the
lease for an additional three (3) year term. The monthly rental fees during the
additional three year term, will be $4,671 from April 1, 2009 and March 31,
2010, $4,904 from April 1, 2010 and March 31, 2011, and $5,149 from April 1,
2011 to March 31, 2012. The landlord has the right to terminate the lease at any
time after March 31, 2009, with six (6) months prior written notice to
Experiential.
 
 ITEM
3. LEGAL
PROCEEDINGS
 
 Our
wholly owned subsidiary, The Experiential Agency, Inc., formerly G/M!
Productions, Inc., an Illinois corporation has a pending lawsuit, Erie West,
L.L.C., v. G/M! Productions, Inc., No. 04 M1 137777, with one of our former
landlords, in the Circuit Court of Cook County, Illinois. The lawsuit is in
connection with office space we previously leased from Eire West, L.L.C. (the
"Landlord"), at 308 West Erie Street, Chicago, Illinois. The Landlord in its
First Amended Verified Complaint, alleged that we failed to provide the Landlord
a cash deposit or new standby letter of credit when our previous letter of
credit expired; and that the Landlord is owed money for unpaid rental fees,
which it alleged we stopped paying under our lease with Landlord on July 1,
2004, which lease was to run until March 31, 2008.
 
 We filed
an Answer and Affirmative Defenses to First Amended Verified Complaint to the
Landlord's claims in the Circuit Court of Cook County, Illinois on May 31, 2005
(the "Answer"). In the Answer, we pleaded certain affirmative defenses,
including that we have fully performed all conditions and covenants under the
lease, and that we are therefore not in default; that we validly terminated the
lease on June 30, 2004, after giving previous notice on several occasions to the
Landlord, as a result of the fact that we were prevented the use and quiet
enjoyment of the premises; and that the Landlord had the duty and obligation at
all times to take reasonable steps to mitigate the damages sustained (the
"Affirmative Defenses").
 
 Since the
filing of our Answer, the Landlord has filed Second and Third Amended Verified
Complaints, and we have answered such complaints. The Landlord's Third Amended
Verified Complaint alleged damages for our alleged breach of the lease and
alleged damages for prospective rent. The total damages asked for by the
Landlord in the Third Amended Verified Complaint total approximately $309,710
plus interest. On February 28, 2006, we filed our Answer and Affirmative
Defenses to Third Amended Verified Complaint, whereby we denied certain of the
Landlord's claims and asserted our Affirmative Defenses. The trial date was
scheduled for July 2007, but has since been extended.  There is a
hearing scheduled for October 14, 2008.
  In March
2006, we received notice of a lawsuit filed against XA, Inc., our wholly owned
subsidiary, The Experiential Agency, Inc., and our Chief Executive Officer and
Director, Joseph Wagner, Chief Operating Officer, Jean Wilson, and one of our
employees, Marcy Manley, individually, by our former employee, Lara Shipp
("Shipp"). The lawsuit was filed in the Northern District of Illinois. The
lawsuit alleged damages in connection with our discharge of Shipp, alleged that
we failed to pay her certain commissions which she was due and that she was
denied rights under the Family Medical Leave Act. Additionally, the lawsuit
alleges breach of contract, declaratory relief regarding her interests in the
Company, promissory estoppel, tortious interference with contract and fraudulent
inducement. Shipp alleged that her employment contract with us entitled her to
commissions of gross revenues on reoccurring business and that she was
terminated in violation of Family and Medical Leave Act ("FMLA").  The
lawsuit asked for all wages, benefits and other compensation that she lost as a
result of her alleged termination in violation of FMLA, front pay and reasonable
attorney's fees. Shipp also alleged that we violated the Illinois Wage Payment
and Collection Act and alleges that she is due commissions and other amounts
greater than $100,000 in unpaid commissions and automobile reimbursement,
attorney's fees, pre and post judgment interest and punitive damages
Furthermore, Shipp alleged that she was due an ownership interest in XA, Inc.,
which is larger than her current stake. The matter has been resolved and the
terms are confidential.
 
 -18-
 During
the second quarter of 2007, we filed a complaint against three of our former
employees and another third party, alleging that two of those former employees
had violated their non-compete agreements with us, which they agreed to pursuant
to and in connection with their entry into employment agreements with us, as
well as other causes of action, including violation of the Illinois Trade
Secrets Act and tortuous interference. We subsequently obtained a Restraining
Order against the two former employees who we allege are barred from their
current actions due to their non-compete agreements with us, which prevents them
from performing any services on behalf of any of our clients. Subsequent to the
filing of this Report, we anticipate entering the discovery phase of the
litigation. We are seeking an injunction against the defendants and damages in
connection with our former employees’ breach of their non-compete agreements and
the other causes of actions alleged.  The case is still
ongoing.
 
 The
Company is not aware of any pending legal proceedings other than the ones
described above, to which it is a party which is material to its business
operations.
 
  ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 None.
  -19-
  PART
II
 
 ITEM
5.MARKET FOR
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
 "Bid" and
"asked" offers for the common stock are listed on the NASDAQ OTC-Bulletin Board
published by the National Quotation Bureau, Inc. The Company's common stock
began regular trading during the third quarter of the fiscal year ended December
31, 2003. The trading symbol for the Common Stock was originally "SYSC", and was
changed to "EXAG" in connection with the Company's name change on December 11,
2003, and was later changed to "XAIN" in connection with the Company's name
change on December 9, 2004.
 
 The
following table sets forth the high and low trading prices for the Company's
common stock for the periods indicated as reported by the NASDAQ OTC-Bulletin
Board. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
 
  TRADING PRICESQuarter Ended
              High
              LowDecember
      31, 2007
              $0.28
              $0.07September
      30, 2007
              $0.50
              $0.28June
      30, 2007
              $0.54
              $0.255March
      31, 2007
              $0.48
              $0.25December
      31, 2006
              $0.35
              $0.21September
      30, 2006
              $0.40
              $0.15June
      30, 2006
              $0.75
              $0.30March
      31, 2006
              $0.51
              $0.40
  
 There
were approximately 35 holders of record of the common stock as of April 11,
2008. The Company has never paid a cash dividend on its common stock and does
not anticipate the payment of a cash dividend in the foreseeable future. The
Company intends to reinvest in its business operations any funds that could be
used to pay a cash dividend. The Company's common stock is considered a "penny
stock" as defined in the Commission's rules promulgated under the Exchange Act.
In general, a security which is not quoted on NASDAQ or has a market price of
less than $5.00 per share where the issuer does not have in excess of $2,000,000
in net tangible assets (none of which conditions the Company meets) is
considered a penny stock. The Commission's rules regarding penny stocks impose
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally persons with net worth in excess of $1,000,000 or an annual income
exceeding $200,000 or $300,000 jointly with their spouse). For transactions
covered by the rules, the broker-dealer must make a special suitability
determination for the purchaser and receive the purchaser's written agreement to
the transaction prior to the sale. Thus, the Rules affect the ability of
broker-dealers to sell the Company's shares should they wish to do so because of
the adverse effect that the Rules have upon liquidity of penny stocks. Unless
the transaction is exempt under the Rules, under the Securities Enforcement
Remedies and Penny Stock Reform Act of 1990, broker-dealers effecting customer
transactions in penny stocks are required to provide their customers with (i) a
risk disclosure document; (ii) disclosure of current bid and ask quotations if
any; (iii) disclosure of the compensation of the broker-dealer and its sales
personnel in the transaction; and (iv) monthly account statements showing the
market value of each penny stock held in the customer's account. As a result of
the penny stock rules the market liquidity for the Company's securities may be
severely adversely affected by limiting the ability of broker-dealers to sell
the Company's securities and the ability of purchasers of the securities to
resell them.
  -20-
 Recent
Sales of Unregistered Securities
 
 
 On June
11, 2007, we entered into Subscription Agreements with G. Chris Andersen and
Paul M. Higbee, whereby we sold each of them (i) $25,000 in twelve (12) month
11% Senor Secured Convertible Promissory Notes (for $50,000 in total Notes sold)
which are convertible as provided in such notes; and (ii) five year Warrants to
purchase 25,000 shares of our common stock each (for the total issuance of
50,000 warrants) at an exercise price of $0.30 per share. We claim an exemption
from registration afforded by Section 4(2) of the Securities Act of 1933 for the
above, since the foregoing did not involve a public offering, the recipients
took the securities for investment and not resale and we took appropriate
measures to restrict transfer.
 
 On June
22, 2007, we entered into a Subscription Agreement with Sands Brothers Venture
Capital LLC, Sands Brothers Venture Capital II LLC, Sands Brothers Venture
Capital III LLC, Sands Brothers Venture Capital IV LLC, and Katie & Adam
Bridge Partners, L.P.(the “Sands Brothers Purchasers”), whereby we sold the
Sands Brothers Purchasers an aggregate of (i) $200,000 in twelve (12) month 11%
Senor Secured Convertible Promissory Notes which are convertible as provided in
such notes; and (ii) five year Warrants to purchase 200,000 shares of our common
stock at an exercise price of $0.30 per share. We claim an exemption from
registration afforded by Section 4(2) of the Securities Act of 1933 for the
above, since the foregoing did not involve a public offering, the recipients
took the securities for investment and not resale and we took appropriate
measures to restrict transfer.
 
 On or
about June 29, 2007, we entered into a Subscription Agreement with Vision
Opportunity Master Fund, Ltd. ("Vision”), whereby we sold Vision (i) $200,000 in
twelve (12) month 11% Senor Secured Convertible Promissory Notes which are
convertible as provided in such notes; and (ii) five year Warrants to purchase
200,000 shares of our common stock at an exercise price of $0.30 per share. We
claim an exemption from registration afforded by Section 4(2) of the Securities
Act of 1933 for the above, since the foregoing did not involve a public
offering, the recipient took the securities for investment and not resale and we
took appropriate measures to restrict transfer.
 
 On
December 21, 2007, we entered into a Subscription Agreements with Sands Brothers
Venture Capital III, LLC and Vision Opportunity Master Fund, Ltd., whereby we
sold each of them (i) $200,000 in twelve (12) month 11% Senor Secured
Convertible Promissory Notes (for $400,000 in total Notes sold) which are
convertible as provided in such notes; and (ii) five year Warrants to purchase
200,000 shares of our common stock each (for the total issuance of 400,000
warrants) at an exercise price of $0.30 per share. We claim an exemption from
registration afforded by Section 4(2) of the Securities Act of 1933 for the
above, since the foregoing did not involve a public offering, the recipients
took the securities for investment and not resale and we took appropriate
measures to restrict transfer.
 
 On
December 21, 2007, in consideration for and in connection with the Second Follow
On Funding (described above) we granted Mastodon 350,000 five year Warrants to
purchase shares of our common stock at an exercise price of $0.30 per share. We
claim an exemption from registration afforded by Section 4(2) of the Securities
Act of 1933 for the above, since the foregoing did not involve a public
offering, the recipient took the securities for investment and not resale and we
took appropriate measures to restrict transfer.
 
 
 ITEM
6. MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 
 THIS
REPORT CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934. THESE FORWARD LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR ANTICIPATED RESULTS, INCLUDING THOSE SET FORTH UNDER "RISK
FACTORS" IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS REPORT. THE FOLLOWING DISCUSSION
AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH "SELECTED FINANCIAL DATA" AND
THE COMPANY'S FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS
REPORT.
  -21-
 Marketing
and Growth Strategy
 
 The major
focus of our growth strategy over the next several years will be the acquisition
and development of targeted business communications and event management
companies in key regions throughout the United States. Our management has
identified a number of targeted strategic acquisition opportunities in the form
of business communications and event management companies in key regions
throughout the United States. Our targeted acquisitions are intended to add
geographic coverage to our existing businesses as well as broaden our service
offerings. The initial acquisitions are planned to focus on business
communications and event management companies which are specialized in the
on-site logistical aspects of the business communications and event management
industry, and are located in the Chicago, New York City and Los Angeles areas.
We have not entered into any preliminary negotiations or discussions with any
acquisition targets, nor do we have any definitive agreements with any
acquisition targets, however we plan to take steps to acquire such acquisition
targets in the future, of which there can be no assurance, funding permitting,
of which there can be no assurance.
  We also
plan to fuel our growth through a broader, carefully designed growth strategy
that includes extending relationships with existing clients, building new client
relationships, expanding our international client base, making selected
infrastructure acquisitions, and expanding our media services. We believe that
substantial opportunities exist to expand relationships with existing clients by
cross-selling the full range of our services, building out our national office
network and expanding our service offerings, particularly with respect to our
events, multimedia and corporate branding capabilities. We will seek to
capitalize on the services provided to one division or operation of a client by
selling our services to other divisions or operations, including their foreign
operations. We have also initiated advertising and public relations programs to
enhance our brand recognition in the marketplace.
 
 We also
believe that multinational organizations headquartered both inside and outside
of the United States are increasingly interested in building relationships with
business communications and event management firms and owners of events who can
provide their services on a worldwide basis. Our international client base
continues to grow and in order to better serve these organizations, we plan to
aggressively expand our international client base over the next 12 to 24 months,
funding permitting.
 
 The
Company believes that there is an increasing trend on the part of associations,
historically the largest owners and operators of exhibitions, to outsource the
operational management and often the ownership of exhibitions as they focus on
their core missions and seek to improve efficiencies.
  We
believe that the events industry revolves on a competitive axis based on service
breadth and quality, creativity, responsiveness, geographic proximity to
clients, and price. Most vendors of outsourced event services are small, local
companies that cannot provide the wide range of services, international
coverage, creative talent, purchasing power and technological capabilities
required by large corporations and associations. As a vertically integrated
service provider we believe that we will be able to offer a comprehensive
solution to these organizations with the assurance of a high quality of service
and the opportunity to form a long-term relationship.
 
 We
differentiate ourselves from our competitors by offering a single source
solution to the market for business communication and event management services
on a national basis, employing creative, energetic professionals, and
centralizing our administration and purchasing functions.
  -22-
 
 COMPARISON
OF OPERATING RESULTS
 
 YEAR
ENDED DECEMBER 31, 2007 COMPARED TO THE YEAR ENDED DECEMBER 31,
2006
 
 We had
sales of $8,433,848 for the year ended December 31, 2007, compared to sales of
$9,824,677 for the year ended December 31, 2006, a decrease in sales from the
prior period of $1,390,829 or 14.2%. The decrease in sales was mainly due to the
loss of the LaSalle Bank account and several other client accounts, during the
year ended December 31, 2007.  Our sales vary quarter to quarter based
on the number of programs and events we plan during those quarters.
 
 We had
cost of goods sold relating to direct production costs of $4,519,232 for the
year ended December 31, 2007, compared to cost of goods sold relating to direct
production costs of $5,782,391 for the year ended December 31, 2006, a decrease
in cost of goods sold from the prior period of $1,263,159 or
21.8%.  The decrease in cost of goods sold was directly attributable
to our decrease in sales for the year ended December 31, 2007, compared to the
prior year.
 
 Cost of
goods sold as a percentage of sales was 53.6% for the year ended December 31,
2007, compared to 58.9% for the year ended December 31, 2006, a decrease in cost
of goods sold as a percentage of sales of 5.3% from the prior year.
  We had
gross profit of $3,914,616 for the year ended December 31, 2007, compared to
gross profit of $4,042,286 for the year ended December 31, 2006, a decrease in
gross profit of $127,670 or 3.2% from the prior period. The decrease in gross
profit was due to the 14.2% decrease in sales offset by the 21.8% decrease in
cost of goods sold.
 
 We had
administrative expenses of $4,775,951 for the year ended December 31, 2007,
compared to administrative expenses of $4,992,871 for the year ended December
31, 2006, a decrease in administrative expenses of $216,920 or 4.3% from the
prior period.
 
 The
decrease in administrative expenses was due to reductions in the number of our
senior producers during the year ended December 31, 2007, compared to the year
ended December 31, 2006, and our management’s effort to reduce administrative
expenses during the three months ended December 31, 2007.
 
 We had a
loss from operations of $861,335 for the year ended December 31, 2007, compared
to a loss from operations of $950,585 for the year ended December 31, 2006, a
decrease in loss from operations of $89,250 or 9.4% from the prior period. The
decrease in loss from operations was mainly attributable to the $216,920 or 4.3%
decrease in administrative expenses offset by the $127,670 or 3.2% decrease in
gross profit for the year ended December 31, 2007, compared to the prior
year.
 
 We had
net other expenses for the year ended December 31, 2007, of $962,620, compared
to net other expenses of $1,041,017 for the year ended December 31, 2006, a
decrease in net other expenses of $78,397 or 7.5% from the prior period. The
main reason for the decrease in net other expenses was a $540,000 decrease in
intangible impairment, to $0 for the year ended December 31, 2007, compared to
$540,000 for the year ended December 31, 2006, in connection with a one time
writedown of an operating loss carryforward, offset by a $453,034 or 88.9%
increase in other expenses, to $962,711 for the year ended December 31, 2007,
compared to $509,677 for the year ended December 31, 2006, in connection with
interest on our outstanding promissory notes and higher accrued interest on our
outstanding convertible notes, in connection with a greater amount of
convertible notes, with a higher interest rate outstanding during the year ended
December 31, 2007, compared to the year ended December 31, 2006, and an $8,569
decrease in other income for the year ended December 31, 2007 compared to the
year ended December 31, 2006.
  We had a
net loss of $1,823,955 for the year ended December 31, 2007, compared to a net
loss of $1,991,602 for the year ended December 31, 2006, a decrease in net loss
of $167,647 or 8.4% from the prior year. The decrease in net loss was
attributable to the 4.3% decrease in administrative expenses, the 21.8% decrease
in cost of goods sold and the 7.5% decrease in net other expenses, offset by the
14.2% decrease in sales for the year ended December 31, 2007, compared to the
year ended December 31, 2006.
 
 -23-
 We had
other comprehensive income, consisting of decrease in fair value of derivatives,
for the year ended December 31, 2007 of $454,091, compared to $296,121 for the
year ended December 31, 2006, an increase of $157,970 or 53.3% from the prior
year.  This decrease in fair value of derivatives is attributable to
the volatile price of the Company’s common stock.
  We had
net comprehensive loss of $1,369,864 for the year ended December 31, 2007,
compared to net comprehensive loss of $1,695,481 for the year ended December 31,
2006, a decrease in net comprehensive loss of $325,617 or 19.2% from the prior
year.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 We had
total current assets of $1,615,096 as of December 31, 2007, which included cash
of $504,012; accounts receivable of $394,453; work in progress at cost of
$43,408; prepaid expenses of $253,473; and prepaid finance charges of
$419,750.
 
 We had
total fixed assets of $964,651 as of December 31, 2007, which included equipment
of $244,736; furniture and fixtures of $66,177; and leasehold improvements of
$1,006,745; which was offset by $353,006 of accumulated deprecation. Leasehold
improvements mainly included the XA Scenes office space and venue rental in New
York, improvements on that space, and equipment mainly includes equipment
purchased in connection with the XA Scenes venue.
 
 We had
other assets of $937,248 as of December 31, 2007, which included $71,939 of
deposits; and $865,309 of goodwill.
 
 We had
total assets of $3,516,995 as of December 31, 2007.
 
 We had
total current liabilities of $5,688,233 as of December 31, 2007, which included
$706,630 of accounts payable, $421,104 of interest payable, which mainly
represents accrued and unpaid interest on our 11% Convertible Notes; $3,292 of
withheld and accrued taxes; $169,303 of unearned revenues; $837,904 of line of
credit; and $3,550,000 of current portion of long term debt in connection with
amounts owed to the Purchasers pursuant to the outstanding promissory
notes.
 
 We had
derivative liability of $10,116 as of December 31, 2007, in connection with the
outstanding notes owed to the Purchasers.
 
 We had
negative working capital of $4,073,137 and a total retained deficit of
$5,233,538 as of December 31, 2007.
 
 We had
net cash used by operating activities of $703,903 for the year ended December
31, 2007, which was mainly due to $1,873,995 of net loss, offset by $334,722
decrease in prepaid finance charges, $318,344 increase in accrued interest,
$192,398 increase in accounts payable, $212,853 in amortization of discounts on
notes payable and $141,145 of depreciation.
 
 We had
$300 of net cash used by investing activities for the year ended December 31,
2007, which was due to $2,000 of purchase of fixed assets offset by $1,700 of
decrease in deposits.
 
 We had
$835,589 of net cash used by financing activities during the year ended December
31, 2007, which represented an $850,000 increase in notes payable and a $37,904
increase in line of credit, offset by an increase of $52,315 in derivative
liability.
 
 The
Company has a line of credit agreement which it entered into on August 12, 2004,
with LaSalle Bank National Association ("LaSalle") for $750,000.  The
line of credit was due August 12, 2005, and the interest varied at 0.25% over
the prime rate. The Company's assets secure the line of credit. Prior to the
expiration of the line of credit, the line of credit was renewed for another
year and increased to $800,000. On or around June 30, 2007, the Company entered
into a promissory note evidencing amounts owed under the line of credit, in the
amount of $600,000, which promissory note accrued interest at the rate of 2.25%
above the prime rate then in affect, which line of credit was later amended and
replaced by the Line of Credit, defined and described below.
 
 -24-
 On June
1, 2006, we entered into a business loan for a loan of up to $750,000 with
LaSalle, which loan accrued interest at the prime rate plus 0.25% until
paid.  The loan was originally due on June 30, 2007, but was extended
by the parties entry into a promissory note on or around June 30, 2007, which
increased the interest rate to 2.25% per annum, which provided for $66,666 to be
paid on July 31, 2007; a payment of accrued interest under the promissory note
on July 31, 2007; and one payment of principal and interest of approximately
$200,064 on July 31, 2007.  We failed to make the required payments
due under the promissory note pursuant to the payment schedule above, and as
such, the interest rate of the funds due under the promissory note increased by
2%; however, this promissory note was subsequently amended and replaced by the
LaSalle Line of Credit defined and described below.
 
 On or
about August 27, 2007, we entered into a promissory note with LaSalle,
evidencing a line of credit (the “LaSalle Line of Credit”), which evidenced and
aggregated the amounts previously outstanding under the line of credit and
promissory note described above, in an amount equal to $867,000.  The
LaSalle Line of Credit bears interest at the rate of 2.25% above the prime rate
then in effect, which was equal to 10.5% per annum as of August 27, 2007,
adjustable as provided in the LaSalle Line of Credit, until paid.  We
were required to make monthly payments of interest under the LaSalle Line of
Credit, with the full outstanding balance of the LaSalle Line of Credit due on
December 1, 2007.  The agreement provides that, in the event of
default, the interest rate of the LaSalle Line of Credit will increase by 2%
over the interest rate then in effect.
 
 We failed
to make the required payment due under the promissory note on December 1, 2007,
which promissory note had a remaining balance of $844,485.03 as of December 11,
2007.  This unpaid balance consisted of $837,904.00 in principle and
$6,581.03 in accrued and unpaid interest.  On December 3, 2007,
LaSalle notified the Company by letter that the promissory note was in default,
and beginning on December 4, 2007, interest will accrue on the unpaid balance of
the promissory note (and any accrued and unpaid interest thereon) at the default
annual rate of 11.75% (the prime rate plus 4.25% per year), based on the bank’s
prime rate of 7.5%.  Pursuant to LaSalle’s letter as of December 4,
2007, the Company had until December 31, 2007 to repay the remaining balance of
the promissory note, or LaSalle would seek alternatives to payment.
 
 We
subsequently paid $100,000 from the Second Follow On Funding to LaSalle, to
repay a portion of the principal and interest owed to LaSalle through the
LaSalle Line of Credit and entered into a Forbearance Agreement with LaSalle,
pursuant to which LaSalle will forbear enforcement of its rights and remedies
against us and Experiential until June 1, 2008, conditioned on performance of
certain terms and conditions.  These terms and conditions include
entering into a new note in the amount of $738,000 with continuing interest and
principal payments of $10,000 due on March 1, 2008, April 1, 2008, and May 1,
2008.  Furthermore, the Forbearance Agreement requires the Company,
the Second Follow On Purchasers and the other junior lenders to enter into
Subordination Agreements and a General Release for the benefit of LaSalle (the
“Subordination Agreements”), as well as requiring us to agree to pay all legal
fees and expenses incurred by LaSalle in connection with the defaults and the
Forbearance Agreement.
 
 Description
of Funding Events:
 
 On August
8, 2006, we entered into a Securities Purchase Agreement, with Sands Brothers
Venture Capital LLC, Sands Brothers Venture Capital II LLC, Sands Brothers
Venture Capital III LLC, Sands Brothers Venture Capital IV LLC, and Katie &
Adam Bridge Partners, L.P. (collectively the "Sands Brothers Purchasers"),
pursuant to which we sold the Sands Brothers Purchasers fifteen month, 11%
Senior Subordinated Secured Convertible Promissory Notes in the aggregate
principal amount of $1,250,000 (the "August 2006 Notes") and five (5) year
warrants to purchase an aggregate of one hundred and seventy-five thousand
(175,000) shares of our common stock at an exercise price of $1.10 per share
(the "Warrants").
 
 -25-
 On
September 26, 2006 and October 23, 2006, we sold an aggregate of $1,450,000 in
additional 11% Senior Subordinated Convertible Promissory Notes (the "Second
Funding Notes") to three purchasers (the "Second Funding Purchasers"), who were
also issued an aggregate of 217,500 five year warrants to purchase shares of our
common stock at $1.10 per share and 100,000 five year warrants to purchase
shares of our common stock at $0.30 per share (the "Second Funding Warrants,"
and collectively the whole transaction, the "Second Funding").
 
 On or
about June 11, 2007, we entered into Securities Purchase Agreements with
Andersen and Higbee (the “Follow On Andersen and Higbee Purchase Agreements”),
two individuals ("Andersen" and "Higbee"). Pursuant to the Andersen and Higbee
Securities Purchase Agreements, we sold Andersen and Higbee $25,000 in twelve
(12) month, 11% Senior Subordinated Secured Convertible Promissory Notes each
(the "Follow On Andersen and Higbee Notes"), and granted each of them
twenty-five thousand (25,000) five year warrants to purchase shares of our
common stock at an exercise price of $0.30 per share (the "Follow On Andersen
and Higbee Warrants," and collectively the “Andersen and Higbee Follow On
Funding”).
 
 On or
about June 22, 2007, we entered into a Securities Purchase Agreement (the
"Follow On Sands Brothers Purchase Agreement") with The Sands Brothers
Purchasers, pursuant to which we sold such Sands Brothers Purchasers twelve (12)
month, 11% Senior Subordinated Secured Convertible Promissory Notes in the
aggregate principal amount of $200,000 (collectively the "Follow On Sands
Brothers Notes") and five (5) year warrants to purchase an aggregate of two
hundred thousand (200,000) shares of our common stock at an exercise price of
$0.30 per share (the "The Follow On Sands Brothers Warrants," and collectively
the “Sands Brothers Follow On Funding”).
 
 On or
about June 29, 2007, we entered into a Securities Purchase Agreement with
Vision, and collectively with Andersen and Higbee and the Sands Brothers
Purchasers, the "Purchasers”). Pursuant to the Securities Purchase Agreement
with Vision (collectively with the Andersen and Higbee Purchase Agreements and
the Sands Brothers Purchase Agreement, the "Follow On Funding Purchase
Agreements"), we sold Vision $200,000 in twelve (12) month, 11% Senior
Subordinated Secured Convertible Promissory Notes (the "Follow On Vision Note,"
and collectively with the Follow On Andersen and Higbee Notes and the Follow On
Sands Brothers Notes, the "Follow On Notes") and granted Vision two hundred
thousand (200,000) five year warrants to purchase shares of our common stock at
$0.30 per share (the “Follow On Visions Warrants,” and collectively the Follow
On Andersen and Higbee Warrants, and the Follow On Sands Brothers Warrants, the
“Follow On Warrants,” and the “Follow On Vision Funding,” and collectively with
the Andersen and Higbee Follow On Funding and the Sands Brothers Follow On
Funding, the “Follow On Funding”).
 
 A
required term of the Follow On Funding was that each of the Purchasers agree
that the maturity date of the Prior Notes which they hold would be extended to
the maturity dates of the Follow On Notes which they hold. The amendment and
extension to each of the Purchaser’s Prior Notes was accomplished by each of the
Purchasers entry into a First Amendment to the 11% Senior Secured Convertible
Promissory Notes with us, on or around the date of their purchases of the Follow
On Notes (and in the case of Andersen and Higbee, on or around the date they
entered into conforming documents with us, as described above, (the “Note
Amendments”)). Pursuant to the Note Amendments, each of the Purchasers agreed
that the maturity date of the Prior Notes which they hold would be extended to
the maturity date of their respective Follow On Notes. For example, the maturity
date of Vision’s Prior Note in the amount of $1,250,000, was extended until the
maturity date of the Follow On Vision Note, June 29, 2008.
  Our
repayment of the August 2006 Notes, Second Funding Notes and Follow On Notes and
any accrued interest thereon is secured by a security interest in substantially
all of our assets, which we granted to the Purchasers pursuant to a Security
Agreements which we entered into with the Purchasers at the
closings.
 
 On or
about December 21, 2007, the Company entered into a Securities Purchase
Agreement (the "Sands Brothers Purchase Agreement") with Sands Brothers Venture
Capital III LLC (the “Sands Brothers III”), pursuant to which we sold Sands
Brothers III a twelve (12) month, 11% Senior Subordinated Secured Convertible
Promissory Note in the aggregate principal amount of $200,000 (the "Second
Follow On Sands Brothers Note") and five (5) year warrants to purchase an
aggregate of two hundred thousand (200,000) shares of our common stock at an
exercise price of $0.30 per share (the "Sands Brothers Warrants," and
collectively the “Sands Brothers Second Follow On Funding”).
 
 -26-
 On or
about December 21, 2007, we entered into a Securities Purchase Agreement with
Vision Opportunity Master Fund, Ltd. ("Vision," and collectively with Sands
Brothers, the "Second Follow On Purchasers”). Pursuant to the Securities
Purchase Agreement with Vision (collectively with the Sands Brothers Purchase
Agreement, the "Second Follow On Funding Purchase Agreements"), we sold Vision a
$200,000 twelve (12) month, 11% Senior Subordinated Secured Convertible
Promissory Note (the "Second Follow On Vision Note," and collectively with the
Second Follow On Sands Brothers Notes, the "Second Follow On Notes") and granted
Vision two hundred thousand (200,000) five year warrants to purchase shares of
our common stock at $0.30 per share (the “Second Follow On Vision Warrants,” and
collectively with the Second Follow On Sands Brothers Warrants, the “Second
Follow On Warrants,” and the “Second Follow On Vision Funding,” and collectively
with the Sands Brothers Second Follow On Funding, the “Second Follow On
Funding”).
 
 On or
about February 29, 2008, the Company and Experiential entered into a Revolving
Line of Credit Agreement (the “Sands Brothers Line of Credit”) with Sands
Brothers Venture Capital III LLC (“Sands Brothers”), pursuant to which Sands
Brothers extended a revolving line of credit to the Company for a period
extending to June 29, 2008 in the principal amount of up to two hundred thousand
dollars ($200,000).
 
 In
connection with the Sands Brothers Line of Credit, the Company received an
initial advance on or around February 29, 2008, of one hundred thousand dollars
($100,000) and executed and delivered to Sands Brothers a Promissory Note (the
“First Advance Note”) in the initial amount of one hundred thousand dollars
($100,000), evidencing such advance.  Further, on March 27, 2008, the
Company received a second advance of one hundred thousand dollars ($100,000) and
executed and delivered to Sands Brothers a Promissory Note (the “Second Advance
Note”) in the amount of one hundred thousand dollars ($100,000), evidencing such
advance.  The second advance exhausted the funding Sands Brothers has
agreed to provide pursuant to the Sands Brothers Line of Credit. The First
Advance Note and the Second Advance Note bear interest until paid in full at the
rate of twelve percent (12%) per annum, with the interest on such notes payable
monthly in arrears commencing on April 1, 2008.  In the event any
payment is not made within three (3) days of the date such payment is due under
either note, both outstanding notes will bear interest at the rate of fifteen
percent (15%) per annum, and such failure to pay the required payment is defined
as an “Acceleration Event.” Any Acceleration Event or Event of Default gives
Sands Brothers the right to provide for the entire amount of unpaid principal
and interest on the outstanding notes to be immediately due and payable with
fifteen days prior notice in the event of an Acceleration Event and without
prior notice if an Event of Default occurs.  The principal and any
unpaid interest on both notes is due and payable on June 29, 2008.
  Use of
Proceeds:
 
 We
immediately used $1,047,000 of the funds received through the sale of the August
2006 Notes along with approximately $40,000 in cash on hand to repay the
$1,086,486 amount owed under our outstanding 6% Convertible Notes, which we sold
to certain purchasers in June and September 2004 (the "6% Notes" and the "6%
Note Purchasers"). The 6% Note Purchasers had originally purchased $2,500,000 in
6% Notes from us in two tranches, one tranche of $1,250,000 on June 30, 2004
(the "First Tranche") and $1,250,000 on September 13, 2004 (the "Second
Tranche").
 
 The 6%
Note Purchasers previously converted a portion of the 6% Notes into shares of
our common stock, and as a result, only approximately $1,056,180 of principal
remained due under the June 2004 tranche of the 6% Notes on June 30, 2006, which
amount was not immediately paid when due. This amount would have accrued
interest at the default rate equal to 15% until paid, however our default was
waived by the 6% Note Purchasers pursuant to our entry into the Waiver of Rights
Agreement with the 6% Note Purchasers. As a result, the remaining balance under
the First Tranche of the 6% Notes was equal to $1,056,180 as of August 8, 2006,
which amount was increased to $1,086,486 in connection with accrued and unpaid
interest at 6% per annum on the outstanding amount of the First Tranche of the
6% Notes and the Second Tranche of the 6% Notes. The remaining amount of the
August 2006 funding equal to approximately $203,000 was paid to various parties
in connection with attorney's fees and finder's fees in connection with the
August 2006 funding.
 
 -27-
 We used
$1,030,575 of the funds received through the Second Funding to repay the amount
due under the Second Tranche of the 6% Notes and interest on such amount as of
October 18, 2006. We owed approximately $1,012,434 in principal on the September
2004 portion of the 6% Notes, which notes were due and payable on September 13,
2006, but which due date was later extended to October 18, 2006, pursuant to the
Third Waiver Agreement. The total amount of principal and interest at 6% per
annum which was due under the 6% Notes as of October 18, 2006, was approximately
$1,030,575. Due to our repayment of the Second Tranche of the 6% Notes, we no
longer owe the 6% Note Purchasers any money, however, such 6% Note Purchasers
still hold 250,000 warrants to purchase shares of our common stock at an
exercise price of $9.60 per share, which expire if unexercised on June 30, 2008.
An additional amount of $165,000 of the remaining amount received through the
Second Funding was used to pay various closing costs and legal fees, including
$80,000 paid to Laidlaw & Company (UK) Ltd. ("Laidlaw") in connection with
finders fees and consulting fees in connection with the October funding and
amounts paid to Vision's legal counsel in attorney's fees and due diligence fees
in connection with the October closing, leaving us with approximately $250,000
from the amount raised through the Second Funding after repaying the 6% Note
Purchasers and closing fees.
 
 In
connection with the Follow On Funding, we agreed to pay legal fees to the Sands
Brothers Purchasers’ counsel, which amounted to approximately $20,000 in
addition to our legal counsel’s fees associated with the Follow On Funding of
approximately $30,000. As a result, we received an aggregate of $400,000 in
connection with the sale of the $450,000 in Follow On Notes.
 
 The
Company paid $100,000 from the Second Follow On Funding to LaSalle, to repay a
portion of the principal and interest owed to LaSalle through the LaSalle Line
of Credit and entered into a Forbearance Agreement with LaSalle, pursuant to
which LaSalle will forbear enforcement of its rights and remedies against us and
Experiential until June 1, 2008, conditioned on performance of certain terms and
conditions.  These terms and conditions include entering into a new
note in the amount of $738,000 with continuing interest and principal payments
of $10,000 due on March 1, 2008, April 1, 2008, and May 1,
2008.  Furthermore, the Forbearance Agreement requires the Company,
the Second Follow On Purchasers and the other junior lenders to enter into
Subordination Agreements and a General Release for the benefit of LaSalle (the
“Subordination Agreements”), as well as requiring us to agree to pay all legal
fees and expenses incurred by LaSalle in connection with the defaults and the
Forbearance Agreement.
 
 The funds
advanced to the Company through the Sands Brothers Line of Credit will be used
for operating expenses in connection with the operations of Experiential, and
will be immediately transferred to Experiential as a capital
contribution.  Such operating expenses may include but are not limited
to legal fees, vendor expenses, auditor fees, payroll, rent, and financing
expenses.
 
 We will
need to raise additional financing in the future to repay the $3,550,000, not
including accrued and unpaid interest on the notes, which we owe under the
August, September and October 2006 Senior Notes, the Follow On Notes and the
Second Follow On Notes, which notes are due and payable on June 22, 2008 in
connection with the $1,250,000 August 2006 funding and $200,000 of the Follow On
Funding, June 11, 2008, in connection with $200,000 of the Notes and $50,000 of
the Follow On Notes, June 29, 2008, in connection with the $1,250,000 October
2006 funding and $200,000 of the Follow On Funding, and December 21, 2008, in
connection with $400,000 of the Second Follow On Notes, assuming such note
holders do not convert such notes into shares of our common stock in connection
with their Optional Conversion and Mandatory Conversion rights (described above)
and will require approximately $837,904 which we owe under the LaSalle Line of
Credit, which amount was due on December 31, 2007; however, LaSalle has agreed
to forbear its rights and remedies against us and Experiential until June, 1,
2008, provided we perform the terms and conditions discussed
above.  We can provide no assurances however that we will be able to
perform these terms and conditions, or that we will be able to obtain sufficient
funds from alternative lending sources to repay the amount owed pursuant to the
LaSalle Line of Credit.  Further, we owe Sands Brothers Venture
Capital III LLC $200,000 in connection with a line of credit, which amount and
any unpaid interest is due and payable on June 29, 2008.  In addition to
the amounts described above, we anticipate the need for approximately $1 to $5
million of additional financing to support strategic acquisitions and our
current expansion plan for the next 18 to 24 months.
 
 -28-
 We
currently hope to raise approximately $3,000,000 in private equity or debt
financing within the next fifteen months, of which there can be no assurance
(the "Private Offering"). If we are able to affect the Private Offering, the
September and October 2006 Second Funding Purchasers will have thirty (30) days
following the closing of the Private Offering to decide whether to convert their
September and October 2006 Notes into shares of our common stock (in connection
with the conversion features of such Notes) and the August 2006 purchasers will
be required to immediately convert their August 2006 Notes into shares of our
common stock. If those September and October 2006 purchasers choose not to
convert their September and October 2006 Notes into shares of our common stock,
we will then have ten (10) days to repay them the total outstanding amount of
their Notes together with any accrued and unpaid interest
thereon.  All of the Follow On Notes are convertible at the option of
the holders thereof until such notes are paid by us in full, along with any
accrued and unpaid interest thereon.
 
 A
substantial portion of our investment capital for the next 12 months, if any,
other than those amounts used to repay the LaSalle Line of Credit (and/or which
will need to be used to repay the Notes, assuming such Notes are not converted
into shares of our common stock) will be used to finance the expansion of our
business in accordance with our growth and acquisition strategy described above.
To the extent that the proceeds are not used for acquisitions, such proceeds
will be used for general corporate purposes and for working capital needs. The
amount and timing of such uses will vary depending on the availability of
acquisition opportunities. Pending such uses, the net proceeds will be invested
in short-term investment grade securities.
 
 Furthermore,
we may receive up to approximately $750,000 in connection with the exercise of
the Warrants, which funds we plan to use, if such Warrants are exercised for
cash (and not pursuant to a cashless exercise), of which there can be no
assurance, for financing future acquisitions and/or working
capital.
  While we
are not currently a party to any agreements with respect to any acquisitions, it
is possible that an agreement in principle or a definitive agreement as to one
or more acquisitions will be executed prior to the completion of the current
capital raising efforts. It is likely that the closing of any acquisition would
require us to raise additional funds, which there can be no assurance will be
available on favorable terms, if at all.
 
 At this
time, no additional financing has been secured. We have no commitments from
officers, directors or affiliates to provide funding. Our growth and continued
operations could be impaired by limitations on our access to the capital markets
as well as penalties we may be forced to pay to the Purchasers if we are unable
to repay the Notes when due, if such Notes are not converted into shares of our
common stock. Without additional financing, we believe we can continue our
operations for at least the next twelve months with our current revenues;
however, if we are unable to obtain additional financing upon terms that
management deems sufficiently favorable, or at all, it would have a material
adverse impact upon our ability to pursue our expansion strategy and/or repay
the Notes when due, if such notes are not converted into shares of our common
stock. There can be no assurance that capital from outside sources will be
available, or if such financing is available, it may involve issuing securities
senior to our common stock or equity financings which are dilutive to holders of
our common stock. In addition, in the event we do not raise additional capital
from conventional sources, it is likely that our growth will be restricted and
we may need to scale back or curtail implementing our business
plan.
 
 -29-
 RISK
FACTORS
 
 WE
HAVE A PRESENT NEED FOR CAPITAL IN ADDITION TO $2.7 MILLION RAISED IN AUGUST
THROUGH OCTOBER 2006, $450,000 RAISED IN JUNE 2007, $400,000 RAISED IN DECEMBER
2007, AND $200,000 RAISED IN MARCH 2008.
 
 We intend
to seek additional acquisitions which acquisitions will likely require
additional capital ranging from $3 to $5 million, which is in addition to $2.7
million raised in August through October 2006, $450,000 raised in June 2007,
$400,000 raised in December 2007, and $200,000 raised in March 2008.
Furthermore, the due date of such Notes (as amended by the First Amendment to
the Notes), is June 22, 2008 in connection with the $1,250,000 August 2006
funding and $200,000 of the Follow On Funding, June 11, 2008, in connection with
$200,000 of the Notes and $50,000 of the Follow On Notes, June 29, 2008, in
connection with the $1,250,000 October 2006 funding and $200,000 of the Follow
On Funding, and December 21, 2008, in connection with $400,000 of the Second
Follow On Notes, if such Notes are not converted into shares of our common stock
prior to such due dates. Finally, we have approximately $837,904 which is due to
LaSalle as of December 31, 2007 (described in greater detail above under
“Liquidity and Capital Resources”) and $200,000 which is due to Sands Brothers
Venture Capital III LLC on June 29, 2008. At this time, no additional financing
has been secured. Our growth and continued operations could be impaired by
limitations on our access to the capital markets. There can be no assurance that
capital from outside sources will be available, or if such financing is
available, that it will be on terms that management deems sufficiently
favorable. If we are unable to obtain additional financing upon terms that
management deems sufficiently favorable, or at all, it would have a material
adverse impact upon our ability to continue our business operations and pursue
our expansion strategy. We need to raise additional capital to repay the
Purchasers and the Line of Credit, and as a result, we may seek to enter into
acquisitions or mergers in the future, of which we currently have no immediate
plans, but which if undertaken, could result in a restructuring, change of
control and/or a change in our business focus, as well as potential dilution to
then current shareholders. In the event we do not raise additional capital from
conventional sources, there is every likelihood that we may need to scale back
or curtail implementing our business plan.
 
 WE
MAY CHOOSE TO GO PRIVATE IN THE FUTURE AND/OR CEASE OUR PUBLIC FILINGS, WHICH
COULD CAUSE YOU TO LOSE ALL LIQUIDITY IN YOUR INVESTMENT, AND/OR COULD CAUSE ANY
INVESTMENT IN THE COMPANY TO BECOME WORTHLESS.
 
 We may
choose to go private in the future through a reverse merger with a separate
company, or otherwise.  Additionally, the Company may file a Form 15
in the future, which if approved by the Commission, will suspend its periodic
and current report filing obligations with the Commission. In the event that our
management decides to take the Company private, any investors in the Company
could be forced to be bought out, could hold shares in a non-reporting company
or in the event of a reverse merger, could own shares in a company with
operations which may be completely different, more risky and have less assets
and/or revenues than the Company.  The shares they hold after any
merger transaction or after any transaction which results in us ceasing to file
reports with the Commission, if any, may not have an equivalent value to their
shares of the Company, and/or may have diminished liquidity.  In the
event that we decide to go private and/or file a Form 15 to suspend our
reporting obligations with the Commission, any investment in the Company could
be lost, may have a lesser value than our shares currently have, and/or may have
no value or liquidity at all.
 
 WE
HEAVILY DEPEND ON JOSEPH WAGNER AND JEAN WILSON.
 
 The
success of the Company depends heavily upon the personal efforts and abilities
of Joseph Wagner and Jean Wilson. Joseph Wagner entered into a sixty (60) month
Consulting Agreement with the Company effective August 1, 2006 (which agreement
was amended on March 8, 2007), pursuant to which Mr. Wagner serves as the
Company's, Chief Executive Officer, President and Secretary. Mr. Wagner is also
the Chairman of the Board of Directors of the Company. Mr. Wagner may engage in
business activities or interests outside of the Company which are not adverse or
competitive to the Company. Jean Wilson serves as the Company's Chief Operating
Officer, Treasurer and as a director of the Company pursuant to a sixty (60)
month Employment Agreement she entered into with the Company, with an effective
date of August 1, 2006. Mr. Wagner and Ms. Wilson may voluntarily terminate
their employment at any time. The loss of Mr. Wagner, Ms. Wilson or other key
employees could have a material adverse effect on our business, results of
operations or financial condition. In addition, the absence of Mr. Wagner or Ms.
Wilson may force us to seek a replacement who may have less experience or who
may not understand our business as well, or we may not be able to find a
suitable replacement.
 
 -30-
 OUR
ABILITY TO OPERATE SUCCESSFULLY AND MANAGE OUR POTENTIAL GROWTH DEPENDS ON OUR
ABILITY TO ATTRACT AND RETAIN HIGHLY QUALIFIED TECHNICAL, MANAGERIAL, SALES,
MARKETING AND FINANCIAL PERSONNEL.
 
 The
Company's success heavily depends upon its ability to attract and retain highly
qualified technical, managerial, sales, marketing and financial personnel. The
Company faces competition for qualified personnel in these areas. The Company
cannot be certain that it will be able to attract and retain qualified
personnel. The Company's inability to hire and retain additional qualified
personnel in the future could have a material adverse effect on our business,
results of operations or financial condition.
 
 OUR
AUDITOR HAS RAISED DOUBT AS TO WHETHER WE CAN CONTINUE AS A GOING
CONCERN.
 
 We had a
net loss of $1,823,955 for the year ended December 31, 2007.  We also
had an adjustment to net loss of $454,091 due to the decrease in the fair value
of our derivatives, and a net comprehensive loss of $1,369,864 for the year
ended December 31, 2007. We had a $4,073,137 working capital deficiency and a
total retained deficit of $5,233,538 as of December 31, 2007. These factors
among others indicate that we may be unable to continue as a going concern,
particularly in the event that we cannot obtain additional financing and/or
attain profitable operations. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty
and if we cannot continue as a going concern, your investment in us could become
devalued or even worthless.
 
 THE
SENIOR NOTES ARE SECURED BY A SECURITY INTEREST IN SUBSTANTIALLY ALL OF OUR
ASSETS.
 
 In August
2006, we sold $1,250,000 in 11% Senior Secured Convertible Notes to certain
purchasers, in September and October we sold an additional $1,450,000 in 11%
Senior Secured Convertible Notes to three purchasers, in June 2007, we sold an
aggregate of $450,000 in 11% Senior Secured Convertible Notes to the Purchasers,
and in December 2007, we sold an aggregate of $400,000 in 11% Senior
Subordinated Secured Convertible Promissory Notes. All of our currently
outstanding Notes and interest on such Notes are convertible into shares of our
common stock; however, if we fail to register the shares which the Notes are
convertible into, such registration statement ceases to be effective or if the
Purchasers fail to convert the outstanding amount of the Senior Notes into
shares of our common stock, we will be obligated to repay up to $3,550,000, not
including any accrued interest, on the due date of such Notes (as amended by the
First Amendment to the Notes), June 22, 2008 in connection with the $1,250,000
August 2006 funding and $200,000 of the Follow On Funding, June 11, 2008, in
connection with $200,000 of the Notes and $50,000 of the Follow On Notes, June
29, 2008, in connection with the $1,250,000 October 2006 funding and $200,000 of
the Follow On Funding, and December 21, 2008, in connection with $400,000 of the
Second Follow On Notes. If we default in our repayment of the Notes when due,
the Purchasers can take control of substantially all of our assets due to the
fact that the repayment of the Notes are secured by a Security Agreement,
pursuant to which we granted the Purchasers a security interest in substantially
all of our assets. As a result, if we default in the repayment of the Notes, the
Purchasers may take control of substantially all of our assets, which could
force us to curtail or abandon our business operations, and any investment in us
could become worthless.
  -31-
 THE
SEC MAY LIMIT THE NUMBER OF SHARES WE ARE ELIGIBLE TO REGISTER FOR RESALE AT ANY
ONE TIME.
  We
previously agreed to register all of the shares of common stock issuable to the
Purchasers and various other parties in connection with the conversion of the
Convertible Notes and the exercise of outstanding warrants to purchase shares of
our common stock. However, the SEC has recently made public statements
indicating the SEC’s Division of Corporation Finance will question the ability
of issuers to register shares for resale in a secondary offering (an offering
made on behalf of a selling shareholder, versus a primary offering made by the
issuer) where the number of shares offered exceeds an estimated one-third of the
total number of shares held by non-affiliates prior to the underlying private
transaction.  Although this position is not written or settled law, it is
possible the SEC staff will view any resale offering by investors as an offering
by us and deem it a primary offering if the number of shares we seek to register
exceeds the estimated one-third threshold.  Even if the number of shares we
seek to register is below the estimated one-third threshold, the SEC staff may
still take the position that the offering is a primary offering rather than a
secondary offering.  In that event, we may seek to register only a portion
of the shares we are required to offer at any one time and will only be able to
register additional shares after the passage of time and the sale of
substantially all of the shares subject to the previous registration
statement.  As a result, the number of shares each investor may include in
a registration statement could be substantially reduced. If we are prohibited
from registering all of the shares underlying the Convertible Notes and
exercisable into common stock in connection with the exercise of the warrants,
as we previously agreed, the Purchasers may be limited in their ability to
convert such Notes and as a result, we could be forced to repay the entire
amount of such Notes which would require a substantial amount of additional cash
than we currently have on hand, and may require us to sell additional notes to
raise such additional funding, of which there can be no assurance.
 
 OUR
INDUSTRY IS HIGHLY COMPETITIVE.
 
 The event
production industry is highly competitive and fragmented. The Company expects
competition to intensify in the future. The Company competes in each of its
markets with numerous national, regional and local event production companies,
many of which have substantially greater financial, managerial and other
resources than those presently available to the Company. Numerous
well-established companies are focusing significant resources on providing event
marketing, design and production services that will compete with the Company's
services. No assurance can be given that the Company will be able to effectively
compete with these other companies or that competitive pressures, including
possible downward pressure on the prices it charges for its products and
services, will not arise. In the event that the Company cannot effectively
compete on a continuing basis or competitive pressures arise, such inability to
compete or competitive pressures will have a material adverse effect on the
company’s business, results of operations and financial condition.
  IF
WE FAIL TO TIMELY FILE AND/OR OBTAIN EFFECTIVENESS OF A REGISTRATION STATEMENT
REGISTERING THE SHARES OF COMMON STOCK UNDERLYING THE PURCHASERS NOTES AND
WARRANTS, WE WILL FACE SIGNIFICANT PENALTIES, WHICH COULD DECREASE THE AMOUNT OF
OUR CASH ON HAND AND CAUSE THE VALUE OF OUR STOCK TO DECLINE IN
VALUE.
 
 Pursuant
to the Registration Rights Agreements, we agreed to register the shares of
common stock which the Notes are convertible into and the shares of common stock
underlying the Warrants (the “Underlying Shares”).  Pursuant to the
Second Follow On Rights Agreements (which replaced and superseded the prior
Registration Rights Agreements entered into in August 2006, October 2006, and
June 2007, in connection with the previous sale of $3,150,000 in 11% Senior
Secured Convertible Notes), we agreed to register the Registrable Securities on
a Form SB-2 registration statement with the Securities and Exchange Commission
(the "Commission" and the "Registration Statement") pursuant to the deadlines
discussed below. We agreed that in the event that the Private Offering has not
occurred within six (6) months of the date of the Second Follow On Funding
closing, December 21, 2007, which date is June 21, 2008, we would file the
Registration Statement with the Commission within forty-five days of such six
(6) month anniversary, August 5, 2008, and that we would obtain effectiveness of
the Registration Statement no more than ninety (90) days after the date we are
required to file such Registration Statement, or November 3, 2008 (the "Initial
Registration Deadlines").  However, in the event that we are unable to
register all of the Registrable Securities in one Registration Statement because
of the applicability of Rule 415 of the Securities Act of 1933, as amended, the
Purchasers, as well as Mastodon Ventures, Inc. (collectively the “Registration
Rights Holders”), have agreed that the number of shares we can register at any
one time will be allocated pro rata to each of the Registration Rights Holders
and to file additional registration statements to register the remaining
Registrable Securities as described above under “Second Follow On Funding
Registration Rights Agreement.”
 
 -32-
 If we
fail to obtain effectiveness of any required Registration Statement by the
applicable Registration Deadlines, or after such effectiveness the Second Follow
On Purchasers are unable to sell the Registrable Securities, due to any reason
other than the Commission’s application of Rule 415, we are obligated, pursuant
to the Second Follow On Rights Agreements, to pay the Second Follow On
Purchasers an amount in cash equal to two (2%) of the total principal amount of
the Prior Notes and the Second Follow On Notes ($71,000), for each thirty (30)
day period which the Registration Deadlines are not met or the Second Follow On
Purchasers are unable to sell the Underlying Shares. If we fail to pay such
damages within five (5) days of the date payable, we are required to pay
interest on the amount payable at the rate of eighteen percent (18%) per annum,
accruing daily until such amounts are paid in full. As a result, if we fail to
timely file the Registration Statement and/or are prevented from timely
receiving effectiveness of such filing, we could be forced to pay the Purchasers
substantial penalties, which would reduce our cash on hand, and could cause us
to curtail our current business plans, which would likely cause the value of our
common stock to decline in value.
  WE
CURRENTLY HAVE A PENDING LAWSUIT WITH ONE OF OUR FORMER LANDLORDS, WHICH
LANDLORD ALLEGED APPROXIMATELY $309,710 IN DAMAGES.
 
 Our
former landlord, Erie West, L.L.C. (the "Landlord"), filed a lawsuit against
us(described in
greater detail under "Legal Proceedings," below) claiming approximately $309,710
in damages and alleging that the Landlord is owed money for unpaid rental fees,
which it alleged we stopped paying rent under on July 1, 2004, which lease was
to run until March 31, 2008. We filed answers to the Landlord's allegations,
denying certain allegations and asserting affirmative defenses to others. If we
are forced to pay the approximately $309,710 in alleged damages and/or
additional amounts in attorney's fees and interest owed to our former landlord,
our cash on hand would be severely impacted and our business could be adversely
affected.
 
 OUR
GROWTH WILL PLACE SIGNIFICANT STRAINS ON OUR RESOURCES.
 
 The
Company's growth is expected to place a significant strain on the Company's
managerial, operational and financial resources as Joseph Wagner and Jean Wilson
are our only officers. The Company has limited employees in addition to its
small number of officers. Furthermore, as the Company receives contracts, the
Company will be required to manage multiple relationships with various customers
and other third parties. These requirements will be exacerbated in the event of
further growth of the Company or in the number of its contracts. There can be no
assurance that the Company's systems, procedures or controls will be adequate to
support the Company's operations or that the Company will be able to achieve the
rapid execution necessary to successfully offer its services and implement its
business plan. The Company's future operating results will also depend on its
ability to add additional personnel commensurate with the growth of its
business. If the Company is unable to manage growth effectively, the Company's
business, results of operations and financial condition will be adversely
affected.
 
 WE
FACE A RISK OF A CHANGE IN CONTROL DUE TO THE FACT THAT OUR CURRENT OFFICERS AND
DIRECTORS DO NOT OWN A MAJORITY OF OUR OUTSTANDING COMMON STOCK.
 
 Our
current officers and Directors can vote an amount of common stock equal to
approximately fifteen percent (15%) of our outstanding common stock. As a
result, our officers and Directors may not exercise majority voting control over
us and our shareholders who are not officers and Directors of us may be able to
obtain a sufficient number of votes to choose who serves as our Directors.
Because of this, the current composition of our Board of Directors may change in
the future, which could in turn have an effect on those individuals who
currently serve in management positions with us. If that were to happen, our new
management could affect a change in our business focus and/or curtail or abandon
our business operations, which in turn could cause the value of our securities,
if any, to decline.
 
 -33-
 OUR
ARTICLES OF INCORPORATION, AS AMENDED, AND BYLAWS LIMIT THE LIABILITY OF, AND
PROVIDE INDEMNIFICATION FOR, OUR OFFICERS AND DIRECTORS.
 
 Our
Articles of Incorporation, as amended, generally limit our officers' and
directors' personal liability to the Company and its stockholders for breach of
fiduciary duty as an officer or director except for breach of the duty of
loyalty or acts or omissions not made in good faith or which involve intentional
misconduct or a knowing violation of law. Our Articles of Incorporation, as
amended, and Bylaws provide indemnification for our officers and directors to
the fullest extent authorized by the Nevada General Corporation Law against all
expense, liability, and loss, including attorney's fees, judgments, fines excise
taxes or penalties and amounts to be paid in settlement reasonably incurred or
suffered by an officer or director in connection with any action, suit or
proceeding, whether civil or criminal, administrative or investigative
(hereinafter a "Proceeding") to which the officer or director is made a party or
is threatened to be made a party, or in which the officer or director is
involved by reason of the fact that he or she is or was an officer or director
of the Company, or is or was serving at the request of the Company as an officer
or director of another  corporation or of a partnership, joint venture,
trust or other enterprise whether the basis of the Proceeding is alleged action
in an official capacity as an officer or director, or in any other capacity
while serving as an officer or director. Thus, the Company may be prevented from
recovering damages for certain alleged errors or omissions by the officers and
directors for liabilities incurred in connection with their good faith acts for
the Company. Such an indemnification payment might deplete the Company's assets.
Stockholders who have questions respecting the fiduciary obligations of the
officers and directors of the Company should consult with independent legal
counsel. It is the position of the Securities and Exchange Commission that
exculpation from and indemnification for liabilities arising under the 1933 Act
and the rules and regulations thereunder is against public policy and therefore
unenforceable.
 
 
 RISKS
RELATING TO OUR COMMON STOCK
 
 THE
MARKET PRICE OF OUR COMMON STOCK HISTORICALLY HAS BEEN VOLATILE.
  The
market price of our common stock historically has fluctuated significantly based
on, but not limited to, such factors as general stock market trends,
announcements of developments related to our business, actual or anticipated
variations in our operating results, our ability or inability to generate new
revenues, conditions and trends in the event production industry and in the
industries in which our customers are engaged.
 
 Our
common stock is traded on the OTCBB under the symbol “XAIN.” In recent years,
the stock market in general has experienced extreme price fluctuations that have
oftentimes been unrelated to the operating performance of the affected
companies. Similarly, the market price of our common stock may fluctuate
significantly based upon factors unrelated or disproportionate to our operating
performance. These market fluctuations, as well as general economic, political
and market conditions, such as recessions, interest rates or international
currency fluctuations may adversely affect the market price of our common
stock.
 
 THE
COMPANY HAS ESTABLISHED PREFERRED STOCK WHICH CAN BE DESIGNATED BY THE COMPANY'S
BOARD OF DIRECTORS WITHOUT SHAREHOLDER APPROVAL AND HAS ESTABLISHED SERIES A
PREFERRED STOCK, WHICH GIVES THE HOLDERS MAJORITY VOTING POWER OVER THE
COMPANY.
 
 The
Company has 500,000 shares of preferred stock authorized. The shares of
preferred stock of the Company may be issued from time to time in one or more
series, each of which shall have distinctive designation or title as shall be
determined by the Board of Directors of the Company ("Board of Directors") prior
to the issuance of any shares thereof. The preferred stock shall have such
voting powers, full or limited, or no voting powers, and such preferences and
relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereof as adopted by the Board of
Directors.
  Because
the Board of Directors is able to designate the powers and preferences of the
preferred stock without the vote of a majority of the Company's shareholders,
shareholders of the Company will have no control over what designations and
preferences the Company's preferred stock will have. As a result of this, the
Company's shareholders may have less control over the designations and
preferences of the preferred stock and as a result the operations of the
Company.
 
 -34-
 THE
CONVERSION OF THE NOTES AND THE EXERCISE OF THE WARRANTS, MVI WARRANTS AND
VENTURE WARRANTS WILL CAUSE SUBSTANTIAL DILUTION TO OUR EXISTING
SHAREHOLDERS.
 
 We had
3,977,252 shares of common stock outstanding as of April 14, 2008. Assuming a
conversion price of $0.25 per share (which conversion price and therefore the
number of shares issuable in connection with the conversion of the Notes is
subject to adjustment as provided in the Notes, subject to a $0.25 floor), the
principal amount of the outstanding notes held by the Purchasers will convert
into 14,200,000 shares of common stock and the outstanding Warrants, MVI
Warrants and Venture Warrants can be exercised for 2,555,167 shares of common
stock. As such, the conversion of the August, September and October 2006 Notes,
the Follow On Notes, the Second Follow On Notes and exercise of the Warrants,
Venture Warrants and MVI Warrants as well as the Follow On Warrants and Second
Follow On Warrants, will cause substantial dilution to our existing
shareholders.  Additionally, shareholders should keep in mind that the
outstanding Warrants, Venture Warrants and MVI Warrants contain cashless
exercise provisions, whereby in the event the shares issuable in connection with
such securities are not registered with the Commission, the holders of such
securities can exercise such securities for shares of our common stock by
receiving a lesser number of shares of our common stock (as calculated in such
warrants) and by not paying cash for such conversions.
 
 WE
WILL INCUR SIGNIFICANT INCREASED COSTS AS A RESULT OF OPERATING AS A FULLY
REPORTING COMPANY IN CONNECTION WITH SECTION 404 OF THE SARBANES OXLEY ACT, AND
OUR MANAGEMENT WILL BE REQUIRED TO DEVOTE SUBSTANTIAL TIME TO NEW COMPLIANCE
INITIATIVES.
 
 Moving
forward, we anticipate incurring significant legal, accounting and other
expenses in connection with our status as a fully reporting public company. The
Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and new rules subsequently
implemented by the SEC have imposed various new requirements on public
companies, including requiring changes in corporate governance practices. As
such, our management and other personnel will need to devote a substantial
amount of time to these new compliance initiatives. Moreover, these rules and
regulations will increase our legal and financial compliance costs and will make
some activities more time-consuming and costly. In addition, the Sarbanes-Oxley
Act requires, among other things, that we maintain effective internal controls
for financial reporting and disclosure of controls and procedures. In
particular, for this Annual Report on Form 10-KSB/A, we were required to perform
system and process evaluation and testing of our internal controls over
financial reporting to allow management to report on the effectiveness of our
internal controls over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act.  For fiscal year 2009, Section 404 will require us
to obtain a report from our independent registered public accounting firm
attesting to the assessment made by management.  Our testing, or the
subsequent testing by our independent registered public accounting firm, may
reveal deficiencies in our internal controls over financial reporting that are
deemed to be material weaknesses. Our compliance with Section 404 will require
that we incur substantial accounting expense and expend significant management
efforts. We currently do not have an internal audit group, and we will need to
hire additional accounting and financial staff with appropriate public company
experience and technical accounting knowledge. Moreover, if we are not able to
comply with the requirements of Section 404 in a timely manner, or if we or our
independent registered public accounting firm identifies deficiencies in our
internal controls over financial reporting that are deemed to be material
weaknesses, the market price of our stock could decline, and we could be subject
to sanctions or investigations by the SEC or other regulatory authorities, which
would require additional financial and management resources.
  -35-
 
 INVESTORS
MAY FACE SIGNIFICANT RESTRICTIONS ON THE RESALE OF OUR COMMON STOCK DUE TO
FEDERAL REGULATIONS OF PENNY STOCKS.
 
 Our
common stock will be subject to the requirements of Rule 15(g)9, promulgated
under the Securities Exchange Act as long as the price of our common stock is
below $5.00 per share. Under such rule, broker-dealers who recommend low-priced
securities to persons other than established customers and accredited investors
must satisfy special sales practice requirements, including a requirement that
they make an individualized written suitability determination for the purchaser
and receive the purchaser's consent prior to the transaction. The Securities
Enforcement Remedies and Penny Stock Reform Act of 1990, also requires
additional disclosure in connection with any trades involving a stock defined as
a penny stock. Generally, the Commission defines a penny stock as any equity
security not traded on an exchange or quoted on NASDAQ that has a market price
of less than $5.00 per share. The required penny stock disclosures include the
delivery, prior to any transaction, of a disclosure schedule explaining the
penny stock market and the risks associated with it. Such requirements could
severely limit the market liquidity of the securities and the ability of
purchasers to sell their securities in the secondary market.
 
 In
addition, various state securities laws impose restrictions on transferring
"penny stocks" and as a result, investors in the common stock may have their
ability to sell their shares of the common stock impaired.
  THE COMPANY HAS NOT PAID ANY CASH
DIVIDENDS.
  The
Company has paid no cash dividends on its common stock to date and it is not
anticipated that any cash dividends will be paid to holders of the Company's
common stock in the foreseeable future. While the Company's dividend policy will
be based on the operating results and capital needs of the business, it is
anticipated that any earnings will be retained to finance the future expansion
of the Company.
 
 THE
NOTES AND WARRANTS ISSUED TO THE PURCHASERS, THE 6% NOTE PURCHASERS, AND CERTAIN
CONSULTANTS IN CONNECTION WITH THOSE FUNDINGS HAVE ANTI-DILUTION PROVISIONS,
WHICH IF TRIGGERED COULD CAUSE SUBSTANTIAL DILUTION TO OUR THEN
SHAREHOLDERS.
 
 The
$3,550,000 in Notes have a conversion price equal to the lesser of $0.50 or 50%
of the effective price of a planned subsequent private offering of our
securities in which we receive gross proceeds of not less than $3,000,000,
subject to a floor of $0.25 (the “Private Offering”), the approximately
2,692,500 five (5) year warrants to purchase shares of our common stock at $0.30
per share which we issued to the Purchasers and certain consultants in
connection with the August, September and October 2006 fundings, the Follow On
Funding and the Second Follow On Funding; and the 250,000 Class A Warrants which
currently have an exercise price of $0.30 per share and are held by the 6% Note
Purchasers, who previously purchased 6% Convertible Term Notes from us in June
and September 2004, which notes have been repaid to date, but which Class A
Warrants remain outstanding, contain anti-dilution provisions. Pursuant to those
anti-dilution provisions, if we issue any shares of common stock or warrants to
purchase any shares of common stock (or convertible securities) with an
effective price per share of less than the conversion price of the Notes then in
effect or the exercise price of the warrants then in effect, the conversion
price of such Notes shall automatically reset to such effective price and/or the
exercise price of such warrants shall reset to such lower effective
price.
  While the
Purchasers have waived these anti-dilution provisions in connection with any
securities issued in connection with the Private Offering, if we issue any other
securities at an effective price less than the conversion price of the Notes or
the exercise price of the Warrants, the Purchasers could be able to convert such
Notes and/or exercise such Warrants into a much greater number of shares of
common stock than they are currently able to. If this were to happen, the
Purchasers could take voting control of the Company (subject to the Purchaser’s
agreement to not hold more than 9.99% of our outstanding common stock unless
they give us sixty-one days prior written notice) or choose to sell such shares
in the open market, which would cause the trading value of our common stock to
decline precipitously and could cause our common stock to become
worthless.
  -36-
 
 IF
WE ARE LATE IN FILING OUR QUARTERLY OR ANNUAL REPORTS WITH THE SEC, WE MAY BE
DE-LISTED FROM THE OVER-THE-COUNTER BULLETIN BOARD.
 
 Pursuant
to Over-The-Counter Bulletin Board ("OTCBB") rules relating to the timely filing
of periodic reports with the SEC, any OTCBB issuer which fails to file a
periodic report (Form 10-QSB's or 10-KSB's) by the due date of such report (not
withstanding any extension granted to the issuer by the filing of a Form
12b-25), three (3) times during any twenty-four (24) month period is
automatically de-listed from the OTCBB. Such removed issuer would not be
re-eligible to be listed on the OTCBB for a period of one-year, during which
time any subsequent late filing would reset the one-year period of de-listing.
If we are late in our filings three times in any twenty-four (24) month period
and are de-listed from the OTCBB, our securities may become worthless and we may
be forced to curtail or abandon our business plan.
 
 WE
CURRENTLY HAVE A SPORADIC, ILLIQUID, VOLATILE MARKET FOR OUR COMMON STOCK, AND
THE MARKET FOR OUR COMMON STOCK MAY REMAIN SPORADIC, ILLIQUID, AND VOLATILE IN
THE FUTURE.
 
 We
currently have a highly sporadic, illiquid and volatile market for our common
stock, which market is anticipated to remain sporadic, illiquid and volatile in
the future and will likely be subject to wide fluctuations in response to
several factors, including, but not limited to:
 
 (1)
              actual
      or anticipated variations in our results of operations;(2)
              our
      ability or inability to generate new revenues;(3)
              the
      number of shares in our public float;(4)
              increased
      competition; and(5)
              conditions
      and trends in the market for event planning services and event
      venues.
 
 Furthermore,
because our common stock is traded on the over the counter bulletin board, our
stock price may be impacted by factors that are unrelated or disproportionate to
our operating performance. These market fluctuations, as well as general
economic, political and market conditions, such as recessions, interest rates or
international currency fluctuations may adversely affect the market price of our
common stock. Additionally, at present, we have a very limited number of shares
in our public float, and as a result, there could be extreme fluctuations in the
price of our common stock. Further, due to the limited volume of our shares
which trade and our limited public float, we believe that our stock prices (bid,
asked and closing prices) are entirely arbitrary, are not related to the actual
value of the Company, and do not reflect the actual value of our common stock
(and in fact reflect a value that is much higher than the actual value of our
common stock). Shareholders and potential investors in our common stock should
exercise caution before making an investment in the Company, and should not rely
on the publicly quoted or traded stock prices in determining our common stock
value, but should instead determine value of our common stock based on the
information contained in the Company's public reports, industry information, and
those business valuation methods commonly used to value private
companies.
 
 -37-
 
 ITEM
7. FINANCIAL
STATEMENTS
 
 The
Financial Statements required by Item 310 of Regulation S-B are stated in U.S.
dollars and are prepared in accordance with U.S. Generally Accepted Accounting
Principles.


Pollard-Kelley
      Auditing Services, Inc.Auditing
      Services
              4500
      Rockside Road #450, Independence OH 44131
  330-836-2558
 
 
 
 
 Report of Independent
Registered Public Accounting Firm
 
 Board of
Directors
 XA, Inc.
and Subsidiary
 
 We have
audited the Balance sheet of XA, Inc. and Subsidiary as of December 31, 2007 and
the related statements of operations, stockholders equity and cash flows for the
years ending December 31, 2007.  These statements are responsibility
of Company’s Management.  Our responsibility is to express an opinion
on these financial statements based on our audit.
 
 We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (Unites States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatements.  An audit
includes examining on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audit provides a reasonable basis
for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of XA, Inc. and Subsidiary as of
December 31, 2007 and the related statements of operations, stockholders equity
and cash flows for the years ending December 31, 2007 in conformity with
generally accepted accounting principles.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note 6 to the
financial statements, the Company has suffered losses the last two
years.  This factor, among others including the Notes payable due in
2008, raises substantial doubt about the Company’s ability to continue as a
going concern.  Management feels the Company’s continuation as a going
concern depends upon its ability to obtain additional sources of capital and
financing.  Management’s plan in regard to this matter is also
described in Note 6.The accompanying
consolidated financial statements do not include any adjustments that may result
from the outcome of this uncertainty.
 
 Pollard-Kelley
Auditing Services, Inc.
 
 /S/
Pollard-Kelley Auditing Services, Inc.
 
 Independence,
Ohio
 April 13,
2008






F-1




XA,
      Inc. and SubsidiaryCONSOLIDATED
      BALANCE SHEETSDecember
      31, 2007 and 20062007
            
            
            2006ASSETSCurrent
      AssetsCash
            
            $
            504,012
            
            
            $
            372,626Accounts
      receivable
            
            
            394,453
            
            
            
            470,270Work
      in process at cost
            
            
            43,408
            
            
            
            -Prepaid
      expenses
            
            
            253,473
            
            
            
            180,981Prepaid
      finance charges
            
            
            419,750
            
            
            
            463,556Total
      Current Assets
            
            
            1,615,096
            
            
            
            1,487,433Fixed
      AssetsEquipment
            
            
            244,736
            
            
            
            244,736Furniture
      and fixtures
            
            
            66,177
            
            
            
            66,177Leasehold
      improvements
            
            
            1,006,745
            
            
            
            1,004,7451,317,657
            
            
            
            1,315,657Less
      accumulated depreciation
            
            
            (353,006
            )
            
            
            (211,861
            )964,651
            
            
            
            1,103,796Other
      AssetsDeposits
            
            
            71,939
            
            
            
            73,639Goodwill
            
            
            865,309
            
            
            
            865,309937,248
            
            
            
            938,948$
            3,516,995
            
            
            $
            3,530,177LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesAccounts
      payable
            
            $
            706,630
            
            
            $
            514,232Interest
      Payable
            
            
            421,104
            
            
            
            102,760Withheld
      and accrued taxes
            
            
            3,292
            
            
            
            3,731Unearned
      revenues
            
            
            169,303
            
            
            
            166,911Line
      of credit
            
            
            837,904
            
            
            
            800,000Current
      portion of long term debt
            
            
            3,550,000
            
            
            
            1,450,000Total
      Current Liabilities
            
            
            5,688,233
            
            
            
            3,037,634Long-term
      DebtNote
      payable
            
            
            -
            
            
            
            1,250,000Derivative
      Liability
            
            
            10,116
            
            
            
            62,431Stockholders'
      EquitySeries
      A preferred stock
            
            
            -
            
            
            
            -Common
      stock
            
            
            3,977
            
            
            
            3,952Additional
      paid in capital
            
            
            2,297,996
            
            
            
            2,289,621Accumulated
      other comprehensive income
            
            
            750,212
            
            
            
            296,121Retained
      deficit
            
            
            (5,233,538
            )
            
            
            (3,409,583
            )(2,181,353
            )
            
            
            (819,889
            )$
            3,516,995
            
            
            $
            3,530,177See
      accompanying notes to financial statements.








F-2




XA,
      Inc. and SubsidiaryCONSOLIDATED
      INCOME STATEMENTFor
      the Year Ended December 31, 2007 and 2006Year-to-date
              
              
              Year-to-date2007
              
              
              2006RevenuesSales
              
              $
              8,433,848
              
              
              $
              9,824,677Cost
      of goods soldDirect
      production costs
              
              
              4,519,232
              
              
              
              5,782,391Gross
      profit
              
              
              3,914,616
              
              
              
              4,042,286Administrative
      expenseAdministrative
              
              
              4,775,951
              
              
              
              4,992,871Income
      from operations
              
              
              (861,335
              )
              
              
              (950,585
              )Other
      income and expensesOther
      income
              
              
              91
              
              
              
              8,660Other
      expenses
              
              
              (962,711
              )
              
              
              (509,677
              )Intangible
      impairment
              
              
              -
              
              
              
              (540,000
              )(962,620
              )
              
              
              (1,041,017
              )Income
      before taxes
              
              
              (1,823,955
              )
              
              
              (1,991,602
              )Tax
      provisionsTax
      provisions
              
              
              -
              
              
              
              -Net
      (Loss)
              
              
              (1,823,955
              )
              
              
              (1,991,602
              )Other
      Comprehensive IncomeDecrease
      in fair value ofderivatives
              
              
              454,091
              
              
              
              296,121Net
      Comprehensive Income
              
              $
              (1,369,864
              )
              
              $
              (1,695,481
              )Loss
      per ShareAverage
      shares outstanding
              
              
              3,960,375
              
              
              
              3,952,250Net
      Loss
              
              $
              (0.46
              )
              
              $
              (0.50
              )Other
      Comprehensive Income
              
              $
              0.11
              
              
              $
              0.07Net
      Other Comprehensive Income
              
              $
              (0.35
              )
              
              $
              (0.43
              )See
      accompanying notes to financial statements.






F-3




XA,
      Inc. and SubsidiaryCONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITYFor
      the Period from January 1, 2005 through December 31, 2007
              
              
              
              
              
              
              
              
              AccumulatedAdditional
              
              
              OtherSeries
      A Preferred Stock
              
              
              Common
      Stock --------------
              
              
              Paid-in
              
              
              Comprehensive
              
              
              RetainedShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Income
              
              
              Deficit
              
              
              TotalBalance
      December 31, 2004
              
              
              3
              
              
              $
              -
              
              
              
              3,516,250
              
              
              $
              3,516
              
              
              $
              2,170,532
              
              
              $
              -
              
              
              $
              (1,300,835
              )
              
              $
              873,213Shares
      issued for services
              
              
              -
              
              
              
              -
              
              
              
              202,500
              
              
              
              203
              
              
              
              42,625
              
              
              
              -
              
              
              
              
              
              
              
              42,828Net
      Loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (109,646
              )
              
              
              (109,646
              )Balance
      December 31, 2005
              
              
              3
              
              
              
              -
              
              
              
              3,718,750
              
              
              
              3,719
              
              
              
              2,213,157
              
              
              
              
              
              
              
              (1,410,481
              )
              
              
              806,395Shares
      issued for services
              
              
              -
              
              
              
              -
              
              
              
              108,500
              
              
              
              108
              
              
              
              51,589
              
              
              
              -
              
              
              
              -
              
              
              
              51,697Shares
      issued for debt
              
              
              -
              
              
              
              -
              
              
              
              125,000
              
              
              
              125
              
              
              
              24,875
              
              
              
              -
              
              
              
              -
              
              
              
              25,000Purchase
      and retirement ofPreferred
      shares
              
              
              (1
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (7,500
              )
              
              
              (7,500
              )Net
      Other Comprehensive Loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              296,121
              
              
              
              (1,991,602
              )
              
              
              (1,695,481
              )Balance
      December 31, 2006
              
              
              2
              
              
              $
              -
              
              
              
              3,952,250
              
              
              $
              3,952
              
              
              $
              2,289,621
              
              
              $
              296,121
              
              
              $
              (3,409,583
              )
              
              $
              (819,889
              )Retirement
      of preferred shares
              
              
              (2
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Shares
      issued for services
              
              
              -
              
              
              
              -
              
              
              
              25,000
              
              
              
              25
              
              
              
              8,375
              
              
              
              
              
              
              
              -
              
              
              
              8,400Shares
      issued for debt
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              -Purchase
      and retirement ofPreferred
      shares
              
              
              
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              -Net
      Other Comprehensive Loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              454,091
              
              
              
              (1,823,955
              )
              
              
              (1,369,864
              )Balance
      December 31, 2007
              
              
              -
              
              
              $
              -
              
              
              
              3,977,250
              
              
              $
              3,977
              
              
              $
              2,297,996
              
              
              $
              750,212
              
              
              $
              (5,233,538
              )
              
              $
              (2,181,353
              )See
      accompanying notes to financial statements.






F-4






XA,
      Inc. and SubsidiaryCONSOLIDATED
      STATEMENT OF CASH FLOWSFor
      the Year Ended December 31, 2007 and 2006Year
      to date
              
              
              Year
      to date2007
              
              
              2006CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income/(loss)
              
              $
              (1,873,995
              )
              
              $
              (1,991,602
              )Adjustments
      to reconcile net earnings to netcash
      provided (used) by operating activities:Intangibles
      impairment
              
              
              
              
              
              
              540,000Depreciation
              
              
              141,145
              
              
              
              59,348Amortization
      of Discounts on Notes Payable
              
              
              212,853
              
              
              
              260,614Stock
      for services and debt
              
              
              8,400
              
              
              
              76,697Changes
      in Current assets and liabilities:(Increase)
      Decrease in Accounts receivable
              
              
              75,817
              
              
              
              744,222(Increase)
      Decrease in Work in process
              
              
              (43,048
              )
              
              
              770,562(Increase)
      Decrease in Prepaid expenses
              
              
              (72,492
              )
              
              
              (144,056
              )(Increase)
      Decrease in Prepaid finance charges
              
              
              334,722
              
              
              
              (250,703
              )(Increase)
      Decrease Prepaid employment contracts
              
              
              -
              
              
              
              164,467(Decrease)
      Increase in Accounts payable
              
              
              192,398
              
              
              
              68,246(Decrease)
      Increase in Accrued payroll
              
              
              -
              
              
              
              -(Decrease)
      Increase in Accrued interest
              
              
              318,344
              
              
              
              41,285(Decrease)
      in Withheld and accrued taxes
              
              
              (439
              )
              
              
              (740
              )Increase
      (Decrease) in Unearned revenue
              
              
              2,392
              
              
              
              (1,055,318
              )NET
      CASH PROVIDED (USED) BYOPERATING
      ACTIVITIES
              
              
              (703,903
              )
              
              
              (716,978
              )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of Fixed assets
              
              
              (2,000
              )
              
              
              (1,027,372
              )Purchase
      of Preferred stock
              
              
              -
              
              
              
              (7,500
              )Increase
      in Goodwill
              
              
              -
              
              
              
              -(Increase)
      Decrease in Deposits
              
              
              1,700
              
              
              
              (927
              )NET
      CASH (USED) BY INVESTINGACTIVITIES
              
              
              (300
              )
              
              
              (1,035,799
              )CASH
      FLOWS FROM FINANCING ACTIVITIESSale
      of common stock
              
              
              -
              
              
              
              -Increase
      in Derivative Liability
              
              
              (52,315
              )
              
              
              62,431Payments
      on Notes Payable
              
              
              -
              
              
              
              (2,032,500
              )Increase
      in Notes Payable
              
              
              850,000
              
              
              
              2,700,000Increase
      in Line of credit
              
              
              37,904
              
              
              
              800,000NET
      CASH USED BYFINANCING
      ACTIVITIES
              
              
              835,589
              
              
              
              1,529,931NET
      INCREASE (DECREASE) IN CASH
              
              
              131,386
              
              
              
              (222,846
              )CASH
      ACQUIRED IN ACQUISITION
              
              
              -
              
              
              
              -CASH
      AT BEGINNING OF PERIOD
              
              
              372,626
              
              
              
              595,472CASH
      AT END OF PERIOD
              
              $
              504,012
              
              
              $
              372,626See
      accompanying notes to financial statements.






F-5




XA, INC.
AND SUBSIDIARY
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2007
 
 NOTE 1 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 HISTORY
 
 The
Company was incorporated on August 29, 1991 as Goldstin/Mercola Productions,
Inc. in Illinois.  On January 4, 1993 the name was changed to G/M
Productions,
Inc.  On  December  4,  2003 the Company
entered into an exchange agreement with
Synreal  Services  Corp  a  publicly  traded  Nevada  corporation.  The
exchange agreement  resulted  in the exchange of 1,769,231
newly issued shares of Synreal
common  stock  for  all  the  outstanding  shares  of  G/M
Productions, Inc.  In
addition  the  shareholder  of  G/M  Productions  entered  into
a stock purchase
agreement  with  the  former  officers  and  directors  of  Synreal  whereby
the shareholder  acquired  1,000,000  shares of
Synreal common stock.  Synreal was a shell at the time of the
acquisition and therefore the acquisition was treated as a
reverse  merger  whereby the acquired company is treated as
the acquiring
company  for  accounting  purposes.  On  December  9,
2003, the stockholders and directors  of  the Company passed
two resolutions changing the Company's name to
The  Experiential  Agency, Inc.,  and
authorizing  a  13:1  forward  stock  split.
 
 On May
26, 2005, the Company issued 52,500 shares of common stock for services. The
shares were valued at $18,428.
 
 On
September 15, 2005, the Company issued 115,000 shares of common stock for
services.  The shares were valued at $14,950.
 
 On
November 9, 2005, the Company issued 10,000 shares of common stock for
services.  The shares were valued at $2,700.
 
 On
December 31, 2005, the Company issued 25,000 shares of common stock for
services.  The shares were valued at $6,750.
 
 On
February 6, 2006, the Company issued 33,500 shares of common stock for
services.  The shares were valued at $9,497.
 
 On April
14, 2006, the Company issued 25,000 shares of common stock for
services.  The shares were valued at $14,067.
 
 On July
31, 2006, the Company issued 25,000 shares of common stock for services. The
shares were valued at $14,067.
  F-6
 XA, INC.
AND SUBSIDIARY
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2007
 
 NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
 
 On
September 1, 2006, the Company issued 50,000 shares of common stock for services
and debt reduction.  The shares were valued at $10,000.
 
 On
November 6, 2006 the Company issued 25,000 shares of common stock for
services.  The shares were valued at $14,066.
 
 On
December 29, 2006 the Company issued 75,000 shares of common stock for services
and debt reduction.  The shares were valued at $15,000.
 
 On
September 4, 2007, the Company issued 25,000 shares of common Stock for
services.  The shares were valued at $8,400.
 
 The
Company has determined the value of all share issues to be the market value of
the security issued on the date the liability for the service was
incurred.
 
 The
consolidated financial statements include the accounts of XA, Inc., The
Experiential Agency, Inc., Fiori XA, Inc. and XA Scenes, Inc. All significant
inter-company accounts and transactions have been eliminated in
consolidation.  The Company is a comprehensive event marketing, design
and production firm with full service offices in Chicago and
New  York,  and  a sales office in Los
Angeles.
 
 CASH
AND CASH EQUIVALENTS
 
 For  purposes  of  the  statement  of  cash  flows,  the  Company  considers
all
short-term  debt  securities  three  months  or  less  to  be  cash
equivalents.
 
 Cash
      paid during the year for:2007
              
              
              
              
              2006----
              
              
              
              
              
              ----Interest
              
              $
              89,641
              
              
              
              
              $
              98,854Income
      taxes
              
              $
              -0-
              
              
              
              
              $
              -0-
 
 
 
 F-7
 
 
 XA, INC.
AND SUBSIDIARY
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2007
 
 NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
 
 PROPERTY
AND EQUIPMENT
 
 Property
and equipment are carried at cost.  Maintenance, repairs and renewals
are expensed as incurred.  Depreciation of property and equipment is
provided for on the straight line and 200% declining balance basis over their
estimated useful lives as follows:
 
 Equipment
              5
      yearsFurniture
      and fixtures
              7
      yearsLeaseholds
              10
      years (the life of the lease)
 
 Depreciation
expense for the year ended December 31, 2007 and 2006 was $141,145 and
$59,348, respectively.
 
 INCOME
TAXES
 
 Before
December 4, 2003 the date of the share exchange with Synreal, the Company had
elected to be taxed under the provisions of Sub-chapter S of the Internal
Revenue Code.  Under these provisions, the Company does not pay
federal or state corporation taxes on its taxable income.  Instead,
the shareholders are liable for individual federal and state income taxes on the
Company's taxable income. There are no differences in accounting for tax and
book.  After December 4, 2003 the Company is taxed as a Sub-chapter C
corporation under the Internal Revenue Code.
 
 The
estimated tax provision at December 31, 2007 and 2006 consists of the
following:
 
 
 
 
 2007
              
              
              2006Federal
              
              $
              -0-
              
              
              $
              -0-State
              
              
              -0-
              
              
              
              -0-$
              -0-
              
              
              $
              -0-
 
 
 F-8
 XA, INC.
AND SUBSIDIARY
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2007
 
 NOTE
1 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - CONTINUED
 
 The
Company has net loss carry forwards of approximately $2,575,961 that begin
to expire  in  2020  for  federal  taxes  and  2017  for  state  taxes.
 
 USE
OF ESTIMATES
 
 The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
 
 CONCENTRATION
OF CREDIT RISKS
 
 During
2007 and 2006 and at December 31, 2007 and 2006, the Company had deposits in
banks  in  excess  of  the  FDIC  insurance  limit.
 
 INTANGIBLE
IMPAIRMENT
 
 In the
fourth quarter of 2007 and 2006, management reviewed the value of its intangible
assets.  This review resulted in the write down of the intangible
asset Deferred Taxes.  The balance in this account represented an
estimate of the cash value of the Company’s net operating loss carry
forward.   Management found no impairment of its intangible
assets at December 31, 2007.  Impairment was tested as required by
SFAS No 142 Goodwill
and Other Intangible Assets,SFAS No 144 Accounting for the
Impairment or Disposal of Long-termAssets,and FAS 141-1
a staff interpretation of Goodwill.
 
 NOTE
2 – PREPAID INTEREST
 
 Discount
on Convertible Notes Payable represents costs the Company incurred in connection
with the convertible promissory notes.  These costs will be amortized
over  the  life  of  the  notes
(24  months)  on  a  straight-line  basis.
 
 F-9
 
 
 XA, INC.
AND SUBSIDIARY
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2007
 
 NOTE
2 – PREPAID INTEREST - CONTINUED
 
 In
connection with the August 8, September 26, October 23, 2006 and June 2007,
notes, the Discount on Convertible Notes Payable represents costs the Company
incurred in connection with the new convertible promissory
notes.  These costs will be amortized over the life of the notes on a
straight-line basis.
 
 Amortization
expense for the year ended December 31, 2007 and 2006 was $212,853 and $167,493,
respectively.
 
 NOTE
3 - NOTES PAYABLE
 
 LINE OF
CREDIT - On August 12, 2004, the Company entered into a Line of Credit agreement
with a bank for $750,000.  The note was due September 30,
2006.  Interest varies at 0.25% over the Bank's prime
rate.  The Company's assets secure the note.  The draws are
based on a borrowing base formula at 75% of eligible accounts receivable less 90
days past due accounts.  The agreement required the payment of a
$5,000 commitment fee.  The balance outstanding under
this  agreement  at  December
31,  2007  and  2006  was  $0  and  $0,  respectively.
 
 On June
1, 2006, the Company converted $800,000 of its line of credit to a construction
loan.  The line of credit agreement was amended to
$750,000.  The Company is in violation of one of the negative
covenants of this loan concerning profitability.  The lender is aware
of the violation and has taken no action to date.  The loan is due
December 1, 2007.  The balance outstanding on these agreements was $0
and $800,000 at December 31, 2007 and 2006, respectively.
 
 On June
30, 2007, the Company entered into a Line of Credit agreement with a bank for
$600,000.  The note was due October 15, 2007.  Interest
varies at 2.25% over the Bank's prime rate.  The balance outstanding
at December 31, 2007 and 2006 was $0 and $0, respectively.
 
 On June
30, 2007, the Company entered into a Line of Credit agreement with a bank for
$266,672.  Interest varies at 2.25% over the Bank’s prime
rate.  The balance outstanding at December 31, 2007 and 2006 was $0
and $0, respectively.
 
 On July
31, 2007, the Company entered into a Line of Credit agreement with a bank for
$837,940.  Interest varies at 2.25% over the Bank’s prime
rate.  The balance outstanding at December 31, 2007 and 2006 was
$837,904 and $0, respectively.
 
 F-10
 
 XA, INC.
AND SUBSIDIARY
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2007
 
 NOTE
3 - NOTES PAYABLE - CONTINUED
 
 LONG TERM
DEBT - On June 29, 2004 the Company entered into a Convertible Promissory Note
agreement with 5 unrelated entities.  The terms of the 5 notes are
identical. The interest rate is 6%.  The notes are convertible into
the Company's common stock at a conversion rate of $2.00 per
share.  Conversion is at the Company's option.  However, if
the Company requests conversion it must convert with registered
stock.  The holder also received Class A and Class B Warrants (Note4)
and purchased an additional $1,250,000 of convertible promissory notes on September
13, 2004.  The June 29, 2004 note was paid in full on August 8, 2006.
The balance of these notes was paid in  2006.
 
 On
September 13, 2004, note holders with $267,500 due converted these notes into
1,076,693 pre-reverse split shares of the Company's common stock in accordance
with the note agreement.  On November 1, 2004, note holders with
$200,000 due converted these notes into 811,533 pre-reverse split shares of the
Company's common stock in accordance with the note agreement.  The
September 13, 2004 note was paid in 2006.  The balance outstanding was
$0 and $2,032,500 at December 31, 2007 and 2006, respectively.
 
 On June
26, 2006, the Company entered into a Securities Purchase Agreement with a group
of  venture capital lenders and sold 11% Senior Subordinated Secured
Convertible Promissory Notes in the amount of $1,250,000, five year warrants at
an  exercise  price  of $1.10 per share and a
conversion feature.  The exercise price of the warrants was changed in
June 2007 to $0.30 per share.  In accordance with EITF 00-27 the
estimated value of the conversion feature is $193,483.  The
value  was  determined using the Black-Scholes pricing model
under the following
assumptions:  life  of  15  months,  risk
free interest rate of 5.0%, a dividend
yield  of  0%  and  volatility  of  11%.   The
notes are secured by all the assets of the Company and are due November 8,
2007.  The balance outstanding at December 31, 2007 and 2006 was
$1,250,000 and $0, respectively.
 
 On
September 26, 2006, the Company entered into a Securities Purchase Agreement
with a group of venture capital lenders and sold 11% Senior Subordinated Secured
Convertible Promissory Notes in the amount of $1,450,000, five year warrants at
an exercise price of $1.10 per share and a conversion feature.  The
exercise price of the warrants was changed in June 2007 to $0.30 per
share.  In accordance with EITF 00-27 the estimated value of the
conversion feature is $16,155.  The value was determined using the
Black-Scholes pricing  model under the following
assumptions:  life  of  15  months,  risk
free interest rate of 5.0%, a dividend
yield  of  0%  and  volatility  of  11%.  The
notes are secured by a second position on all the assets of the Company with
$200,000 due December 26, 2007.  The due date was extended in June
2007 to  June
2008.  The balance outstanding at December 31, 2007 and 2006 was
$200,000 and $0, respectively.
 
 F-11
 XA, INC.
AND SUBSIDIARY
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2007
 
 NOTE
3 - NOTES PAYABLE - CONTINUED
 
 
 On
October 23, 2006, the Company entered into a Securities Purchase Agreement with
a group of venture capital lenders and sold 11% Senior Subordinated Secured
Convertible Promissory Notes in the amount of $1,250,000, five year warrants at
an exercise price of $1.10 per share and a conversion feature.  The
exercise price of the warrants was changed in June 2007 to $0.30 per share.  In
accordance with EITF 00-27 the estimated value of the conversion feature is
$100,967.  The value was determined using the Black-Scholes
pricing  model under the following
assumptions:  life  of  15  months,  risk
free interest rate of 5.0%, a dividend
yield  of  0%  and  volatility  of  0.1%.  The
notes are secured by a second position on all the assets of the Company with
$1,250,000 due January 23, 2008.  The due date was extended in June
2007 to June 2008.  The balance outstanding at December 31, 2007 and
2006 was $1,250,000 and $0, respectively.
 
 The notes
will automatically convert to shares of common stock at the conversion price
when the Company completes a private offering of its equity securities and
receives  gross  proceeds  of no less than
$3,000,000, with a effective purchase price of $1.50 per share and the Company
has completed an effective registration
statement  covering  the  resale  of  the  conversion  shares.
 
 On June
11, 22 and 29, 2007, the Company entered into a Securities Purchase Agreement
with two individuals and two venture capital groups and sold 11% Senior
Subordinated Secured Convertible Promissory Notes in the total amount of
$450,000, five year warrants at an exercise price of $0.30 per share and a
conversion factor.  In accordance with EITF 00-27 the estimated value
of the conversion feature is $400,068.  The value was determined using
the Black-Scholes pricing  model under the following
assumptions:  life  of  12  months,  risk
free interest rate of 5.0%, a dividend
yield  of  0%  and  volatility  of  0.1%.  The
notes are secured by a first position on all the assets of the Company with
$1,250,000 due in June 2008.  The balance outstanding at December 31,
2007 and 2006 was $450,000 and $0, respectively.
 
 On
December 21, 2007, the Company entered into a Securities Purchase Agreement with
a venture capital group and sold 11% Senior Subordinated Secured Convertible
Promissory Notes in the total amount of $400,000, five year warrants at an
exercise price of $0.30 per share and a conversion factor.  In
accordance with EITF 00-27 the estimated value of the conversion feature was
$0.  The value was determined using the Black-Scholes
pricing  model under the following
assumptions:  life  of  12  months,  risk
free interest rate of 5.0%, a dividend
yield  of  0%  and  volatility  of  0.1%.  The
notes are secured by a first position on all of the assets of the
Company
 
 F-12
 XA, INC.
AND SUBSIDIARY
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2007
 
 NOTE
3 - NOTES PAYABLE - CONTINUED
 
 with
$1,250,000 due in June 2008.  The balance outstanding at December 31,
2007 and 2006 was $400,000 and $0, respectively.
 
 Total
Long-Term debt at December 31, 2007, is as follows:
  Total
      term debt
              
              $
              3,550,000Less
      Current portion
              
              
              (3,550,000
              )Long-term
      debt
              
              $
              -0-
 
 NOTE
4 - EQUITY
 
 PREFERRED
STOCK
 
 On
December 27, 2004, the Board of Directors, with shareholder approval, issued 3
shares,  of the  authorized 10,000,000 shares of "blank
check" preferred, as
Series  A  Preferred  Shares.  The
Series A Preferred Shares have a par value of
$.001  per  share,  have  no  rights
to dividends, no liquidation preference, no
conversion  rights  and  no redemption
rights.  The holders thereof, voting as a class, shall have the right
to vote on all shareholder matters equal to fifty-one percent of the total
vote.   On May 22, 2006, the Company purchased and retired one
share of preferred stock for $7,500.  In January 2007, the Company
formally retired the remaining two shares.
 
 COMMON STOCK
 
 On
December 19, 2005 the shareholders of the Company increased the total authorized
shares of common stock to 20,000,000 with a par value of $.001 per
share.  The Company had 3,977,250 and 3,952,250 shares outstanding at
December 31, 2007 and 2006, respectively.
 
 STOCK
WARRANTS
 
 The
Company has issued warrants to the now retired 6% note holders for 250,000
shares of common stock.  The purchase price of the shares is
$9.60.  The warrants expire June 30, 2008.  These warrants
remain outstanding at December 31, 2007.
 
 The
Company has issued warrants to its employees for 490,000 shares of common
stock.  The purchase price of the shares is $0.34.  The
warrants expire June 19, 2009.  These warrants remain outstanding at
December 31, 2007.
 
 The
Company has issued warrants to the June 26, September 26, and October 23, 2006
Convertible securities for 433,333 shares of common stock at $0.30 and for
392,500 shares of common stock at $1.10, which were re-priced in June 2007, to
$0.30 per share.  The warrants expire in August and November
2011.  These warrants remain outstanding at December 31,
2007.
 
 F-13
 XA, INC.
AND SUBSIDIARY
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2007
 
 STOCK
WARRANTS - CONTINUED
 
 The
Company has issued warrants during 2006 in connection with services rendered for
766,667 shares of common stock at $0.30.  The warrants expire in
August and November 2011.  These warrants remain outstanding at
December 31, 2007.
 
 The
Company has issued warrants during 2006 to two of its executives for 1,500,000
shares of common stock at $0.75 per share.  These warrants have a
vesting schedule and start vesting 12 months after the filing of an effective
registration statement covering the resale of the common stock the 11% notes are
convertible into.  These warrants remain outstanding at December 31,
2007.
 
 The
Company has issued warrants to the June 11, 22, 29, 2007 Convertible securities
for 450,000 shares of common stock at $0.30.  The warrants expire in
June 2012.  These warrants remain outstanding at December 31,
2007.
 
 The
Company has issued warrants to the December 21, 2007 Convertible securities for
400,000 shares of common stock at $0.30.  The warrants expire in June
2012.  These warrants remain outstanding at December 31,
2007.
 
 F-14
  XA, INC.
AND SUBSIDIARY
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2007
 
 
 NOTE
5 - COMMITMENTS
 
 On
February 1, 2001, the Company entered into a seven-year lease agreement for
office space in Chicago.  The lease terminates March 31,
2008.  Lease payments are on a sliding scale as follows:
 
 Period
              
              Monthly
      RentYear
      1
              
              $
              11,032Year
      2
              
              $
              11,319Year
      3
              
              $
              11,614Year
      4
              
              $
              11,918Years
      5 & 6
              
              $
              12,231Year
      7
              
              $
              12,886
 
 The lease
was terminated by the Company in July of 2004.
 
 On August
20, 2003, the Company entered into a five-year lease agreement for shared office
space in New York.  The lease terminates August 1,
2008.  The lease calls for monthly payments of $1,250 per
month.
 
 April 1,
2003, the Company entered into an equipment lease with a finance
company.  The  lease  is  for  60  months  with  monthly  payments  of  $1,383.
 
 On
November 20, 2001, the Company entered into a vehicle lease with a finance
company.  The  lease  is  for  39  months  with  monthly  payments  of  $1,099.
 
 On
January 15, 2004, the Company entered into a four year and seven month shared
office space agreement in Los Angeles.  The lease begins May 1, 2004
and has an option for one 60-month extension.  The Company's portion
of the monthly rent is $1,820 per month.
 
 On
February 17, 2004, the Company entered into an equipment lease with a finance
company.  The  lease  is  for  60  months  with  monthly  payments  of  $239.
 
 On June
14, 2004, the Company entered into an equipment lease with a finance
company.  The lease is for 60 months with monthly payments of
$389.
 
 On June
30, 2004 the Company entered into an eight-year lease for office space in
Chicago.  The lease terminates June 30, 2012.  Lease
payments are on a sliding scale as follows:
  F-15
 XA, INC.
AND SUBSIDIARY
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2007
 
 NOTE
5- COMMITMENTS - CONTINUED
 
 Period
              
              Monthly
      Rent
              
              Period
              
              Monthly
      RentYear
      1
              
              $
              9,590
              
              Year
      5
              
              $
              11,508Year
      2
              
              $
              10,069
              
              Year
      6
              
              $
              11,987Year
      3
              
              $
              10,549
              
              Year
      7
              
              $
              12,466Year
      4
              
              $
              11,028
              
              Year
      8
              
              $
              12,946
 
 On June
30, 2004, the Company entered into a five-year lease for retail/office space in
Chicago.  The lease terminates August 31, 2008.  Lease
payments are on a sliding scale as follows:
 
 Period
              
              Monthly
      RentYear
      1
              
              $
              5,250Year
      2
              
              $
              5,408Year
      3
              
              $
              5,570Year
      4
              
              $
              5,736Year
      5
              
              $
              5,909
 
 On August
1, 2004, the Company entered into an equipment lease with a finance
company.  The  lease  is  for  60  months  with  monthly  payments  of  $613.
 
 On
December 23, 2005, the Company entered into a ten-year lease for office, event
and production space in New York City.  The lease payments are $21,667
per
month  and  increase  3%  per  year  each  year  after  the  first  year.
 
 On August
7, 2006 the Company entered into a 60 month lease for equipment.  The
lease payments are $704 per month.
 
 On August
7, 2006 the Company entered into a 60 month lease for equipment.  The
lease payments are $168 per month.
 
 On August
7, 2006 the Company entered into a 12 month lease for an apartment in New York
City.  The lease payments are $3,025 per month.
 
 On August
30, 2006 the Company entered into a 36 month lease for warehouse space in
Chicago.  The lease payments are $4,750 per month.
 
 On
October 5, 2007 the Company entered into a 48 month lease for
equipment.  The lease payments are $555 per month.
 
 F-16
 XA, INC.
AND SUBSIDIARY
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 December
31, 2007
 
 NOTE
5- COMMITMENTS - CONTINUED
 
 Future
minimum payments due under these lease agreements are as follows:
 
 2007
              $
              618,7892008
              $
              558,5942009
              $
              531,7172010
              $
              502,2402011
              $
              450,321
 
 NOTE
6 – GOING CONCERN
 
 The
Company has suffered significant losses.  This combined with the
secured and subordinated notes payable due dates raise substantial doubts
concerning its ability to continue as a going concern.The Company’s
continuation as a going concern depends upon its ability to generate sufficient
cash flow to conduct its operations and its ability to obtain additional sources
of capital and financing.  Management has plans to increase revenues
over the next year which should increase cash flows from
operations.  It also feels it can raise additional capital, and meet
the conditions that will allow the 11% notes to be converted into common
stock.  The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
 
 
 F-17


ITEM
8.CHANGES IN
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
 
 None.
 
 ITEM
8A. CONTROLS
AND PROCEDURES
  We have
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and our Principal
Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2007.
Based on such evaluation, we have concluded that, as of such date, our
disclosure controls and procedures were not effective to ensure that
information required to be disclosed by us in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in applicable SEC rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and
Principal Financial Officer, as appropriate, to allow timely discussions
regarding required disclosure.
 
 The
reason we believe such disclosure controls and procedures were not effective is
that the Company failed to include its “Management’s Report on Internal Control
Over Financial Reporting,” described below, in its original Annual Report on
Form 10-KSB filing, which in of itself constitutes a material weakness in the
Company’s disclosure controls and procedures.
  The
Company plans to allot sufficient time and resources to conduct its management’s
review of internal control over financial reporting prior to the end of the
fiscal year ended December 31, 2008, and to timely file its “Management’s Report
on Internal Control Over Financial Reporting” in its Annual Report on Form 10-K
for the year ended December 31, 2008.
 ·
                  Pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;
  ·
                  Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the Company
      are being made only in accordance with authorizations of management and
      directors of the Company; and
  ·
                  Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisitions, use or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.
  
 Because
of its inherent limitations, internal controls over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
 
 Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2007. In making this assessment, the Company’s
management used the criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). Based on our assessment, we believe that, as of December
31, 2007, the Company’s internal control over financial reporting wereeffective based on those
criteria.
 
 This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
 ITEM
8B. OTHER
INFORMATION.
 
 None.


-38-
 
 PART
III
 
 ITEM
9. DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS COMPLIANCE WITH SECTION 16(A)
OF THE EXCHANGE ACT
 
 DIRECTORS
AND OFFICERS
 
 The
Directors and Officers of the Company are as follows:
 
 Name
              Age
              Position
              SinceJoseph
      Wagner
              41
              President,
              August
      2004Chief
      Executive Officer,Secretary
      and ChairmanJean
      Wilson
              46
              Chief
      Operating Officer,
              August
      2004Chief
      Accounting Officer,Treasurer
      and DirectorChristopher
      Spencer
              38
              Director
              December
      2005Darren
      Andereck
              42
              President
      of The Experiential Agency, Inc.
              June
      2007
 
 Joseph
Wagner
 
 Joseph
Wagner was appointed Chief Executive Officer of the Company on February 17,
2005. Mr. Wagner has served as a consultant to the Company performing the
functions of President and Secretary and as a Director of the Company since
August 2004. Since February 23, 2007, Mr. Wagner has served as Chairman of our
Board of Directors. Mr. Wagner has worked for the Company since February 2003.
Mr. Wagner may engage in business activities or interests outside of the Company
which are not adverse or competitive to the Company. Mr. Wagner concurrently
serves as President of LSC Capital Advisers ("LSC Capital"). Mr. Wagner has
worked for LSC Capital since October 1997. From March of 2000 to October 2004,
Mr. Wagner served as Managing Director of LSC Associates, LLC. Mr. Wagner has
advised public and private companies in the areas of strategic planning,
international project development, international finance, project management,
logistics, and business development. Mr. Wagner has served as an officer and/or
director of emerging growth companies and has been responsible for operational
oversight in the areas of mergers and acquisitions, corporate governance,
business development, strategic financial planning and SEC audits. Mr. Wagner
earned a Bachelor of Arts in Law & Society from Purdue University, highest
distinction, Phi Beta Kappa; and he earned a Master of Arts from Northern
Illinois University.
 
 Jean
Wilson
 
 Jean
Wilson was appointed Chief Operating Officer of the Company on February 17,
2005. Ms. Wilson has served as the Company's Treasurer and as a Director of the
Company since August 2004. Ms. Wilson has worked for XA since July 2002. From
January 1999 to July 2002, Ms. Wilson held a management position with ESM
Association. From September 1982 to January 1999, Ms. Wilson worked in
operations for The Meetinghouse Companies. Ms. Wilson brings more than twenty
years of full time experience in event and meeting planning to the Company.
During her career, Ms. Wilson has been responsible for every facet of producing,
selling and coordinating corporate special events, trade shows, conventions and
seasonal decorating programs for a host of clients. Ms. Wilson earned a
Bachelors degree with honors in Recreation/Leisure Studies from Eastern Illinois
University.
  -39-
 Christopher
Spencer
 
 Christopher
Spencer has served as a Director of the Company since December 19, 2005. He has
not previously and does not currently serve as an officer or employee of the
Company. Since approximately February 1996, Mr. Spencer has served as the Chief
Executive Officer, President, Treasurer and as a Director of Wizzard Software
Corp. a company which is publicly traded on the OTC Bulletin Board under the
symbol [WIZD] and which specializes in speech recognition software and
text-to-speech technology. From approximately May 1994 to approximately February
1996, Mr. Spencer served as the Chief Executive Officer of Chinawire, Inc. which
provided money transfer services between high population Chinese areas in the
United States and mainland China. From approximately July 1992 to approximately
April 1994, he served as Chief Executive Officer of Lotto USA, which provided
lottery ticket brokerage services that allowed persons in one state to purchase
a different state's lottery tickets through Lotto USA. Mr. Spencer has his IBM
certification in speech recognition.
 
 Darren
Andereck
 
 Darren
Andereck has served as President of the Company’s wholly owned subsidiary, The
Experiential Agency, Inc. (“Experiential), since June 2007.  Since
July 2004, Mr. Andereck has served as Creative Director of
Experiential.  Prior to being employed by Experiential, Mr. Andereck
was a co-owner of Alice’s Garden, one of Chicago’s most prestigious floral and
event décor providers for approximately 10 years.  Mr. Andereck does
not have a consulting or employment agreement with the Company.  Mr.
Andereck received a Bachelor of Science degree in Finance and Economics from The
University of Missouri.
 
 
 
 All
directors of the Company will hold office until the next annual meeting of the
shareholders, and until their successors have been elected and qualified.
Officers of the Company are elected by the Board of Directors and hold office at
the pleasure of the Board.
  EMPLOYMENT
AND
 CONSULTING
AGREEMENTS
 
 Joseph
Wagner
 
 In August
2006, Joseph Wagner, our Chief Executive Officer, President and Director entered
into a Consulting Agreement with us effective August 1, 2006, which Consulting
Agreement replaced a prior Consulting Agreement entered into between the parties
with an effective date of August 1, 2004.
 
 Pursuant
to the Consulting Agreement, Mr. Wagner is to serve as our Chief Executive
Officer, President and Secretary for a period of sixty (60) months from the
effective date of the Consulting Agreement, August 1, 2006. Upon the expiration
of the initial term of the Consulting Agreement, the Consulting Agreement shall
automatically renew for successive one (1) year terms unless either party
provides the other of its intent not to renew, at least thirty (30) days, but
not more than sixty (60) days prior to the end of the term. Additionally,
pursuant to the Consulting Agreement, Mr. Wagner will devote such time as the
Company may reasonably deem to be necessary and beneficial to the efficient and
effective operation of the Company's business. Mr. Wagner may engage in business
activities or interests outside of the Company which are not adverse or
competitive to the Company. Mr. Wagner will receive $200,000 per year as
compensation as well as thirty (30) days of paid time off ("PTO") pursuant to
the Consulting Agreement. Additionally, pursuant to the Consulting Agreement,
Mr. Wagner was granted an aggregate of 850,000 stock options, which options
shall vest to Mr. Wagner as provided in the Option Agreement which evidences the
options and expire on the fifth anniversary of their grant date August 2, 2006,
if unexercised, or as otherwise provided in the option agreement, which Options
are described in greater detail. The Company is obligated to maintain a director
and officer insurance policy of at least $1,000,000 during the term of Mr.
Wagner's Consulting Agreement. The Company may terminate the Consulting
Agreement; however, in the event of termination for good reason by Mr. Wagner or
without cause, the Company is obligated to pay Mr. Wagner a severance payment of
$250,000 in addition to all unpaid payments of salary through the end of the
term of the Consulting Agreement in one lump sum payment and all unvested
options shall vest to Mr. Wagner immediately.
 
 -40-
 Jean
Wilson
 
 In August
2006, Jean Wilson, our Chief Operating Officer, Treasurer and Director entered
into an Employment Agreement with us effective August 1, 2006, which Employment
Agreement replaced a prior Employment Agreement entered into between the parties
with an effective date of August 1, 2004.
 
 Pursuant
to the Employment Agreement, Ms. Wilson is to serve as our Chief Operating
Officer and Treasurer for a period of sixty (60) months from the effective date
of the Employment Agreement, August 1, 2006. Upon the expiration of the initial
term of the Employment Agreement, the Employment Agreement shall automatically
renew for successive one (1) year terms unless either party provides the other
of its intent not to renew, at least thirty (30) days, but not more than sixty
(60) days prior to the end of the term. Additionally, pursuant to the Employment
Agreement, Ms. Wilson will devote such time as the Company may reasonably deem
to be necessary and beneficial to the efficient and effective operation of the
Company's business. Ms. Wilson will receive $150,000 per year as compensation as
well as thirty (30) days of PTO pursuant to the Employment Agreement. Pursuant
to the Employment Agreement, Ms. Wilson was granted an aggregate of 650,000
stock options, which options shall vest to Ms. Wilson as provided in the Option
Agreement which evidences the options and expire on the fifth anniversary of
their grant date August 2, 2006, if unexercised, or as otherwise provided in the
option agreement, which Options are described in greater detail below. The
Company is obligated to maintain a director and officer insurance policy of at
least $1,000,000 during the term of Ms. Wilson's Employment Agreement. The
Company may terminate the Employment Agreement; however, in the event of
termination for good reason by Ms. Wilson or without cause, the Company is
obligated to pay Ms. Wilson a severance payment of $250,000 in addition to all
payments of salary earned through the end of the term of the Employment
Agreement in one lump sum payment and all unvested options shall vest to Ms.
Wilson immediately.
 
 Christopher
Spencer
 
 Christopher
Spencer entered into a one year, renewable consulting agreement with us to serve
as our Director on December 19, 2005. The consulting agreement was for a period
of twelve (12) months. Pursuant to the consulting agreement, Mr. Spencer was
paid $2,000 per month and received an aggregate of 100,000 restricted shares of
our common stock while employed under the consulting agreement, one for each
quarter he is employed under the consulting agreement, which shares have been
issued to date. The Company is obligated to maintain a director and officer
policy of at least $1,000,000 during the term of Mr. Spencer's consulting
agreement. The consulting agreement is terminated by Mr. Spencer's disability or
his death. Mr. Spencer can terminate the consulting agreement for good reason
and the Company can terminate the consulting agreement with cause (as described
in the consulting). Additionally, Mr. Spencer's consulting agreement is
terminated if the Company's voting shareholders vote to remove him as a Director
or if he fails to be re-elected upon the termination of his current term as
Director. Also the consulting agreement may be terminated by the mutual
agreement of the parties. Upon Mr. Spencer's termination for any reason, he is
entitled to receive only the compensation earned by him (including shares of
stock) up to the date of the termination. The Consulting Agreement was renewed
for the year ending December 31, 2007, with Mr. Spencer receiving $1,000 per
month for his services as Director instead of $2,000 per month as was his
consideration for the initial one year term of the agreement.  The
Consulting Agreement has not been further renewed since December 31,
2007.
 
 Joseph
Wagner and Jean Wilson Options
 
 On June
19, 2006, the Company's Board of Directors approved the issuance of 650,000
Incentive Stock Options to the Company's Chief Executive Officer, President,
Secretary and Director, Joseph Wagner and 550,000 Incentive Stock Options to
Jean Wilson, the Company's Chief Operating Officer, Treasurer and Director, who
both also own more than 10% of the Company's outstanding voting shares (the "10%
Shareholder Options") pursuant to the Plan. The 10% Shareholder Options had an
exercise price of $0.38 per share, which was equal to 110% of the mean of the
highest and lowest quoted selling prices of
the Company's common stock on the Over-The-Counter Bulletin Board on the
Valuation Date. The 10% Shareholder Options were evidenced by Option Agreements,
pursuant to the Plan. The 10% Shareholder Options shall vest three (3) years
from the Valuation Date (June 19, 2009), and terminated if unexercised on June
19, 2011, unless terminated earlier pursuant to the terms of the Option
Agreements; provided however, that the 10% Shareholder Options shall vest
immediately upon the occurrence of a Change in Control of the Company. The 10%
Shareholder Options were later rescinded by the Company in connection with the
Funding and the grant of the JJ Options, as described in greater detail
below.
  -41-
 On August
2, 2006 (the "Valuation Date"), the Directors granted 850,000 options to
purchase shares of our common stock ("Options") to Joseph Wagner, the Company's
Chief Executive Officer and Director of the Company and 650,000 Options to Jean
Wilson, the Company's Chief Operating Officer and Director, who are both greater
than 10% shareholders of the Company (the "JJ Options"). The exercise price of
the JJ Options is $0.75 per share (which exercise price was greater than 110% of
the mean of the highest ($0.31) and lowest ($0.31) quoted selling prices of the
Company's common stock on the Valuation Date). The JJ Options expire if
unexercised on the fifth anniversary of the Vesting Date, or as otherwise
provided in the Option Agreements.
 
 Mr.
Wagner shall vest 283,333 of the Options upon the twelve (12) month anniversary
of the date the United States Securities and Exchange Commission declares
effective a registration statement covering the resale of the shares of common
stock which the 11% Senior Secured Convertible Promissory Notes which we sold in
August, September and October 2006 to certain third party purchasers (the
"Purchasers") are convertible into and the shares of common stock which the
Warrants granted to such Purchasers are exercisable for (the "Effectiveness
Date"); Mr. Wagner shall vest 283,333 of the Options upon the twenty-four (24)
month anniversary of the Effectiveness Date; and Mr. Wagner shall vest the
remaining 283,334 options upon the thirty-six (36) month anniversary of the
Effectiveness Date, provided however that all of the options shall vest
immediately upon a Change in Control of the Company (as defined
below).
 
 Ms.
Wilson shall vest 216,667 of the Options upon the twelve (12) month anniversary
of the Effectiveness Date; Ms. Wilson shall vest 216,666 of the Options upon the
twenty-four (24) month anniversary of the Effectiveness Date; and Ms. Wilson
shall vest the remaining 216,666 options upon the thirty-six (36) month
anniversary of the Effectiveness Date, provided that all of the options shall
vest immediately upon a Change in Control of the Company (as defined
below).
 
 A "Change
in Control" includes the adoption of a plan of merger or consolidation of the
Company with any other corporation or association as a result of which the
holders of the voting capital stock of the Company as a group would receive less
than 50% of the voting capital stock of the surviving or resulting corporation;
the approval by the Board of Directors of the Company of an agreement providing
for the sale or transfer of substantially all the assets of the Company; or in
the absence of a prior expression of approval by the Board of Directors, the
acquisition of more than 20% of the Company's voting capital stock by any person
within the meaning of Rule 13d-3 under the Securities Act of 1933 (the
"Act," other than the Company or a person that directly or indirectly controls,
is controlled by, or is under common control with, the Company).
 
 -42-
  OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-ENDOPTION
      AWARDS
              STOCK
      AWARDSName
                (a)
              Number
      of Securities Underlying Unexercised Options
                (#)
                Exercisable
                (b)
              Number
      of Securities Underlying Unexercised Options
                (#)
                Unexercisable
                (c)
              Equity
      Incentive Plan Awards: Number of Securities Underlying Unexercised
      Unearned Options
                (#)
                (d)
              Option
      Exercise Price
                ($)
                (e)
              Option
      Expiration Date
                (f)
              Number
      of Shares or Units of Stock That Have Not Vested
                (#)
                (g)
              Market
      Value of Shares or Units of Stock That Have Not Vested
                ($)
                (h)
              Equity
      Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
      That Have Not Vested
                (#)
                (i)
              Equity
      Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
      Other Rights That Have Not Vested
                (#)
                (j)Joseph
      Wagner
              -
              850,000(1)
              -
              $0.75
              August
      2, 2011Jean
      Wilson
              -
              650,000(1)
              -
              $0.75
              August
      2, 2011Chris
      Spencer
              150,000
              -
              -
              $0.34
              June
      19, 2016
 
 
 (1) An
aggregate of 850,000 options to purchase shares of our common stock were granted
to Joe Wagner and an aggregate of 650,000 options to purchase shares of our
common stock at $0.75 per share, were granted to Jean Wilson in August 2006,
which options vest at the rate of 1/3 per year, beginning one year from the date
the Registration Statement we are contractually obligated to file to register
the shares of common stock issuable in connection with the conversion of the
Purchasers’ 11% Senior Secured Convertible Notes is declared effective with the
Commission (the "Effectiveness Date") and/or upon a Change in Control (as
defined in the options), as described in greater detail above.
 
 Section 16 (A) Beneficial
Ownership Reporting Compliance
 
 Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's
directors, executive officers and persons who own more than 10% of a class of
the Company's equity securities which are registered under the Exchange Act to
file with the Commission initial reports of ownership and reports of changes of
ownership of such registered securities. Such executive officers, directors and
greater than 10% beneficial owners are required by the Commission to furnish the
Company with copies of all Section 16(a) forms filed by such reporting
persons.
 
 To the
Company's knowledge, based solely on a review of the copies of such reports
furnished to the Company and on representations that no other reports were
required, no person required to file such a report failed to file on a timely
basis during the most recent fiscal year or prior fiscal years. Based on
stockholder filings with the SEC, Joseph Wagner, Jean Wilson, Vision Opportunity
Master Fund, Ltd.,  and Christopher Spencer are subject to Section
16(a) filing requirements.
 
 -43-
 Code Of
Ethics
 
 The Board
of Directors adopted a Code of Ethics in February 2004, meeting the requirements
of Section 406 of the Sarbanes-Oxley Act of 2002. The Company will provide to
any person without charge, upon request, a copy of such Code of Ethics. Persons
wishing to make such a request should contact Joseph Wagner, President, 875
North Michigan Avenue, Suite 2626, Chicago, Illinois 60611, telephone: (312)
397-9100.
 
 Audit
Committee
 
 As of the
date of this filing, the Company has no Audit Committee in place nor any
immediate plans to form one. However, if or when the Company is required to
maintain an Audit Committee pursuant to the Sarbanes-Oxley act of 2002, the
Company plans to comply with such requirement.
 
 ITEM
10. EXECUTIVE
COMPENSATION
 
 The table
that follows presents the annual compensation of our Chief Executive Officer,
and other executive officers who made more than $100,000 per year for the last
three fiscal years ending December 31, 2007.
  SUMMARY
COMPENSATION TABLE
 Annual
Compensation*
 All
      OtherName
      & Principal
                
                
                Stock
                Stock
                Compen-
                TotalPosition
                Year
                Salary
      ($)
                Awards
                Options
                sation
                Compen-
                  sationJoseph Wagner
      (1)
                2007
                $200,000
                -
                -
                -
                $200,000CEO,
      President,
                2006
                $200,000
                $49,167(3)
                (5)
                -
                $249,167Secretary,
                2005
                $203,666
                $28,333(3)
                -
                -
                $231,999and
      Chairman ofthe
      Board of DirectorsJean Wilson
      (2)
                2007
                $150,000
                -
                -
                -
                $150,000Chief
      Operating
                2006
                $150,000
                $15,297(4)
                (5)
                -
                $165,297Officer,
                2005
                $143,699
                $
      8,815(4)
                -
                -
                $152,514PrincipalAccounting
      Officer,Treasurer,and
      DirectorChristopher
      Spencer
                2007
                $12,000
                -
                -
                -
                $12,000DirectorDarren
      Andereck
                2007
                $148,000
                -
                -
                -
                $148,000President
      of ExperientialFrank
      Goldstin(6)
                2005
                $189,246
                $50,000(6)
                -
                -
                $239,246Former
      CEO
  * Does
not include perquisites and other personal benefits in aggregate amounts less
than 10% of the total annual salary and other compensation. No Executive Officer
received any Bonuses, Non-Equity Incentive Plan Compensation, or Nonqualified
Deferred Compensation Earnings, during the three years ended December 31,
2007.
 
 -44-
 (1)
Joseph Wagner, has served as our President Secretary and Treasurer since August
1, 2004, and served as our Chief Operating Officer from August 1, 2004 until
February 17, 2005, at which time he resigned as Chief Operating Officer and was
appointed Chief Executive Officer entered into a thirty-six (36) month
consulting agreement with the Company effective August 1, 2004, pursuant to
which Mr. Wagner will receive compensation of $200,000 per year.
  (2) Jean
Wilson has served as our Chief Accounting Officer and Treasurer since August 1,
2004. Between August 1, 2004 and February 17, 2005, Mrs. Wilson served as our
Vice President of operations and on February 17, 2005, was appointed Chief
Operating Officer. In August 2006, Ms. Wilson entered into a (60) month
employment agreement with the Company, effective August 1, 2006, which
employment agreement replaced a prior employment agreement entered into on
August 1, 2004.  Pursuant to the agreement, Ms. Wilson will receive
$150,000 per year as compensation.
  (3) In
August 2004, Mr. Wagner also received as additional consideration 225,000
restricted shares of the Company's common stock subject to a risk of forfeiture.
On December 31, 2004, 75,000 shares became fully vested and on December 31, 2005
an additional 75,000 shares became fully vested. The risk of forfeiture covering
the remaining 75,000 shares ceased to exist in August 2006, in connection with
our entry into a sixty (60) month Consulting Agreement with Mr. Wagner pursuant
to which he will continue to receive $200,000 per year for his services to us
(described in greater detail below). Mr. Wagner may engage in business
activities or interests outside of the Company which are not adverse or
competitive to the Company. The values listed in the table above represent the
amortized amounts of the vested shares for each year presented.  The
values above were calculated pursuant to FAS 123R.
  (4) In
August 2004, Ms. Wilson also received as additional consideration 70,000
restricted shares of the Company's common stock subject to a risk of forfeiture.
On December 31, 2004, 25,000 shares became fully vested and on December 31,
2005, 22,500 shares became fully vested. The risk of forfeiture covering the
remaining 22,500 shares ceased to exist in August 2006, in connection with Ms.
Wilson's entry into a sixty (60) month Executive Employment Agreement, pursuant
to which she received a pro rata amount of her salary payable under the
Executive Employment Agreement for the months between August and December 2006,
and will receive $150,000 per year for her services to us, during the remaining
years of the Executive Employment Agreement (described in greater detail below).
The values listed in the table above represent the amortized amounts of the
vested shares for each year presented. The values above were calculated pursuant
to FAS 123R.
  (5)
Joseph Wagner and Jean Wilson were granted 850,000 and 650,000 options to
purchase shares of our common stock at an exercise price of $0.75 per share,
respectively in August 2006. A Black - Scholes computation pursuant to FAS 123R
of those options indicated that neither grant had material value, due to the
fact that they have not vested yet (the options are described in greater detail
under "Employment and Consulting agreements above.")
  (6) Frank
Goldstin served as our Chief Executive Officer from December 2003 to February
17, 2005, when Mr. Wagner was elected as our Chief Executive Officer. Effective
August 1, 2004, Mr. Goldstin entered into a thirty-six (36) month employment
agreement with the Company effective August 1, 2004, pursuant to which Mr.
Goldstin would have received compensation of $360,000 per year. On or about
February 17, 2005, Mr. Goldstin entered into a Twenty-Four (24) month employment
agreement with the Company which superseded the previous agreement he had with
the Company, and which would have paid him $100,000 per year as the Chairman of
the Company's Board of Directors. Mr. Goldstin's employment agreement was
terminated effective December 19, 2005, due to the fact that he was not elected
a Director of the Company at our annual meeting of shareholders on the same day.
In connection with the termination of Mr. Goldstin's employment, and pursuant to
a "Severance Agreement and Release in Full" (the "Severance Agreement"), he was
provided a lump sum payment in the amount of $50,000, less applicable tax
withholding, and a payment of $5,538.43, less applicable tax withholding, in
connection with amounts previously owed to Mr. Goldstin in connection with his
employment (collectively the "Severance Pay").
  -45-
 Pursuant
to the Severance Agreement, Mr. Goldstin agreed to release and forever discharge
us, our former, present and future officers, directors, employees, agents,
administrators, persons and corporations who may be liable for the conduct of
any of the aforesaid parties, from any and all debts, demands, promises,
actions, claims, liabilities, damages, and causes of action of any nature, known
or unknown, both in law and equity, which have accrued or may ever accrue to Mr.
Goldstin, his heirs, executors, legal administrator, successors, or assigns by
reason of his employment with us. Mr. Goldstin's release included all claims
whether arising in tort, contract or statute. Additionally, pursuant to the
Severance Agreement, Mr. Goldstin agreed to repay us the Severance Pay if he
violates the Severance Agreement in any material respect.
  Additionally,
we had two other employees who made between $100,000 and $129,999 per year for
the year ended December 31, 2007, and one other employee who made more than
$150,000 per year for the year ended December 31, 2007. While these individuals
perform various tasks for us, we do not believe these individuals perform any
functions as executive officers of the Company.
 
 Severance and Change in
Control Payouts:
 
 We grant
change in control and severance arrangements to our executive officers on a
case-by-case basis. Currently Joseph Wagner, our Chief Executive Officer,
Secretary and Chairman of the Board, and Jean Wilson, our Chief Financial
Officer, Chief Operating Officer, and Treasurer are the only executive officers
with whom we have any change in control and severance arrangements. We believe
that granting these arrangements to certain key employees is an important
element in the retention of such employees.
 
 In Mr.
Wagner’s case, his severance arrangement takes effect pursuant to his Consulting
Agreement, if he is terminated without cause by us, or he terminates his
employment by giving ten (10) days written notice for “good reason,” defined as
if he is assigned, without his express written consent to any duties materially
inconsistent with his positions, duties, responsibilities or status with us as
of the date of his Consulting Agreement, or a change in his reporting
responsibilities or titles as in effect as of the date of the Consulting
Agreement; if his compensation is reduced; or if we do not pay him any material
amount of compensation due under the Consulting Agreement within ten (10) days
of the date he gives us notice that such amount has not been paid (each a
“Severance Event”). In the event of a Severance Event, Mr. Wagner shall be
entitled to receive as severance pay, an amount equal to $250,000 in addition to
all of the unpaid payments of salary that he would had earned assuming that he
had provided services to us for the full term of the Consulting Agreement. For
instance, if he terminated his service to us pursuant to a Severance Event on
August 1, 2007 (the one year anniversary of his entry into the Consulting
Agreement), he would receive as severance compensation, $250,000 plus the
remaining amount of payments he would be due under the Consulting Agreement,
$800,000 (four (4) years at $200,000 per year), so he would therefore be due a
total of $1,050,000 in a lump sum payment. Additionally, all 850,000 of the
options to purchase shares of our common stock which he was granted in August
2006, would vest to him immediately.
 
 In Ms.
Wilson’s case, her severance arrangement takes effect pursuant to the same
Severance Events as defined above for Mr. Wagner. In the event of a Severance
Event, Ms. Wilson shall be entitled to receive as severance pay, an amount equal
to $250,000 in addition to all of the unpaid payments of salary that she has
earned as of her termination date pursuant to the Employment Agreement. For
instance, if she terminated her service to us pursuant to a Severance Event
after August 1, 2007 (the one year anniversary of her entry into the Employment
Agreement), she would receive as severance compensation, $250,000 plus the
remaining amount of payments she had earned prior to the termination of the
Employment Agreement. Additionally, all 650,000 of the options to purchase
shares of our common stock which she was granted in August 2006, would vest to
her immediately.
 
 -46-
 Mr.
Wagner’s and Ms. Wilson’s options also contain change of control provisions,
whereby in the event of the adoption of a plan of merger or consolidation of the
Company with any other corporation or association as a result of which the
holders of the voting capital stock of the Company as a group would receive less
than 50% of the voting capital stock of the surviving or resulting corporation;
the approval by the Board of Directors of the Company of an agreement providing
for the sale or transfer of substantially all the assets of the Company; or in
the absence of a prior expression of approval by the Board of Directors, the
acquisition of more than 20% of the Company's voting capital stock by any person
within the meaning of Rule 13d-3 under the Securities Act of 1933 (the "Act,"
other than the Company or a person that directly or indirectly controls, is
controlled by, or is under common control with, the Company), all of the options
which they currently hold shall vest to them immediately.
  Additionally,
all of the options granted to employees in June 2006, as described herein, shall
immediately vest to those employees upon a Change in Control.
  COMPENSATION DISCUSSION AND
ANALYSIS
 
 Director
Compensation
 
 Joseph
Wagner, the Chairman of our Board of Directors and Jean Wilson a Director of the
Company do not receive any separate consideration from the Company other than
the compensation they are paid as the Company’s executives for their services on
the Board of Directors. The Board of Directors reserves the right in the future
to award the members of the Board of Directors cash (or additional cash in the
case of Mr. Spencer) or stock based consideration for their services to the
Company, which awards, if granted shall be in the sole determination of the
Board of Directors.
 
 Executive
Compensation Philosophy
 
 Our Board
of Directors, consisting of Joseph Wagner, who also serves as the Chairman of
the Board of Directors, Jean Wilson and Christopher Spencer, determine the
compensation provided to our executive officers in their sole determination. Our
executive compensation program is designed to attract and retain talented
executives to meet our short-term and long-term business objectives. In doing
so, we attempt to align our executives’ interests with the interests of our
shareholders by providing an adequate compensation package to such executives.
This compensation package includes a base salary, which we believe is
competitive with other companies of our relative size. In addition, we have
previously granted certain options to our executive and non-executive employees
as part of our compensation package, and our Board of Directors reserves the
right to award incentive bonuses which are linked to our performance, as well as
to the individual executive officer’s performance in the future. This package
may also include long-term, stock based compensation to certain executives which
is intended to align the performance of our executives with our long-term
business strategies, which may be similar to our previous stock options granted
during the year ended December 31, 2006.
  Base
Salary
 
 The base
salary of our executive officers, Joseph Wagner, our Chief Executive Officer,
President, Secretary and Chairman of the Board of Directors, was established by
our entry into a sixty month Consulting Agreement entered into with Mr. Wagner
in August 2006, which has since been amended, currently totals a base salary of
$200,000 per year and Jean Wilson, our Chief Operating Officer, Principal
Accounting Officer, Treasurer and Director, was established by our entry into a
sixty month Employment Agreement with Ms. Wilson in August 2006, currently
totals a base salary of $150,000 per year, were established by evaluating the
range of responsibilities of their positions, as well as the anticipated impact
that Mr. Wagner and Ms. Wilson could have in meeting our strategic objectives.
The established base salary of each individual was then benchmarked to
comparable positions with that of our industry and similarly sized companies.
Base salaries are adjusted to reflect the varying levels of position
responsibilities and individual executive performance.
 
 -47-
 Incentive
Bonus
 
 Along
with our executives’ base salaries, the Board of Directors reserves the right to
give incentive bonuses to our executive officers, which bonuses the Board of
Directors may grant in its sole discretion, if the Board of Directors believes
such bonuses are in the Company’s best interest, after analyzing our current
business objectives and growth, if any, and the amount of revenue we are able to
generate each month, which revenue is a direct result of the actions and ability
of such executives in the sole discretion of the Board of
Directors.
 
 As of the
date of this filing, Joseph Wagner holds 850,000 incentive options to purchase
shares of our common stock and Jean Wilson holds 650,000 incentive options to
purchase shares of our common stock at an exercise price of $0.75 per share,
which options vest to those individuals and are exercisable as provided above
under “Certain Relationships and Related Transactions.”
 
 Long-term,
Stock Based Compensation
 
 In order
to attract, retain and motivate executive talent necessary to support the
Company’s long-term business strategy we may award certain executives with
long-term, stock based compensation in the future, in the sole discretion of our
Board of Directors, which we do not currently have any immediate plans to
award.
 
 Criteria
for Compensation Levels
 
 The
Company has always sought to attract and retain qualified executives and
employees able to positively contribute to the success of the Company for the
benefit of its various stakeholders, the most important of which is its
shareholders, but also including its customers, its employees, and the
communities in which the Company operates.
 
 The Board
of Directors (in establishing compensation levels for the Chief Executive
Officer and Chief Operating Officer, as well as other executive positions) and
the Company (in establishing compensation levels for all executives of the
Company) may consider many factors, including, but not limited to, the
individual’s abilities and executed performance that results in: the advancement
of corporate goals of the Company, execution of the Company’s business
strategies, contributions to positive financial results, contributions to the
Company’s overall image and reputation in the Company’s industry, and
contributions to the development of the management team and other employees. An
officer must demonstrate his or her ability to deliver results in his or her
areas of responsibility, which can include, among other things: business
development with new and existing customers, development of new products,
efficient management of operations and systems, implementation of appropriate
changes and improvements to operations and systems, personnel management,
financial management, and strategic decision making. In determining compensation
levels, the Board of Directors may also consider: competitiveness of
compensation packages relative to other comparable companies, both inside and
outside of the event planning industry, and the experience level of each
particular individual.
  Compensation
levels for executive officers are generally reviewed upon the expiration of such
executive’s employment and/or consulting agreements (if any), or annually, but
may be reviewed more often as deemed appropriate.
 
 Compensation
Philosophy and Strategy
 
 In
addition to the “Criteria for Compensation Levels” set forth above, the Company
has a “Compensation Philosophy” for all employees of the Company (set forth
below), and a “Compensation Strategy for Key Management Personnel” (set forth
below), a substantial portion of which also applies to all employees of the
Company.
 
 -48-
 Compensation
Philosophy
 
 The
Company’s compensation philosophy is as follows:
  ·
                The
      Company believes that compensation is an integral component of its overall
      business and human resource strategies. The Company’s compensation plans
      will strive to promote the hiring and retention of personnel necessary to
      execute the Company’s business strategies and achieve its business
      objectives.
 
 ·
                The
      Company’s compensation plans will be strategy-focused, competitive, and
      recognize and reward individual and group contributions and results. The
      Company’s compensation plans will strive to promote an alignment of the
      interests of employees with the interests of the shareholders by having a
      portion of compensation based on financial results and actions that will
      generate future shareholder value.
 
 ·
                In
      order to reward financial performance over time, the Company’s
      compensation programs generally will consist of: base compensation, and
      may also consist of short-term variable incentives and long-term variable
      incentives, as appropriate.
 
 ·
                The
      Company’s compensation plans will be administered consistently and fairly
      to promote equal opportunities for the Company’s
  employees.
 
  Compensation
Strategy for Key Management Personnel
  The
Company’s compensation strategy for its key management personnel is as
follows:
 
 ·
                Total
      compensation may include base salary and short-term and long-term variable
      incentives based on annual and long term performance, and long-term
      variable incentives, in each case, where
  appropriate.
 
 ·
                Compensation
      will be comparable to general and industry-specific compensation
      practices.
 
 
 ·
                Generally,
      base compensation, and targeted short and long-term variable compensation,
      if any, will be established within the range of compensation of similarly
      situated companies in the Company’s industry. The Company’s organization
      size and complexity will be taken into account, and therefore similarly
      situated companies include companies of similar size and complexity
      whether or not such companies are in the Company’s industry or
      not.
 
 ·
                When
      determining compensation for officers, managers and consultants, the
      Company takes into account the employee’s (and/or consultant’s) knowledge,
      experience, past employment history and connections in the industry,
      including industry specific knowledge and experience, to the extent such
      knowledge and experience contributes to the Company’s ability to achieve
      its business objectives.
 
 ·
                The
      Company reserves the right to adjust annual base salaries of employees
      and/or to award performance based bonuses if individual performance is at
      or above pre-established performance
  expectations.
 
 
 -49-
 ITEM
11.SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
 
 The
following table sets forth information as of April 14, 2008, with respect to the
beneficial ownership of the Common Stock by (i) each director and officer of the
Company, (ii) all directors and officers as a group and (iii) each person known
by the Company to own beneficially 5% or more of the Common Stock:
  Name
      and Address
                Shares
      beneficially owned (1)
                
                Percent
      (2)Joe
      Wagner
                385,201
                (3)(4)(5)
                9.7%CEO,
      President, Secretary
                  and
      Director875
      North Michigan Avenue
                  Suite
      2626
                  Chicago,
      Illinois 60611Jean
      Wilson
                96,000
                (5)
                2.4%CFO,
      COO, Treasurer and Director875
      North Michigan Avenue
                  Suite
      2626
                  Chicago,
      Illinois 60611Chris
      Spencer
                100,000
                
                2.5%Director875
      North Michigan Avenue
                  Suite
      2626
                  Chicago,
      Illinois 60611David
      M. Loev
                379,933
                (6)
                9.2%
                (7)6300
      West Loop South
                  Bellaire,
      Texas 77401Vision
      Opportunity Master Fund, Ltd.
                393,748
                (9)
                9.9%
                (10)(8)
                  20
      West 55th Street
                  5th
      Floor
                  New
      York, New York 10019-5373Paul
      M. Higbee
                393,748
                (11)
                9.9%
                (12)175
      Elmsley Court
                  Ridgewood,
      New Jersey 07450
    -50-
 G.
      Chris Andersen
                393,748
                (11)
                9.9%
                (12)430
      Park Avenue
                  Suite
      701
                  New
      York, New York 10022Sands
      Brothers Venture Capital II LLC
                393,748
                (14)
                9.9%
                (15)(13)
                  90
      Park Ave. 31st Floor
                  New
      York, New York 10016Sands
      Brothers Venture Capital III LLC
                393,748
                (17)
                9.9%
                (18)(16)
                  90
      Park Ave. 31st Floor
                  New
      York, New York 10016Sands
      Brothers Venture Capital IV LLC
                393,748
                (20)
                9.9%
                (21)(19)
                  90
      Park Ave. 31st Floor
                  New
      York, New York 10016Katie
      & Adam Bridge Partners, L.P.
                393,748
                (23)
                9.9%
                (24)(22)
                  90
      Park Ave. 31st Floor
                  New
      York, New York 10016Mastodon
      Ventures, Inc.
                194,885
                (26)
                4.9%
                (27)(25)
                  600
      Congress Avenue
                  Suite
      1220
                  Austin,
      Texas 78701All  officers  and  directors
      as a group (3 persons)
                581,201
                (3)(4)(5)
                14.6%
  *
Approximate.
 
 (1) The
number of shares of common stock owned are those "beneficially owned" as
determined under the rules of the Securities and Exchange Commission, including
any shares of common stock as to which a person has sole or shared voting or
investment power and any shares of common stock which the person has the right
to acquire within 60 days through the exercise of any option, warrant or right.
Shares of common stock subject to a Convertible Note or Warrant currently
convertible or exercisable, or convertible or exercisable within 60 days are
deemed outstanding for computing the percentage of the person holding such
Convertible Note or Warrant, but are not deemed outstanding for computing the
percentage of any other person.
 
 -51-
 (2) Using
3,977,252 shares of common stock outstanding as of March 26, 2007, unless
otherwise stated.
 
 (3)
Includes 35,201 shares held personally by Joseph Wagner.
 
 (4)
Includes 350,000 shares of common stock held by Sandra M. Wagner, the wife of
Joseph Wagner.
 
 (5) Does
not include an aggregate of 850,000 options to purchase shares of our common
stock held by Joe Wagner and 650,000 options to purchase shares of our common
stock at $0.75 per share, held by Jean Wilson, which shares vest at the rate of
1/3 per year, beginning one year from the date the Registration Statement we are
contractually obligated to file to register the shares of common stock issuable
in connection with the conversion of the Purchasers’ 11% Senior Secured
Convertible Notes is declared effective with the Commission (the "Effectiveness
Date") and/or upon a Change in Control (as defined in the options), as such
options do not vest to Mr. Wager and Ms. Wilson until one year from such
Effectiveness Date and/or upon a Change of Control.
 
 (6)
Includes 225,000 shares of common stock and 154,933 warrants to purchase shares
of our common stock at an exercise price of $0.30 per share. Mr. Loev
beneficially owns an aggregate of 154,933 warrants to purchase shares of our
common stock at an exercise price of $0.30 per share and an aggregate of 225,000
shares of common stock held in the name of The Loev Family Partnership, Ltd.,
which Mr. Loev is deemed to beneficially own. Mr. Loev has agreed not to hold
more than 9.9% of our common stock at any one time,
  (7) Based
on 4,087,250 shares outstanding, assuming the exercise of 135,000 warrants
beneficially owned by Mr. Loev, which would result in Mr. Loev owning
approximately 9.9% of our common stock.
 
 (8) The
beneficial owner of Vision Master Fund, Ltd. ("Vision") is Adam Benowitz, its
Portfolio manager.
 
 (9)
Although Vision has agreed to not hold more than 9.9% of our outstanding common
stock at anyone time unless they provide us sixty-one (61) days prior notice,
Vision has the ability to convert its outstanding 11% Senior Secured Convertible
Notes ("Notes") into approximately 6,600,000 shares of common stock at a
conversion price of $0.25 per share (which exercise price varies as provided in
the Notes); and can exercise its 920,833 warrants at an exercise price of $0.30
per share for that same number of shares, providing it the ability to own
7,520,833 shares of our common stock, which if Vision provides us notice of
their intent to hold more than the 9.9% share limit and converts and exercises
all of the shares in connection with the conversion of the Notes it holds and
the shares underlying the warrants would represent 65.4% of our outstanding
common stock based on 11,498,085 shares then outstanding.
 
 (10)
Based on 4,371,000 shares then outstanding assuming the conversion and/or
exercise of 393,748 shares, which represents approximately 9.9% of our
outstanding shares of common stock.
 
 (11)
Although Mr. Higbee and Mr. Andersen have agreed to not hold more than 9.9% of
our outstanding common stock at anyone time unless they provide us sixty-one
(61) days prior notice, they each have the ability to convert their outstanding
11% Senior Secured Convertible Notes ("Notes") into approximately 500,000 shares
of common stock at a conversion price of $0.25 per share (which exercise price
varies as provided in the Notes); and can exercise their 40,000 warrants at an
exercise price of $0.30 per share for that same number of shares, providing each
of them the ability to own 540,000 shares of our common stock, which if either
provides us notice of their intent to hold more than the 9.9% share limit and
converts and exercises all of the shares in connection with the conversion of
the Notes it holds and the shares underlying the warrants would represent 12.0%
of our outstanding common stock based on 4,517,252 shares then
outstanding.
 
 -52-
 (12)
Based on 4,371,000 shares then outstanding assuming the conversion and/or
exercise of 393,748 shares, which represents approximately 9.9% of our
outstanding shares of common stock.
 
 (13) The
manager of Sands Brothers Venture Capital II LLC is Sands Brothers Venture
Capital Management LLC, which is managed by Scott Baily. Scott Baily, Steven
Sands and Martin Sands have voting and/or investment control over shares held by
Sands Brothers Venture Capital II LLC.
 
 (14)
Although Sands Brothers Venture Capital II LLC has agreed to not hold more than
9.9% of our outstanding common stock at anyone time unless it provides us
sixty-one (61) days prior notice, it has the ability to convert its outstanding
11% Senior Secured Convertible Notes ("Notes") into
approximately  464,000 shares of common stock at a conversion price of
$0.25 per share (which exercise price varies as provided in the Notes); and can
exercise its 46,000 warrants at an exercise price of $0.30 per share for that
same number of shares, providing it the ability to own 510,000 shares of our
common stock, which if it provides us notice of its intent to hold more than the
9.9% share limit and converts and exercises all of the shares in connection with
the conversion of the Notes it holds and the shares underlying the warrants
would represent 11.4% of our outstanding common stock based on 4,487,252 shares
then outstanding.
 
 (15)
Based on 4,371,000 shares then outstanding assuming the conversion and/or
exercise of 393,748 shares, which represents approximately 9.9% of our
outstanding shares of common stock.
 
 (16) The
manager of Sands Brothers Venture Capital III LLC is Sands Brothers Venture
Capital Management LLC, which is managed by Scott Baily. Scott Baily, Steven
Sands and Martin Sands have voting and/or investment control over shares held by
Sands Brothers Venture Capital III LLC.
 
 (17)
Although Sands Brothers Venture Capital III LLC has agreed to not hold more than
9.9% of our outstanding common stock at anyone time unless it provides us
sixty-one (61) days prior notice, it has the ability to convert its outstanding
11% Senior Secured Convertible Notes ("Notes") into
approximately  4,396,000 shares of common stock at a conversion price
of $0.25 per share (which exercise price varies as provided in the Notes); can
exercise its 556,500 warrants at an exercise price of $0.30 per share for that
same number of shares, and currently holds 50,000 shares of common stock,
providing it the ability to own 8,929,752 shares of our common stock, which if
it provides us notice of its intent to hold more than the 9.9% share limit and
converts and exercises all of the shares in connection with the conversion of
the Notes it holds and the shares underlying the warrants would represent 56% of
our outstanding common stock based on 8,929,752 shares then
outstanding.
 
 (18)
Based on 4,371,000 shares then outstanding assuming the conversion and/or
exercise of 393,748 shares, which represents approximately 9.9% of our
outstanding shares of common stock.
 
 (19) The
manager of Sands Brothers Venture Capital IV LLC is Sands Brothers Venture
Capital Management LLC, which is managed by Scott Baily. Scott Baily, Steven
Sands and Martin Sands have voting and/or investment control over shares held by
Sands Brothers Venture Capital IV LLC.
 
 (20)
Although Sands Brothers Venture Capital IV LLC has agreed to not hold more than
9.9% of our outstanding common stock at anyone time unless it provides us
sixty-one (61) days prior notice, it has the ability to convert its outstanding
11% Senior Secured Convertible Notes ("Notes") into
approximately  1,160,000 shares of common stock at a conversion price
of $0.25 per share (which exercise price varies as provided in the Notes); can
exercise its 114,999 warrants at an exercise price of $0.30 per share for that
same number of shares, and currently holds 33,333 shares of common stock,
providing it the ability to own 1,308,332 shares of our common stock, which if
it provides us notice of its intent to hold more than the 9.9% share limit and
converts and exercises all of the shares in connection with the conversion of
the Notes it holds and the shares underlying the warrants would represent 24.9%
of our outstanding common stock based on 5,252,251 shares then
outstanding.
 
 -53-
 (21)
Based on 4,371,000 shares then outstanding assuming the conversion and/or
exercise of 393,748 shares, which represents approximately 9.9% of our
outstanding shares of common stock.
 
 (22) The
manager of Katie & Adam Bridge Partners L.P. is Katie & Adam Bridge
Partners Management L.P., which is managed by Scott Baily. Scott Baily, Steven
Sands and Martin Sands have voting and/or investment control over shares held by
Sands Brothers Venture Capital III LLC.
 
 (23)
Although Katie & Adam Bridge Partners L.P. has agreed to not hold more than
9.9% of our outstanding common stock at anyone time unless it provides us
sixty-one (61) days prior notice, it has the ability to convert its outstanding
11% Senior Secured Convertible Notes ("Notes") into
approximately  464,000 shares of common stock at a conversion price of
$0.25 per share (which exercise price varies as provided in the Notes); and can
exercise its 46,001 warrants at an exercise price of $0.30 per share for that
same number of shares, providing it the ability to own 510,001 shares of our
common stock, which if it provides us notice of its intent to hold more than the
9.9% share limit and converts and exercises all of the shares in connection with
the conversion of the Notes it holds and the shares underlying the warrants
would represent 11.4% of our outstanding common stock based on 4,487,253 shares
then outstanding.
 
 (24)
Based on 4,371,000 shares then outstanding assuming the conversion and/or
exercise of 393,748 shares, which represents approximately 9.9% of our
outstanding shares of common stock.
 
 (25) The
beneficial owner of Mastodon Ventures, Inc. (“MVI”) is Robert S. Hersch, its
President.
 
 (26)
Although MVI can exercise its 779,334 warrants to purchase shares of common
stock which it beneficially owns for that same number of shares, which shares if
exercised would represent approximately 16.4% of our then outstanding common
stock based on 4,756,586 shares of common stock then outstanding, MVI has
contractually agreed not to own 5% or more of our common stock at any one
time.
 
 (27)
Based on 4,172,137 shares then outstanding assuming the exercise of 194,885
warrants, which represents 4.9% of our outstanding shares of common
stock.
 
 ITEM
12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
 
 On June
19, 2006, the Company's Board of Directors approved the issuance of 650,000
Incentive Stock Options to the Company's Chief Executive Officer, President,
Secretary and Director, Joseph Wagner and 550,000 Incentive Stock Options to
Jean Wilson, the Company's Chief Operating Officer, Treasurer and Director, who
both also own more than 10% of the Company's outstanding voting shares (the "10%
Shareholder Options") pursuant to the Plan. The 10% Shareholder Options had an
exercise price of $0.38 per share, which was equal to 110% of the mean of the
highest and lowest quoted selling prices of the Company's common stock on the
Over-The-Counter Bulletin Board on the Valuation Date. The 10% Shareholder
Options were evidenced by Option Agreements, pursuant to the Plan. The 10%
Shareholder Options shall vest three (3) years from the Valuation Date (June 19,
2009), and terminated if unexercised on June 19, 2011, unless terminated earlier
pursuant to the terms of the Option Agreements; provided however, that the 10%
Shareholder Options shall vest immediately upon the occurrence of a Change in
Control of the Company. The 10% Shareholder Options were later rescinded by the
Company in connection with the Funding and the grant of the JJ Options, as
described in greater detail below.
 
 On August
2, 2006 (the "Valuation Date"), the Directors granted 850,000 options to
purchase shares of our common stock ("Options") to Joseph Wagner, the Company's
Chief Executive Officer and Director of the Company and 650,000 Options to Jean
Wilson, the Company's Chief Operating Officer and Director, who are both greater
than 10% shareholders of the Company (the "JJ Options"). The exercise price of
the JJ Options is $0.75 per share (which exercise price was greater than 110% of
the mean of the highest ($0.31) and lowest ($0.31) quoted selling prices of the
Company's common stock on the Valuation Date). The JJ Options expire if
unexercised on the fifth anniversary of the Vesting Date, or as otherwise
provided in the Option Agreements.
  -54-
 Mr.
Wagner shall vest 283,333 of the Options upon the twelve (12) month anniversary
of the date the United States Securities and Exchange Commission declares
effective a registration statement covering the resale of the shares of common
stock which the 11% Senior Secured Convertible Promissory Notes which we sold in
August, September and October 2006 to certain third party purchasers (the
"Purchasers") are convertible into (as described in greater detail in our most
recent periodic filings) and the shares of common stock which the Warrants
granted to such Purchasers are exercisable for (the "Effectiveness Date"); Mr.
Wagner shall vest 283,333 of the Options upon the twenty-four (24) month
anniversary of the Effectiveness Date; and Mr. Wagner shall vest the remaining
283,334 options upon the thirty-six (36) month anniversary of the Effectiveness
Date, provided however that all of the options shall vest immediately upon a
Change in Control of the Company (as defined below).
 
 Ms.
Wilson shall vest 216,667 of the Options upon the twelve (12) month anniversary
of the Effectiveness Date; Ms. Wilson shall vest 216,666 of the Options upon the
twenty-four (24) month anniversary of the Effectiveness Date; and Ms. Wilson
shall vest the remaining 216,666 options upon the thirty-six (36) month
anniversary of the Effectiveness Date, provided that all of the options shall
vest immediately upon a Change in Control of the Company (as defined
below).
 
 A "Change
in Control" includes the adoption of a plan of merger or consolidation of the
Company with any other corporation or association as a result of which the
holders of the voting capital stock of the Company as a group would receive less
than 50% of the voting capital stock of the surviving or resulting corporation;
the approval by the Board of Directors of the Company of an agreement providing
for the sale or transfer of substantially all the assets of the Company; or in
the absence of a prior expression of approval by the Board of Directors, the
acquisition of more than 20% of the Company's voting capital stock by any person
within the meaning of Rule 13d-3 under the Securities Act of 1933 (the "Act,"
other than the Company or a person that directly or indirectly controls, is
controlled by, or is under common control with, the Company).
  In
February 2007, pursuant to an “Agreement Regarding the Cancellation of the
Series A Preferred Stock of XA, Inc.,” Joseph Wagner and Jean Wilson, our
Directors agreed to cancel the two (2) shares of Series A Preferred Stock which
they held for aggregate consideration of $1.00.
 
 On
February 23, 2007, at our 2007 Annual Meeting of Stockholders, Joseph Wagner,
Jean Wilson and Christopher Spencer were re-elected as Directors of the Company
and Joseph Wagner was additionally appointed as Chairman of the Company’s Board
of Directors.
 
 In March
2007, XA Interactive Inc., one of our wholly owned subsidiaries, entered into a
strategic alliance with Wizzard Media, which is part of Wizzard Software
Corporation, to enhance the podcasting service offerings of Wizzard Media.
Christopher Spencer, one of our directors, is the Chief Executive Officer,
President and a director of Wizzard Software Corporation.
 
 On March
8, 2007, with an effective date of August 1, 2006, Joseph Wagner, our Chief
Executive Officer, President, Chairman and Secretary entered into a First
Amendment to Consulting Agreement with us, which amended and replaced his sixty
(60) month Consulting Agreement entered into with us in August 2006, effective
as of August 1, 2006, which Consulting Agreement replaced a prior Consulting
Agreement entered into between us and Mr. Wagner with an effective date of
August 1, 2004. The main amendments to the Consulting Agreement were the
inclusion of the position of Chairman in the prior provision which stated that
in the event Mr. Wagner is terminated for good reason by Mr. Wagner or without
cause by us, from his employment under any position he held with us, that he
would receive a lump sum payment of $250,000 and any and all unpaid payments of
salary he would have been owed pursuant to the amended Consulting Agreement, and
the inclusion of a tie-breaking vote for Mr. Wagner, as described below. The
terms of the Consulting Agreement, as amended are discussed below.
 
 The
Consulting Agreement, as amended, also provides for Mr. Wagner to have an
additional tie-breaking vote on any matters to come before the Board of
Directors, which end in a tie or deadlock between the then voting members of the
Board of Directors (including Mr. Wagner’s vote in such tie or deadlock vote),
while Mr. Wagner is Chairman of the Board of Directors. For instance, if there
are four voting members of the Board of Directors present at a Board of
Directors meeting (one of which is Mr. Wagner), and two members vote to approve
a resolution which has come before the Board of Directors and two members
(including Mr. Wagner) vote not to approve the resolution, the approval or
non-approval of the resolution will be decided by a tie-breaking vote to be cast
by Mr. Wagner as Chairman of the Board of Directors in his sole discretion
(which shall in effect give Mr. Wagner, while serving as the Chairman of the
Board of Directors a second vote on any tied or deadlocked vote to come before
the Board of Directors).
 
 During
the years ended December 31, 2006 and 2007, the Company sold various Notes to
the Purchasers (as defined above) and granted such Purchasers and affiliated
parties various Warrants in connection with the sale of such
Notes.  The transactions with the Purchasers are described above in
greater detail under “Business History”.
 
 -55-
 ITEM
13. EXHIBITS
AND REPORTS ON FORM 8-K
 
 a)
EXHIBITS
 
 Exhibit
      Number
                Description of Exhibit10.1(1)
                Common
      Stock Purchase Warrant A10.2(2)
                Voting
      Agreement between Joseph Wagner and Frank Goldstin10.3(2)
                Voting
      Agreement between Jean Wilson and Frank Goldstin10.4(3)
                Fiori
      Asset Purchase Agreement10.5(4)
                Asset
      Acquisition Agreement with Musters & Company, Inc.10.6(4)
                Waiver
      Agreement10.7(5)
                Christopher
      Spencer Consulting Agreement10.8(6)
                Waiver
      of Rights Agreement10.9(7)
                Securities
      Purchase Agreement Dated August 8, 200610.10(7)
                11%
      Senior Secured Convertible Promissory Note with Sands Brothers Venture
      Capital LLC10.11(7)
                11%
      Senior Secured Convertible Promissory Note with Sands Brothers Venture
      Capital II LLC10.12(7)
                11%
      Senior Secured Convertible Promissory Note with Sands Brothers Venture
      Capital III LLC10.13(7)
                11%
      Senior Secured Convertible Promissory Note with Sands Brothers Venture
      Capital IV LLC10.14(7)
                11%
      Senior Secured Convertible Promissory Note with Katie & Adam Bridge
      Partners L.P.10.15(7)
                Warrant
      with Sands Brothers Venture Capital LLC ($1.10 initial exercise
      price)10.16(7)
                Warrant
      with Sands Brothers Venture Capital II LLC ($1.10 initial exercise
      price)10.17(7)
                Warrant
      with Sands Brothers Venture Capital III LLC ($1.10 initial exercise
      price)10.18(7)
                Warrant
      with Sands Brothers Venture Capital IV LLC ($1.10 initial exercise
      price)10.19(7)
                Warrant
      with Katie & Adam Bridge Partners L.P. ($1.10 initial exercise
      price)10.20(7)
                Warrant
      with Sands Brothers Venture Capital LLC ($0.30 initial exercise
      price)10.21(7)
                Warrant
      with Sands Brothers Venture Capital II LLC ($0.30 initial exercise
      price)10.22(7)
                Warrant
      with Sands Brothers Venture Capital III LLC ($0.30 initial exercise
      price)
    -56-
  10.23(7)
                Warrant
      with Sands Brothers Venture Capital IV LLC ($0.30 initial exercise
      price)
 
 10.24(7)
                Warrant
      with Katie & Adam Bridge Partners L.P. ($0.30 initial exercise
      price)10.25(7)
                Warrant
      with Mastodon Ventures, Inc. ($0.30 initial exercise
  price)10.26(7)
                Registration
      Rights Agreement10.27(7)
                Security
      Agreement10.28(7)
                Joseph
      Wagner 60 Month Consulting Agreement Effective August 1,
    200610.29(7)
                Jean
      Wilson 60 Month Employment Agreement Effective August 1,
    200610.30(7)
                Joseph
      Wagner Stock Option Agreement to Purchase 850,000 Shares at an Exercise
      Price of $0.75 Per Share10.31(7)
                Jean
      Wilson Stock Option Agreement to Purchase 650,000 Shares at an Exercise
      Price of $0.75 Per Share10.32(8)
                Second
      Funding Waiver of Rights Agreement10.33(9)#
                Securities
      Purchase Agreement Effective September 26, 2006 with G. Chris
      Andersen10.34(9)#
                11%
      Senior Secured Convertible Promissory Note with G. Chris
      Andersen10.35(9)#
                Warrant
      with G. Chris Andersen ($1.10 initial exercise price)10.36(9)#
                Registration
      Rights Agreement with G. Chris Andersen10.37(9)#
                Security
      Agreement with G. Chris Andersen10.38(9)
                Securities
      Purchase Agreement Dated October 23, 2006 with Vision Opportunity Master
      Fund, Ltd.1039(9)
                11%
      Senior Secured Convertible Promissory Note with Vision Opportunity Master
      Fund, Ltd. (1)10.40(9)
                Warrant
      with Vision Opportunity Master Fund, Ltd. ($1.10 initial exercise
      price)10.41(9)
                Warrant
      with Vision Opportunity Master Fund, Ltd. ($0.30 initial exercise
      price)10.42(9)
                Registration
      Rights Agreement with Vision Master Fund, Ltd.10.43(9)
                Security
      Agreement with Vision Master Fund, Ltd.10.44(9)
                Third
      Waiver of Rights Agreement with the 6% Purchasers10.45(9)
                Consulting
      Agreement with MVI10.46(10)
                Agreement
      Regarding the Cancellation of the Series A Preferred Stock of XA,
      Inc.
   -57-
  10.47(10)
                Legal
      Services Agreement with David M. Loev10.48(11)
                Securities
      Purchase Agreement With the Sands Brothers Purchasers (June 22,
      2007)10.49(11)
                11%
      Senior Secured Convertible Promissory Note with Sands Brothers Venture
      Capital LLC (June 22, 2007)10.50(11)
                11%
      Senior Secured Convertible Promissory Note with Sands Brothers Venture
      Capital II LLC (June 22, 2007)10.51(11)
                11%
      Senior Secured Convertible Promissory Note with Sands Brothers Venture
      Capital III LLC (June 22, 2007)10.52(11)
                11%
      Senior Secured Convertible Promissory Note with Sands Brothers Venture
      Capital IV LLC (June 22, 2007)10.53(11)
                11%
      Senior Secured Convertible Promissory Note with Katie & Adam Bridge
      Partners L.P. (June 22, 2007)10.54(11)
                Warrant
      with Sands Brothers Venture Capital LLC ($0.30 initial exercise price)
      (June 22, 2007)10.55(11)
                Warrant
      with Sands Brothers Venture Capital II LLC ($0.30 initial exercise price)
      (June 22, 2007)10.56(11)
                Warrant
      with Sands Brothers Venture Capital III LLC ($0.30 initial exercise price)
      (June 22, 2007)10.57(11)
                Warrant
      with Sands Brothers Venture Capital IV LLC ($0.30 initial exercise price)
      (June 22, 2007)10.58(11)
                Warrant
      with Katie & Adam Bridge Partners L.P. ($0.30 initial exercise price)
      (June 22, 2007) (June 22, 2007)10.59(11)
                Registration
      Rights Agreement with the Sands Brothers Purchasers (June 22,
      2007)10.60(11)
                Security
      Agreement with the Sands Brothers Purchasers (June 22,
    2007)10.61(11)
                Securities
      Purchase Agreement Dated June 29, 2007 with Vision Opportunity Master
      Fund, Ltd.10.62(11)
                11%
      Senior Secured Convertible Promissory Note with Vision Opportunity Master
      Fund, Ltd. (June 29, 2007)10.63(11)
                Warrant
      with Vision Opportunity Master Fund, Ltd. ($0.30 initial exercise price)
      (June 29, 2007)10.64(11)
                Registration
      Rights Agreement with Vision Master Fund, Ltd. (June 29,
    2007)10.64(11)
                Security
      Agreement with Vision Master Fund, Ltd. (June 29, 2007)10.65(11)
                Securities
      Purchase Agreement effective June 11, 2007 with G. Chris
      Andersen
   -58-
  10.66(11)
                11%
      Senior Secured Convertible Promissory Note with G. Chris Andersen
      (effective June 11, 2007)10.67(11)
                Warrant
      with G. Chris Andersen ($0.30 initial exercise price) (effective June 11,
      2007)10.68(11)
                Registration
      Rights Agreement with G. Chris Andersen (effective June 11,
      2007)10.69(11)
                Security
      Agreement with G. Chris Andersen (effective June 11,
  2007)10.70(11)
                Securities
      Purchase Agreement effective June 11, 2007 with Paul M.
    Higbee10.71(11)
                11%
      Senior Secured Convertible Promissory Note with Paul M. Higbee (effective
      June 11, 2007)10.72(11)
                Warrant
      with Paul M. Higbee ($0.30 initial exercise price) (effective June 11,
      2007)10.73(11)
                Registration
      Rights Agreement with Paul M. Higbee (effective June 11,
    2007)10.74(11)
                Security
      Agreement with Paul M. Higbee (effective June 11, 2007)10.75(11)
                Waiver
      of Rights Agreement Dated On Or Around June 22, 2007 with the
      Purchasers10.76(11)
                First
      Amendment to Consulting Agreement with Joseph Wagner10.77(11)
                First
      Amendment to 11% Senior Secured Convertible Promissory Note with the Sands
      Brothers Purchasers10.78(11)
                First
      Amendment to 11% Senior Secured Convertible Promissory Note with Vision
      Master Fund, Ltd.10.79(11)
                First
      Amendment to 11% Senior Secured Convertible Promissory Note with Paul M.
      Higbee10.80(11)
                First
      Amendment to 11% Senior Secured Convertible Promissory Note with G. Chris
      Andersen10.81(12)
                Securities
      Purchase Agreement with Sands Brothers Venture Capital III LLC (December
      21, 2007)10.82(12)
                11%
      Senior Secured Convertible Promissory Note with Sands Brothers Venture
      Capital III LLC (December 21, 2007)10.83(12)
                Warrant
      with Sands Brothers Venture Capital III LLC ($0.30 initial exercise price)
      (December 21, 2007)10.84(12)
                Registration
      Rights Agreement with Sands Brothers Venture Capital III LLC (December 21,
      2007)10.85(12)
                Security
      Agreement with Sands Brothers Venture Capital III LLC (December 21,
      2007)10.86(12)
                Securities
      Purchase Agreement with Vision Opportunity Master Fund, Ltd. (December 21,
      2007)10.87(12)
                11%
      Senior Secured Convertible Promissory Note with Vision Opportunity Master
      Fund, Ltd. (December 21, 2007)
   -59-
  10.88(12)
                Warrant
      with Vision Opportunity Master Fund, Ltd. ($0.30 initial exercise price)
      (December 21, 2007)10.89(12)
                Registration
      Rights Agreement with Vision Master Fund, Ltd. (December 21,
      2007)10.90(12)
                Security
      Agreement with Vision Master Fund, Ltd. (December 21,
  2007)10.91(12)
                Forbearance
      Agreement10.92(13)
                Revolving
      Line of Credit Agreement with Sands Brothers Venture Capital III LLC
      (February 29, 2008) and Promissory Note with Sands Brothers Venture
      Capital III LLC (February 29, 2008)10.93(14)
                Promissory
      Note with Sands Brothers Venture Capital III LLC (March 27,
      2008)21.1*
                Subsidiaries31.1*
                Certificate
      of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2*
                Certificate
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1*
                Certificate
      of the Chief Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2*
                Certificate
      of the Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
 
 (1)
 Filed as Exhibits 10.1, 10.2, 10.3, 10.4, 10.5, 10.6, and 10.7 to the
Company's Form SB-2 Registration Statement filed with the Securities and
Exchange Commission on August 17, 2004, and incorporated herein by
reference.
 
 (2)
 Filed as Exhibit 10.1 and 10.2 to our Form 8-K filed with the Securities
and Exchange Commission on August 6, 2004, and incorporated herein by
reference.
 
 (3)
 Filed as Exhibit 1.1 to the Company's Form 8-K filed with the Securities
and Exchange Commission on August 9, 2004, and incorporated herein by
reference.
 
 (4)
 Filed as Exhibits to our Form 8-K filed with the Commission on March 11,
2005, and incorporated herein by reference.
 
 (5)
 Filed as an Exhibit to our Report on Form 10-KSB for the year ended
December 31, 2005, which was filed with the Commission on March 24, 2006, and
incorporated herein by reference.
 
 (6)
 Filed as an Exhibit to our Form 8-K filed with the Commission on July 24,
2006, and incorporated by reference herein.
 
 (7)
 Filed as Exhibits to our Form 8-K filed with the Commission on August 15,
2006, and incorporated herein by reference.
 
 -60-
 (8)
 Filed as an Exhibit to our Form 8-K filed with the Commission September
14, 2006 and incorporated herein by reference.
 
 (9)
 Filed as Exhibits to our Form 8-K filed with the Commission on November 1,
2006, and incorporated herein by reference.
 
 (10) Filed
as Exhibits to our Form SB-2 Registration Statement filed with the Commission on
March 26, 2007, and incorporated herein by reference.
 
 (11)
Filed as Exhibits to our Report on Form 8-K filed with the Commission on July
12, 2007, and incorporated herein by reference.
 
 (12)
 Filed as Exhibits to our Form 8-K filed with the Commission on January 25,
2008, and incorporated herein by reference.
 
 (13)
 Filed as an Exhibit to our Form 8-K filed with the Commission on March 4,
2008, and incorporated herein by reference.
 
 (14)
Filed as an Exhibit to our Report on Form 8-K filed with the Commission on April
7, 2008, and incorporated herein by reference.
 
 * Filed
Herein.
  # The
September 2006 closing documents including the Securities Purchase Agreement,
11% Senior Secured Convertible Promissory Note, Registration Rights Agreement
and Security Agreement with G. Chris Andersen and Paul M. Higbee are identical
except for their respective names and addresses, and as such, we have only
included those documents relating to Mr. Andersen. Both the closing documents
with Mr. Andersen and Mr. Higbee, including the Securities Purchase Agreements,
Registration Rights Agreements, Senior Notes and Warrants (but not the Security
Agreement), were re-executed by Mr. Andersen and Mr. Higbee on or about October
23, 2006, to be effective as of September 26, 2006, to conform to the Vision
Opportunity Master Fund, Ltd. closing documents, which October 2006 closing
documents replaced and superseded the prior executed September 2006
documents.
 
 (B)
Reports on Form 8-K
 
 The
Company filed the following report on Form 8-K during the period covered by this
report:
 
 o
                The
      Company filed a report on Form 8-K on December 17, 2007 to report the
      Company being in default on a promissory note with LaSalle Bank National
      Association in connection  with a line of credit
      agreement.The
      Company filed the following reports on Form 8-K subsequent to the period
      covered by this Report:o
                The
      Company filed a report on Form 8-K on January 25, 2008 to report the
      closing of the sale of $400,000 Senior Subordinated Secured Convertible
      Notes and warrants to two purchasers and related agreements and
      transactions.o
                The
      Company filed a report on Form 8-K on March 4, 2008 to report the entry
      into a revolving line of credit agreement with Sands Brothers Venture
      Capital III LLC and the initial advance on the line of
    credit.o
                The
      Company filed a report on Form 8-K on April 7, 2008, to report the entry
      into a Promissory Note with Sands Brothers Venture Capital III LLC in
      connection with the Line of Credit
 
 
 -61-
 ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
 
 Audit
Fees
 
 The
aggregate fees billed for each of the fiscal years ended December 31, 2007 and
2006 for professional services rendered by the principal accountant for the
audit of the Company's annual financial statements and for review of the
financial statements included in the registrant's Form 10-QSB or for services
that are normally provided by the accountant in connection with statutory and
regulatory filings or engagements for those fiscal years was approximately
$35,000 and $34,000, respectively.
 
 Audit Related
Fees
 
 None.
 
 Tax Fees
 
 None.
 
 All Other
Fees
 
 None.
  -62-
  SIGNATURES
 
 In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
 
 XA,
      INC.DATED:  September 11,
      2008
                By: /s/ Joseph
    WagnerJoseph
      WagnerChief
      Executive OfficerDATED:  September
      11, 2008
                By: /s/ Jean
      WilsonJean
      WilsonPrincipal
      Financial OfficerIn
      accordance with the Securities Exchange Act of 1934, this report has been
      signed below by the following persons on behalf of the Registrant and in
      the capacities and on the dates indicated.NAME
                TITLE
                DATE/s/ Joseph
    WagnerJoseph
      Wagner
                Chief
      Executive Officer,
                September 11,
      2008President,
      Secretary andChairman
      of the Board of Directors/s/ Jean WilsonJean
      Wilson
                Principal
      Financial Officer,
                September 11,
      2008Treasurer,
      Chief Operating Officerand
      Director








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