**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-QSB**





(Mark
      One)


x **QUARTERLY
      REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES**


**EXCHANGE
      ACT OF 1934**




**For
      the quarterly period ended June 30, 2007**




**Or**




**TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES**


**EXCHANGE
      ACT OF 1934**




**For
      the transition period from  _______ to ________**


**Commission
      file number: 000-49743**




**TXP
      CORPORATION**


(Exact
      name of small business issuer as specified in its charter)




**Nevada**
            
            **88-0443110**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                Employer
              Identification
                No.)**1299
                Commerce Drive**
              **Richardson,
                Texas 75081**
            
            **(214)
                575-9300**(Address
                of principal
              executive
                offices)
            
            (Issuer’s
                telephone number)





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the preceding 12 months (or for such shorter
      period that the issuer was required to file such reports), and (2) has been
      subject to the filing requirements for the past 90 days. Yes x No o




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o No x




**APPLICABLE
      ONLY TO CORPORATE ISSUERS**




State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date: The number of shares issued and outstanding
      of the registrant's common stock, par value $.001 per share, as of August 9,
      2007 was 112,535,647 shares.




Transitional
      Small Business Disclosure Format (Check one): Yes o No x














**TXP
      CORPORATION**




**JUNE
      30, 2007 FORM 10-QSB QUARTERLY REPORT**




**INDEX**





PagePART
                I - FINANCIAL INFORMATION
            
            F-1Item
                1**-**Financial Statements
            
            F-1Item
                2 - Management's Discussion and Analysis or Plan of
                Operation
            
            1Item
                3 - Controls and Procedures
            
            24PART
                II - OTHER INFORMATION
            
            25Item
                1 - Legal Proceedings.
            
            25Item
                2 - Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            25Item
                3 - Defaults Upon Senior Securities
            
            25Item
                4 - Submission of Matters to a Vote of Security Holders
            
            25Item
                5 - Other Information
            
            25Item
                6 - Exhibits
            
            26










**PART
      I - FINANCIAL INFORMATION**


**Item
      1.**  **Financial** **Statements**




TXP
      CORPORATION


CONSOLIDATED
      BALANCE SHEETS


June
      30,
      2007 and December 31, 2006





**2007**
              
              **2006**(unaudited)
              
              (audited)ASSETSCurrent
                  assetsCash
              
              $
              351,000
              
              $
              228,000Accounts
                  receivable, net of allowance of $10,000 and $0 as ofJune
                  30, 2007 and December 31, 2006, respectively.
              
              
              1,226,000
              
              
              976,000Inventory
              
              
              1,636,000
              
              
              673,000Other
                  assets
              
              
              318,000
              
              
              346,000Total
                  current assets
              
              
              3,531,000
              
              
              2,223,000Property
                  and equipment, net
              
              
              2,670,000
              
              
              2,667,000Other
                  assets
              
              
              13,000
              
              
              13,000TOTAL
                  ASSETS
              
              $
              6,214,000
              
              $
              4,903,000LIABILITIES
                  AND STOCKHOLDERS' EQUITY (DEFICIT)Current
                  liabilitiesCurrent
                  maturities of notes payable
              
              $
              151,000
              
              $
              272,000Current
                  capital lease obligations
              
              
              84,000
              
              
              46,000Line
                  of credit
              
              
              400,000
              
              
              400,000Current
                  derivative financial instruments
              
              
              —
              
              
              1,288,000Current
                  convertible debentures, net of unamortized discount
                  of$423,000
                  as of December 31, 2006
              
              
              —
              
              
              467,000Accounts
                  payable
              
              
              1,081,000
              
              
              913,000Deferred
                  revenue
              
              
              13,000
              
              
              332,000Accrued
                  expenses
              
              
              259,000
              
              
              412,000Total
                  current liabilities
              
              
              1,988,000
              
              
              4,130,000Notes
                  payable, net of current maturities
              
              
              67,000
              
              
              144,000Capital
                  lease obligations, net of current obligations
              
              
              96,000
              
              
              32,000Line
                  of credit
              
              
              1,050,000
              
              
              1,000,000Convertible
                  debentures, net of unamortized discount of $3,507,000 as of June
                  30, 2007
              
              
              493,000
              
              
              —Derivative
                  financial instruments, net of current obligation
              
              
              2,542,000
              
              
              2,507,000Deferred
                  tax liability
              
              
              48,000
              
              
              48,000TOTAL
                  LIABILITIES
              
              
              6,284,000
              
              
              7,861,000STOCKHOLDERS'
                  EQUITY (DEFICIT):Common
                  stock, $.001 par value, 300,000,000 shares authorized, 112,535,647
                  and
                  104,080,623 shares issued and outstanding as of June 30, 2007 and
                  December
                  31, 2006, respectively.
              
              
              113,000
              
              
              104,000Additional
                  paid in capital
              
              
              6,832,000
              
              
              2,121,000Accumulated
                  deficit
              
              
              (7,022,000
              )
              
              (5,190,000
              )Accumulated
                  other comprehensive income
              
              
              7,000
              
              
              7,000TOTAL
                  STOCKHOLDERS' EQUITY (DEFICIT)
              
              
              (70,000
              )
              
              (2,958,000
              )TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
              
              $
              6,214,000
              
              $
              4,903,000




The
      accompanying notes are an integral part of the consolidated financial
      statements.


F-1




TXP
      CORPORATION


CONSOLIDATED
      STATEMENTS OF OPERATIONS


Three
      Months and Six Months ended June 30, 2007 and 2006 (unaudited)


**Three
                  Months Ended****June
                  30**
              
              **Six
                  Months Ended****June
                  30**Revenues
              
              **2007**
              
              **2006**
              
              **2007**
              
              **2006**Prototyping
                  and assembly
              
              $
              1,838,000
              
              $
              1,383,000
              
              $
              3,106,000
              
              $
              2,255,000Material
                  management services
              
              
              1,409,000
              
              
              557,000
              
              
              1,974,000
              
              
              1,187,000Product
                  and accessory sales
              
              
              49,000
              
              
              —
              
              
              68,000
              
              
              —Design
                  and development services
              
              
              —
              
              
              —
              
              
              332,000
              
              
              —Total
                  Revenues
              
              
              3,296,000
              
              
              1,940,000
              
              
              5,480,000
              
              
              3,442,000Cost
                  of sales
              
              
              2,008,000
              
              
              1,172,000
              
              
              3,457,000
              
              
              2,215,000Gross
                  profit
              
              
              1,288,000
              
              
              768,000
              
              
              2,023,000
              
              
              1,227,000Costs
                  and expensesSelling,
                  general administrative
              
              
              1,048,000
              
              
              1,422,000
              
              
              2,250,000
              
              
              2,014,000Research
                  and development
              
              
              1,261,000
              
              
              —
              
              
              2,007,000
              
              
              —Depreciation
              
              
              37,000
              
              
              22,000
              
              
              69,000
              
              
              42,000Total
                  costs and expenses
              
              
              2,346,000
              
              
              1,444,000
              
              
              4,326,000
              
              
              2,056,000Operating
                  loss
              
              
              (1,058,000
              )
              
              (676,000
              )
              
              (2,303,000
              )
              
              (829,000
              )Other
                  income and expenseInterest
                  expense, net
              
              
              (457,000
              )
              
              (271,000
              )
              
              (701,000
              )
              
              (326,000
              )Change
                  in fair value of derivative financial instruments
              
              
              61,000
              
              
              (4,323,000
              )
              
              1,172,000
              
              
              (4,323,000
              )Gain on
                  sale of fixed assets
              
              
              —
              
              
              —
              
              
              —
              
              
              18,000Gain
                  on extinguishment of debt
              
              
              —
              
              
              465,000
              
              
              —
              
              
              465,000Total
                  other income and expense
              
              
              (396,000
              )
              
              (4,129,000
              )
              
              471,000
              
              
              (4,166,000
              )Loss
                  before income taxes
              
              
              (1,454,000
              )
              
              (4,805,000
              )
              
              (1,832,000
              )
              
              (4,995,000
              )Income tax
                  expense
              
              
              —
              
              
              —
              
              
              —
              
              
              —Net
                  loss
              
              
              (1,454,000
              )
              
              (4,805,000
              )
              
              (1,832,000
              )
              
              (4,995,000
              )Foreign
                  currency translationadjustment
              
              
              —
              
              
              —
              
              
              —
              
              
              —Comprehensive
                  loss
              
              $
              (1,454,000
              )
              $
              (4,805,000
              )
              $
              (1,832,000)
              
              $
              (4,995,000
              )Basic
                  earnings per share
              
              $
              (.01
              )
              $
              (.05
              )
              $
              (.02
              )
              $
              (.05
              )Diluted
                  earnings per share
              
              $
              (.01
              )
              $
              (.05
              )
              $
              (.02
              )
              $
              (.05
              )Basic
                  weighted average shares outstanding:
              
              
              112,469,385
              
              
              93,011,484
              
              
              108,374,698
              
              
              91,165,020Diluted
                  weighted average shares outstanding:
              
              
              112,469,385
              
              
              93,011,484
              
              
              108,374,698
              
              
              91,165,020




The
      accompanying notes are an integral part of the consolidated financial
      statements.




F-2


TXP
      CORPORATION


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


Six
      Months Ended June 30, 2007 and 2006 (unaudited)


2007
              
              2006CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  loss
              
              $
              (1,832,000
              )
              $
              (4,995,000
              )Adjustments
                  to reconcile net loss to cash used in operating
                  activities:Depreciation
              
              
              245,000
              
              
              123,000Provision
                  for bad debt
              
              
              10,000
              
              
              —Gain
                  on sale of fixed assets
              
              
              —
              
              
              (18,000
              )Deferred
                  revenue
              
              
              (319,000
              )
              
              —Amortization
                  of discount on convertible notes
              
              
              478,000
              
              
              248,000Gain
                  on extinguishment of debt
              
              
              —
              
              
              (465,000
              )Stock
                  compensation
              
              
              345,000
              
              
              —Change
                  in fair value of derivative financial instruments
              
              
              (1,172,000
              )
              
              4,323,000Changes
                  in assets and liabilities:Aborted
                  offering costs
              
              
              —
              
              
              697,000Accounts
                  receivable
              
              
              (260,000
              )
              
              (553,000
              )Inventory
              
              
              (963,000
              )
              
              (99,000
              )Other
                  current assets
              
              
              28,000
              
              
              (32,000
              )Deferred
                  offering costs
              
              
              —
              
              
              (9,000
              )Other
                  assets
              
              
              —
              
              
              (1,000
              )Accounts
                  payable
              
              
              168,000
              
              
              29,000Accrued
                  expenses
              
              
              74,000
              
              
              17,000CASH
                  FLOWS USED IN OPERATING ACTIVITIES
              
              
              (3,198,000
              )
              
              (735,000
              )CASH
                  FLOWS FROM INVESTING ACTIVITIESCapital
                  expenditures
              
              
              (113,000
              )
              
              (155,000
              )Proceeds
                  from sale of fixed assets
              
              
              —
              
              
              60,000CASH
                  FLOWS USED IN INVESTING ACTIVITIES
              
              
              (113,000
              )
              
              (95,000
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESProceeds
                  from convertible debenture
              
              
              3,615,000
              
              
              480,000Proceeds
                  from note payable
              
              
              —
              
              
              150,000Line
                  of credit, net
              
              
              50,000
              
              
              150,000Repayment
                  of notes payable and capital lease obligation
              
              
              (231,000
              )
              
              (87,000
              )CASH
                  FLOWS PROVIDED BY FINANCING ACTIVITIES
              
              
              3,434,000
              
              
              693,000Effect
                  of currency translation on cash balances
              
              
              —
              
              
              —NET
                  INCREASE/(DECREASE) IN CASH
              
              
              123,000
              
              
              (137,000
              )Cash,
                  beginning of period
              
              
              228,000
              
              
              342,000Cash,
                  end of period
              
              $
              351,000
              
              $
              205,000




The
      accompanying notes are an integral part of the consolidated financial
      statements.




F-3




TXP
      CORPORATION


CONSOLIDATED
      STATEMENTS OF CASH FLOWS -continued


Six
      Months Ended June 30, 2007 and 2006 (unaudited)




**SUPPLEMENTAL
      DISCLOSURE OF CASH AND NONCASH INVESTING AND FINANCING
      ACTIVITIES:**


**2007**
              
              **2006****Cash**Interest
                  paid
              
              $
              92,000
              
              $
              21,000Taxes
                  paid
              
              $
              —
              
              $
              —**NONCASH
                  INVESTING AND FINANCING ACTIVITIES**1,700,000
                  shares issued to extinguish debt
              
              $
              —
              
              $
              684,000Liabilities
                  assumed upon merger
              
              $
              —
              
              $
              744,000923,657
                  shares issued on conversion of debt
              
              $
              —
              
              $
              145,000Modification
                  of debt treated as extinguishment and new debt
              
              $
              —
              
              $
              619,000125,000
                  shares issued to investor to settle commitment fee liability (Note
                  10)
              
              $
              60,000
              
              $
              —6,730,032
                  shares issued on conversion of debt and accrued interest
              
              $
              792,000
              
              $
              —Property
                  acquired under capital lease obligations and notes payable
              
              $
              135,000
              
              $
              63,000Reclassification
                  of warrants to additional paid in capital (Note 10)
              
              $
              2,684,000
              
              $
              —Fees
                  paid to holder in conjunction with the issuance of convertible
                  note
              
              $
              350,000
              
              $
              —Offering
                  costs charged to additional paid in capital
              
              $
              35,000
              
              $
              —Fair
                  value of embedded conversion option bifurcated from convertible
                  note
              
              $
              2,603,000
              
              $
              —Warrants
                  issued to investor
              
              $
              797,000
              
              $
              —Fees
                  to holder settled in common stock in conjunction with issuance of
                  convertible note
              
              $
              76,000
              
              $
              —




The
      accompanying notes are an integral part of the consolidated financial
      statements.




F-4






TXP
      CORPORATION


STATEMENTS
      OF STOCKHOLDERS' EQUITY/ (DEFICIT)


Six
      Months Ending June 30, 2007 (unaudited)


**Common
                  Stock**
              
              **Additional**
                **paid
                  in**
              
              **(Accumulated**
              
              **Accumulated
                  other**
                **comprehensive****Shares**
              
              **Amount**
              
              **capital**
              
              **deficit)**
              
              **income**
              
              **Total****Balance,
                  December 31, 2006**
              
              
              **104,080,623**
              
              **$**
              **104,000**
              
              **$**
              **2,121,000**
              
              **$**
              **(5,190,000**
              **)**
              **$**
              **7,000**
              
              **$**
              **(2,958,000**
              **)**Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,832,000
              )
              
              —
              
              
              (1,832,000
              )Stock
                  compensation: options awarded to employees (Note 4)
              
              
              —
              
              
              —
              
              
              106,000
              
              
              —
              
              
              —
              
              
              106,000Stock
                  compensation: shares awarded to employees (Note 4)
              
              
              —
              
              
              —
              
              
              240,000
              
              
              —
              
              
              —
              
              
              240,000Shares
                  issued to employees
              
              
              1,404,870
              
              
              2,000
              
              
              (2,000
              )
              
              —
              
              
              —
              
              
              —Shares
                  issued to an investor for commitment fee (Note 10”)
              
              
              125,000
              
              
              —
              
              
              60,000
              
              
              —
              
              
              —
              
              
              60,000Compensation
                  shares (Note 10)
              
              
              195,122
              
              
              —
              
              
              76,000
              
              
              —
              
              
              —
              
              
              76,000Offering
                  costs
              
              
              —
              
              
              —
              
              
              (35,000
              )
              
              —
              
              
              —
              
              
              (35,000
              )Warrants
                  issued to investor (Note 10)
              
              
              —
              
              
              —
              
              
              797,000
              
              
              —
              
              
              —
              
              
              797,000Shares
                  issued in conversion of debentures and accrued interest (Note 10
                  and
                  11)
              
              
              6,730,032
              
              
              7,000
              
              
              785,000
              
              
              —
              
              
              —
              
              
              792,000Reclassification
                  of warrants from derivative financial instruments (Note
                  10)
              
              
              —
              
              
              —
              
              
              2,684,000
              
              
              —
              
              
              —
              
              
              2,684,000**Balance,
                  June 30, 2007**
              
              
              **112,535,647**
              
              **$**
              **113,000**
              
              **$**
              **6,832,000**
              
              **$**
              **(7,022,000**
              **)**
              **$**
              **7,000**
              
              **$**
              **(70,000**
              **)**




The
      accompanying notes are an integral part of the consolidated financial
      statements.


F-5




TXP
      CORPORATION


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




**NOTE
      1 - BASIS OF PRESENTATION AND ORGANIZATION AND NATURE OF
      OPERATIONS**





The
      accompanying unaudited interim financial statements of TXP Corporation ("TXP")
      have been prepared in accordance with accounting principles generally accepted
      in the United States of America and the rules of the Securities and Exchange
      Commission ("SEC"), and should be read in conjunction with the audited financial
      statements and notes included in the 10-KSB/A filed May 14, 2007. In the opinion
      of management, all adjustments, consisting of normal recurring adjustments,
      necessary for a fair presentation of financial position and the results of
      operations for the interim periods presented have been reflected herein. The
      results of operations for interim periods are not necessarily indicative of
      the
      results to be expected for the full year. Notes to the financial statements,
      which would substantially duplicate the disclosure contained in the audited
      financial statements for the most recent fiscal year 2006 as reported in the
      10-KSB/A filed May 14, 2007, have been omitted.





TXP
      specializes in quick-turn complex circuit card assemblies and optoelectronic
      prototyping, new product introduction, and pilot production of electronic
      assemblies for Technology Innovators and Original Equipment Manufacturers (OEM)
      and Contract Manufacturers (CM) in the United States of America.





In
      December of 2006, TXP created a new business unit, iPhotonics, which focuses
      primarily on the development and sale of Optical Network Terminals (“ONT's”) and
      related accessories and to a lesser extent related design and development
      services. ONTs are the customer premise located devices used by a carrier to
      serve residential and business customers over a PON-based (Passive Optical
      Networking) system. PON is a maturing point-to-multipoint technology which
      is
      being adopted by telephone companies globally because of its cost effectiveness
      in extending fiber-based service delivery all the way to the customer premise
      (Fiber-to-the-Home [FTTH] or Fiber-to-the-Premise [FTTP]). TXP's ONTs will
      sit
      at each customer premise and will be connected over fiber to an Optical Line
      Terminal (OLT) generally located in the carrier's central office. A single
      OLT
      can deliver services to thousands of ONTs.





The
      Company was originally formed in Nevada in June of 1994 under the name Cyber
      Synergy, Inc. to develop stock market related software applications. The
      Corporate name has changed several times to date including in November 1999
      to
“Jesse Livemore.com” and in December 2001 to “Stock Market Solutions, Inc.” and
      in April of 2006 to “YTXP Corporation”. On April 28, 2006, the reverse merger
      between the wholly owned subsidiary of Stock Market Solutions, Inc. was
      consummated with Texas Prototypes, Inc. - a private company. The transaction
      was
      treated as a recapitalization of Texas Prototypes, Inc., with Texas Prototypes,
      Inc. treated as the accounting acquirer and continuing reporting entity. A
      change of control was deemed to have occurred as a result of the transaction.
      In
      June of 2006, the articles of incorporation were amended and the Company's
      name
      was changed to TXP Corporation (See NOTE 2 Merger and
      Recapitalization).





**NOTE
      2 - ACCOUNTING POLICIES**





***Merger
      and Recapitalization***





On
      June
      14, 2005 Stock Market Solutions, Inc. and its wholly owned subsidiary entered
      into a definitive Agreement and Plan of Merger “Agreement” with Texas
      Prototypes, Inc.





On
      April
      28, 2006, YTXP Corporation (f/k/a Stock Market Solutions, Inc.) issued
      89,298,042 shares or 94.7% of the issued and outstanding shares to the
      shareholders of Texas Prototypes, Inc. and acquired all of the outstanding
      shares of Texas Prototypes, Inc. As contemplated with the agreement and
      concurrent with closing of the transaction, all directors and officers of YTXP
      resigned and were replaced by appointees of the current shareholders of YTXP.
      A
      change of control was deemed to have occurred as a result of the merger. For
      accounting purposes, the acquisition has been treated as recapitalization of
      Texas Prototypes, Inc. with Texas Prototypes, Inc. as the acquirer and as the
      continuing reporting entity. Accordingly, financial statements filed for
      post-merger periods will depict the acquisition of YTXP by the accounting
      acquirer and will include financial statements of the accounting acquirer for
      the pre-merger comparable periods. As of April 28, 2006, the Company completed
      a
      recapitalization transaction which resulted in new common shares outstanding
      of
      94,295,715, after giving effect of cancellation of shares in the transaction
      and
      reissuance per the related merger agreement. As required by accounting guidance,
      authorized shares, issued and outstanding shares and per share amounts have
      been
      retroactively restated throughout these consolidated financial statements and
      the accompanying notes.





After
      closing the Merger on April 28, 2006, YTXP began operating a business model
      focused solely on the pre-manufacturing services segment of the electronics
      industry supporting original equipment manufacturers, original design
      manufacturers, contract manufacturers and new technology innovators. YTXP has
      ceased all pre-merger operations. In June of 2006, the articles of incorporation
      were amended in order to change the name of the Company to TXP
      Corporation.





***Consolidation***





As
      of
      June 30, 2007, TXP had one wholly owned subsidiary, TXP-Asia. All material
      inter-company balances and inter-company transactions have been
      eliminated.




F-6




***Basis
      of Accounting***





TXP
      maintains its accounts on the accrual method of accounting in accordance with
      accounting principles generally accepted in the United States of
      America.





***Use
      of Estimates***





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





***Foreign
      Currency Translation***





Pursuant
      to Statement of Financial Accounting Standards ("SFAS") No. 52, Foreign Currency
      Translation, TXP's investment in TXP- Asia translates all assets and liabilities
      at the respective period-end currency exchange rates and revenues and expenses
      at an average currency exchange rate for the period. The resulting translation
      adjustments are accumulated as a separate component of shareholders'
      equity.




***Cash
      and Cash Equivalents***





TXP
      considers all highly liquid debt instruments and other short-term investments
      with an initial maturity of three months or less to be cash or cash equivalents.
      TXP maintains cash and cash equivalents with a financial institution that
      periodically exceed the limit of insurability under Federal Deposit Insurance
      Corporation. At June 30, 2007 and December 31, 2006, the cash balance at our
      financial institution exceeded the insured limits by $361,000 and $375,000,
      respectively.





***Allowance
      for Doubtful Accounts***





Earnings
      are charged with a provision for doubtful accounts based on a current review
      of
      collectibility of accounts receivable. Accounts deemed uncollectible are applied
      against the allowance for doubtful accounts.





***Inventory***





Inventory
      is valued at the lower of cost or market. Cost is determined by using the
      average cost method. Inventory consists primarily of direct raw material costs
      related to customer prototyping and assembly projects. In November 2004 the
      Financial Accounting Standards Board ("FASB") issued Statement of Financial
      Accounting Standards No. 151, "Inventory Costs-an amendment of ARB No. 43,
      Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB No. 43, Chapter
      4,
      "Inventory Pricing," to clarify the accounting for abnormal amounts of idle
      facility expense, freight, handling costs and wasted material (spoilage). Among
      other provisions, the new rule requires that items such as idle facility
      expense, excessive spoilage, double freight and rehandling costs be recognized
      as current-period charges regardless of whether they meet the criterion of
      "so
      abnormal" as stated in ARB No. 43. Additionally, SFAS 151 requires that the
      allocation of fixed production overhead to the costs of conversion be based
      on
      the normal capacity of the production facilities. SFAS 151 is effective for
      fiscal years beginning after June 15, 2005. As of January 1, 2006, the Company
      adopted SFAS 151. The adoption did not have a material impact on the Company's
      consolidated financial condition and results of operations.





***Deferred
      Offering Costs***




Deferred
      offering costs were costs incurred by TXP related to entering into the
      $15,000,000 Standby Equity Distribution Agreement (See Note 9 of Financial
      Statements). These costs consist of related legal, accounting, and commitment
      fees and were charged to expense on April 28, 2006 upon consummation of the
      merger and recapitalization (See Note 2) when the Company became subject to
      SAB
      Topic 5A. SAB TOPIC 5A considers significant delays in offerings to be aborted
      and that the offering costs should be expensed.




***Property
      and Equipment***





Property
      and equipment are stated at cost less accumulated depreciation. Major renewals
      and improvements are capitalized; minor replacements, maintenance and repairs
      are charged to current operations. Depreciation is computed by applying the
      straight-line method over the estimated useful lives, which are generally three
      to seven years.




F-7




***Accounting
      for Convertible Debentures, Warrants and Derivative
      Instruments***





The
      Company accounts for its embedded conversion features and freestanding warrants
      pursuant to SFAS No. 133, "Accounting for Derivative Instruments and Hedging
      Activities", and EITF 00-19, “Accounting for Derivative Financial Instruments
      Indexed to and Potentially Settled in, a Company's Own Stock,” (“EITF 00-19”)
      which requires freestanding contracts that are settled in a company's own stock,
      including common stock warrants, to be designated as an equity instrument,
      asset
      or a liability. Under the provisions of EITF 00-19, a contract designated as
      an
      asset or a liability must be carried at fair value on a company's balance sheet,
      with any changes in fair value recorded in the company's results of operations.
      In accordance with EITF 00-19, certain warrants to purchase common stock and
      embedded conversion options are accounted for as liabilities at fair value
      and
      the unrealized changes in the values of these derivatives are recorded in our
      consolidated statement of operations as “Changes in Fair Value of Derivative
      Financial Instruments”. The recognition of derivative liabilities is applied
      first to the proceeds of such issuance, at the date of issuance, and the excess
      of derivative liabilities over the proceeds is recognized in our consolidated
      statement of operations as “Changes in Fair Value of Derivative Financial
      Instruments.”




TXP
      uses
      the Black Scholes Pricing Model to determine fair values of its derivatives.
      Valuations derived from this model are subject to ongoing internal and external
      verification and review. The model uses market-sourced inputs such as interest
      rates, exchange rates and option volatilities. Selection of these inputs
      involves management's judgment and may impact net income. The fair value of
      the
      derivative liabilities are subject to the changes in the trading value of the
      Company's common stock. As a result, the TXP's financial statements may
      fluctuate from quarter-to-quarter based on factors, such as the price of the
      Company's stock at the balance sheet date, the amount of shares converted by
      note holders and/or exercised by warrant holders. Consequently, TXP’s financial
      position and results of operations may vary from quarter-to-quarter based on
      conditions other than its operating revenues and expenses.





TXP
      has
      penalty provisions in the registration rights agreement executed prior to the
      year 2007 of its Cornell debentures and warrants (See NOTE 10 - CONVERTIBLE
      DEBENTURES, WARRANTS, AND SECURITIES) that require TXP to file the registration
      statement which registers the shares underlying the Cornell debentures and
      warrants no later than 45 days from the date of closing and to use its best
      efforts to cause the registration statement to be declared effective no later
      than 120 days after filing and to insure that the registration statement remains
      in effect until all of the shares of common stock issuable upon conversion
      of
      the debentures and exercise of the warrants have been sold. In the event of
      a
      default of the Company’s obligations under the Registration Rights Agreement,
      including its agreement to file the registration statement for the shares of
      common stock issuable upon conversion of the debentures and exercise of the
      warrants with the Securities and Exchange Commission no later than 45 days
      from
      the date of closing, or if the registration statement is not declared effective
      within 120 days of filing, TXP is required to pay to Cornell, as liquidated
      damages, for each month that the registration statement has not been filed
      or
      declared effective, as the case may be, either a cash amount or shares of our
      common stock at Cornell's option, equal to 2% of the liquidated value of the
      debentures. The agreement does not specify whether the liquidated damages may
      be
      satisfied in unregistered shares or how the payment in shares would be valued
      should Cornell elect to be paid liquidated damages in common stock. The Company
      obtained a waiver from Cornell Capital waiving any claim or payment of
      liquidated damages up through and including May 15, 2007. On May 14, 2007,
      the
      SEC declared TXP's registration statement effective for the aforementioned
      shares of common stock issuable upon conversion of the debentures and exercise
      of the warrants.





On
      October 11, 2006, TXP entered into a securities purchase agreement which
      provided for the filing of a registration statement by the Company with the
      Securities and Exchange Commission registering the shares and the shares of
      common stock issuable upon exercise of the warrants. (See NOTE 10 - CONVERTIBLE
      DEBENTURES, WARRANTS, AND SECURITIES) The Company is obligated to file the
      registration statement no later than December 15, 2006 and to use its best
      efforts to cause the registration statement to be declared effective no later
      than 90 days after filing. If the Company does not meet the aforementioned
      filing and effectiveness deadlines, it shall pay to the investor an amount
      equal
      to 1% of the purchase price for the first 60 days or part thereof of the
      pendency of such non-registration event and 2% for each 30 days or part thereof
      thereafter, of the purchase price of the shares and the warrants; provided,
      however, that the aforementioned liquidated damages shall only accrue, if at
      all, for 12 months after the closing date.  The Company obtained a waiver
      from the investor waiving any claim or payment of liquidated damages up through
      and including May 15, 2007. On May 14, 2007, the SEC declared TXP's registration
      statement effective for the aforementioned shares and the shares of common
      stock
      issuable upon exercise of the warrants.


F-8




On
      March
      30, 2007, TXP entered into a securities purchase agreement with Cornell which
      provided for the filing of a registration statement with the Securities and
      Exchange Commission registering 100% of the shares of common stock issuable
      upon
      conversion of the notes and exercise of the warrants within 30 days of receipt
      of written demand of Cornell. The Company is obligated to use its best efforts
      to cause the registration statement to be declared effective no later than
      90
      days after filing and to ensure that the registration statement remains in
      effect until all of the shares of common stock issuable upon conversion of
      the
      notes and exercise of the warrants have been sold. In the event of a default
      of
      TXP’s obligations under the registration rights agreement, including its
      agreement to file the registration statement with the Securities and Exchange
      Commission no later than 30 days from receipt of a written demand from Cornell,
      or if the registration statement is not declared effective within 90 days of
      filing, the Company is required pay to Cornell, as liquidated damages for each
      month that the registration statement has not been filed or declared effective,
      as the case may be, a cash amount equal to 2% of the liquidated value of the
      notes. Notwithstanding the foregoing, the Company shall not be liable for
      liquidated damages with respect to any warrants or warrant shares and the
      maximum aggregate liquidated damages payable to Cornell by the Company, if
      any,
      shall be 15% of the aggregate purchase price paid by Cornell pursuant to the
      purchase agreement. As of June 30, 2007, TXP had not received written demand
      from Cornell to file a registration statement with the Securities and Exchange
      Commission registering the shares of common stock issuable upon conversion
      of
      the notes and exercise of the warrants as set forth in the March 30, 2007
      Securities Purchase Agreement.





TXP
      accounts for these penalties as contingent liabilities, applying the accounting
      guidance of Financial Accounting Standard No. 5, “Accounting for Contingencies”
(“FAS 5”). This accounting is consistent with views established by the Emerging
      Issues Task Force in its consensus set forth in EITF 05-04 and FASB Staff
      Positions FSP EITF 00-19-2 “Accounting for Registration Payment Arrangements”,
      which was issued December 21, 2006. Accordingly, TXP recognizes the damages
      when
      it becomes probable that they will be incurred and amounts are reasonably
      estimable.





***Revenue
      Recognition***





Revenues
      are derived from the following sources:





·
            Prototyping
                and assembly services;





·
            Prototyping
                -Photonics/Optoelectronics
                services;





·
            Material
                supply chain management services;





·
                Turn-key
                    solution - consists of material supply chain management services
                    and one
                    of the other services listed
                    above;





·
            Optical
                Network Terminal (ONT) product and accessory sales;
                and





·
            ONT
                design and development services





The
      following is a description of each revenue source and our revenue recognition
      policy for each source:





Prototyping
      and assembly services typically consist of assembling and designing surface
      mount technology and other build-to-order products to the customer provided
      design specifications. These services are priced based on the complexity,
      time-to-turn and unit volume of the customer project. The majority of TXP’s
      prototyping and assembly services projects are completed in less than three
      weeks. TXP recognizes revenue when persuasive evidence of an arrangement exists,
      delivery has occurred, services have been performed, the sales price is fixed
      or
      determinable and collectibility is probable. These criteria are generally met
      after an internal quality control review of the product and at the time product
      is shipped.





Prototyping-Photonics/Optoelectronics
      services typically consists of assembling and designing optical and optical
      related products to the customer provided design specifications. TXP recognizes
      revenue when persuasive evidence of an arrangement exists, delivery has
      occurred, services have been performed, the sales price is fixed or determinable
      and collectibility is probable. These criteria are generally met after an
      internal quality control review of the product and at the time product is
      shipped.





Material
      supply chain management services consists of locating and procuring materials
      according to customer design specifications, qualifying components and auditing
      vendors, inventorying materials, and providing dual vendor sourcing if
      necessary. Material supply chain management services are priced at the cost
      of
      the material plus 5% to 25%. The pricing is solely dependent on the complexity
      and volume of the services performed. TXP recognizes revenue when persuasive
      evidence of an arrangement exists, delivery has occurred, services have been
      performed, the sales price is fixed or determinable and collectibility is
      probable. These criteria are generally met at the time materials have been
      received and inventoried, and the materials have shipped.





F-9




Turn-key
      solution is a combination of material supply chain management and one of the
      other service revenue sources described above. Revenue is generally recognized
      after both services have been performed and the products have
      shipped.





Optical
      Network Terminal (ONT) product and accessory sales. In December of 2006, TXP
      created a new business unit, iPhotonics, which focuses primarily on the
      development and sale of ONT's and related accessories. ONTs are the customer
      premise located devices used by a carrier to serve residential and business
      customers over a PON-based (Passive Optical Networking) system. PON is a
      maturing point-to-multipoint technology which is being adopted by telephone
      companies globally because of its cost effectiveness in extending fiber-based
      service delivery all the way to the customer premise (Fiber-to-the-Home [FTTH]
      or Fiber-to-the-Premise [FTTP]). TXP's ONTs will sit at each customer premise
      and will be connected over fiber to an Optical Line Terminal (OLT) generally
      located in the carrier's central office. A single OLT can deliver services
      to
      thousands of ONTs. TXP recognizes revenue when persuasive evidence of an
      arrangement exists, delivery has occurred, services have been performed, the
      sales price is fixed or determinable and collectibility is probable. These
      criteria are generally met after an internal quality control review of the
      product and at the time product is shipped.





ONT
      design and development services. TXP offers contract services related to the
      design and development of ONT products and accessories. TXP recognizes design
      and development services revenue using the percentage-of-completion method
      of
      accounting, in accordance with SOP 81-1, “Accounting for Performance of
      Construction-Type and Certain Production-Type Contracts.” Revenues are
      recognized primarily based on costs incurred to date compared with total
      estimated contract costs. Generally TXP’s design and development service costs
      consist of engineering labor costs.





***Income
      Taxes***





Income
      taxes are computed using the asset and liability method. Under the asset and
      liability method, deferred income tax assets and liabilities are determined
      based on the differences between the financial reporting and tax bases of assets
      and liabilities and are measured using the currently enacted tax rates and
      laws.
      A valuation allowance is provided for the amount of deferred tax assets that,
      based on available evidence, are not expected to be realized.





***Stock-Based
      Compensation***




Effective
      January 1, 2006, the Company adopted Statement of Financial Accounting
      Standards No.  123(R), “Share-Based Payment,” (SFAS No. 123R) which
      was issued by the Financial Accounting Standards Board (FASB) in December 2004.
      SFAS No. 123R revises SFAS No. 123 “Accounting for Stock Based
      Compensation,” and supersedes APB No. 25, “Accounting for Stock Issued to
      Employees,” (APB No. 25) and its related interpretations. SFAS
      No. 123R requires recognition of the cost of employee services received in
      exchange for an award of equity instruments in the financial statements over
      the
      period the employee is required to perform the services in exchange for the
      award (presumptively the vesting period). SFAS No. 123R also requires
      measurement of the cost of employee services received in exchange for an award
      based on the grant-date fair value of the award. SFAS No. 123R also amends
      SFAS No. 95 “Statement of Cash Flows,” to require that excess tax benefits
      be reported as financing cash inflows, rather than as a reduction of taxes
      paid,
      which is included within operating cash flows.





In
      June
      of 2006, the majority of shareholders approved the "2006 Stock Incentive Plan."
      The plan provides for up to 10,000,000 shares of TXP's common stock to be issued
      in the form of incentive and/or non-qualified common stock for employees,
      directors and consultants to TXP. As of June 30, 2007, 2,808,929 stock
      options and 1,533,870 shares of common stock have been issued to employees,
      directors or consultants under this plan of which the company recognized $60,000
      of stock compensation expense in SGA in the statement of operations for quarter
      ended June 30, 2007.





***Net
      Loss Per Share***





Basic
      net
      loss per share is computed using the weighted average number of common shares
      outstanding during the period. Contingently issuable shares are included in
      the
      computation of basic net income (loss) per share when the related conditions
      are
      satisfied. Diluted net income (loss) per share is computed using the weighted
      average number of common shares and potentially dilutive securities outstanding
      during the period. Potentially dilutive securities consist of contingently
      issuable shares, the incremental common shares issuable upon conversion of
      preferred stock or convertible debt (using the “if converted” method) and shares
      issuable upon the exercise of stock options and warrants (using the “treasury
      stock” method). Potentially dilutive securities are excluded from the
      computation if their effect is anti-dilutive.


F-10




***Reclassifications***





Certain
      prior periods' balances have been reclassified to conform to the current
      period's financial statement presentation. These reclassifications had no impact
      on previously reported results of operations or stockholders'
      equity.





**NOTE
      3 - RELATED PARTY TRANSACTIONS**





In
      Q2
      2006, the majority shareholder and Chief Executive Officer of the Company,
      Michael C. Shores, loaned the company $150,000. The unsecured loan has a
      one-year term and bears interest at 10%. The loan principal and interest are
      due
      at maturity. The Company repaid $37,500 of principal in 2006. The loan was
      repaid in full in Q2 2007. The balance on the note at December 31, 2006 was
      $112,500.





The
      majority shareholder and Chief Executive Officer of the Company, Michael C.
      Shores, has provided his personal guarantee on all of the Company's notes
      payables, lines of credit, and all of the capital leases originated prior to
      2007.





In
      Q3
      2006, the Company entered into an asset purchase agreement with Mr. Richard
      Smitten, the former Chief Executive Officer and sole director of its
      predecessor corporation, Stock Market Solutions, Inc., pursuant to which the
      Company sold the assets of its predecessor business, including the business
      and
      related software, as well as the book-rights to three Livermore related books
      relating to a teaching and a computer training program designed to provide
      educational/instructional assistance and aid to those stock market traders
      who
      wish to learn how to trade in the stock market using a system previously
      developed by an early 20 th century
      stock market trader, Jesse Livermore. In consideration for the sale of the
      assets, Mr. Smitten agreed to forgive the repayment of a certain debt related
      to
      accrued compensation that the Company owed to Mr. Smitten in the aggregate
      amount of $329,272, of which $179,272 was forgiven by Mr. Smitten pursuant
      to
      that certain Agreement and Plan of Merger dated as of June 15, 2005 and $150,000
      was forgiven by Mr. Smitten pursuant to the Agreement.





On
      November 15, 2006, the Company entered into an asset purchase agreement with
      G3
      Global Investments, Inc., a Texas corporation, pursuant to which the Company
      purchased all of the SMT line production assets of G3. G3 is 100% owned and
      controlled by Mr. Michael C. Shores, the Company’s Chief Executive Officer.
      Prior to entering into the agreement, the Company leased the assets from G3
      for
      a monthly price of $15,000 under a certain equipment lease (the “Lease”) dated
      as of May 1, 2005 by and between G3 and Texas Prototypes, Inc., a wholly owned
      subsidiary of the Company. The lease terminates on April 30, 2007. The
      Company assumed the lease from its wholly owned subsidiary in April 2006. In
      consideration for the sale of the assets, the Company paid a purchase price
      of
      $300,000 to G3. In addition, G3 and TXP agreed to terminate the lease pursuant
      to the terms of the agreement. Prior to the termination of the lease, TXP
      paid $157,500 and $180,000 in 2006 and 2005, respectively to G3 in
      accordance with the terms of the lease.





**NOTE
      4 - STOCK BASED COMPENSATION**




In
      June
      of 2006, the majority of shareholders approved the "2006 Stock Incentive Plan."
      The purpose of the Plan is to promote the long-term growth and profitability
      of
      the Company by providing key people, including employees, officers,
      directors and consultants, with incentives to improve stockholder value and
      to
      contribute to the growth and financial success of the Company through their
      future services, and enabling the Company to attract, retain and reward the
      best-available persons.  The Plan permits the granting of stock options
      (including incentive stock options qualifying under Code section 422 and
      nonqualified stock options), stock appreciation rights, restricted or
      unrestricted stock awards, phantom stock, performance awards, other stock-based
      awards, or any combination of the foregoing. The plan provides for up to
      10,000,000 shares of TXP's common stock to be issued in the form of incentives
      discussed above for employees, officers, directors and consultants of
      TXP.





In
      Q3
      2006, the Company issued a combined 149,000 free-trading shares which were
      registered under a registration statement on Form S-8 to all of its employees
      who were employed as of April 28, 2006 except for the CFO and CEO. In the
      Company’s statement of operations for the year ended December 31, 2006, the
      Company recorded $61,000 of compensation cost for the issuance of these shares
      based on the closing price of the Company's stock on the issue
      date.





In
      Q4
      2006, the Company agreed to issue a combined 1,404,870 free-trading shares
      on
      April 2, 2007 to certain employees who were hired as of October 2, 2006. The
      agreement between the Company and employees provided that the stock would vest
      50% on January 1, 2007 with the remaining 50% vesting daily through April 2,
      2007. In accordance with the agreement, 1,404,870 shares of common stock were
      issued to these employees in April of 2007. In the Company's statement of
      operations for the quarter ended June 30, 2007, the Company recorded $5,000
      of
      compensation cost for the issuance of these shares based on the closing price
      of the Company's stock on the award date of October 2, 2006.
      Total stock compensation costs related to the April 2, 2007 issuance was
      $478,000 which was expensed ratably over the vesting period of October of 2006
      to April of 2007.




In
      Q2 2007, the Company agreed to issue a combined
      137,000 free trading shares to certain employees hired during the quarter. 
The agreements provide that the stock shall become fully vested approximately
      one year from the date of the agreements.





Options
      granted under the 2006 Plan are generally at an exercise price per share not
      less than the fair market value per share of common stock on the option grant
      date. Options are granted with a term of up to 10 years and generally become
      exercisable in installments over periods of up to three years.




F-11




A
      summary
      of stock option activity for the six months ended June 30, 2007 is presented
      in
      the following table.


**Options**
              
              **Weighted**
                **average**
                **exercise**
                **price**
              
              **Aggregate**
                **intrinsic**
                **value**
              
              **Weighted**
                **average**
                **remaining**
                **contractual**
                **life
                  (years)****Outstanding
                  at January 1, 2007**
              
              
              **2,407,329**
              
              
              **0.31**Granted
              
              
              401,600
              
              $
              0.33Exercised
              
              
              —
              
              
              —Forfeited
              
              
              —
              
              
              —Expired
              
              
              —
              
              
              —**Outstanding
                  at June 30, 2007**
              
              
              **2,808,929**
              
              **$**
              **0.31**
              
              **$**
              **235,000**
              
              
              **9.30****Exercisable
                  at June 30, 2007**
              
              
              **514,454**
              
              **$**
              **0.30**
              
              **$**
              **51,000**
              
              
              **9.20**




The
      Company adopted SFAS No. 123R effective January 1, 2006. In the
      Company’s statement of operations for the quarter ended June 30, 2007, it
      recorded $55,000 of compensation cost for stock option share-based payment
      arrangements, and the final $5,000 of compensation costs for the issuance of
      1,404,870 shares of common stock to employees on April 2, 2007. Total stock
      compensation costs related to the April 2, 2007 issuance was $478,000 which
      was
      expensed ratably over the vesting period of October of 2006 to April of
      2007.  In Q2 2007, the Company agreed to issue a combined
      137,000 free trading shares to certain employees hired during the quarter. 
The agreements provide that the stock shall become fully vested approximately
      one year from the date of the agreements.No stock options were
      exercised during the quarter ended June 30, 2007.




The
      fair
      value of stock options is determined using the Black-Scholes valuation model.
      During quarter ended June 30, 2007 117,600 stock options were issued. 
The fair value of each stock option award was determined as of the date of
      grant
      using the Black-Scholes option-pricing model with the following approximate
      assumptions:





Expected
                volatility
            
            
            111
            %Expected
                term (years)
            
            
            6.0Risk-free
                interest rate
            
            
            4.6
            %Expected
                dividend yield
            
            
            0
            %Forfeiture
                rate
            
            
            10
            %





Expected
      volatility is based solely on historical volatility of the Company’s common
      stock over the period commensurate with the expected term of the stock options.
      The Company relies solely on historical volatility because its traded options
      do
      not have sufficient trading activity to allow it to incorporate the mean
      historical implied volatility from traded options into the
      Company's estimate of future volatility. The expected term calculation for
      stock options is based on the “simplified” method described in Staff Accounting
      Bulletin No. 107, Share-Based Payment. The risk-free interest rate is based
      on the U.S. Treasury yield in effect at the time of grant for an instrument
      with
      a maturity that is commensurate with the expected term of the stock options.
      The
      dividend yield of zero is based on the fact that the Company has never paid
      cash
      dividends on its common stock, and the Company has no present intention to
      pay cash dividends.




As
      of
      June 30, 2007, there was $551,000 of total unrecognized compensation cost,
      which
      includes the impact of expected forfeitures related to unvested share-based
      compensation arrangements. That cost is expected to be recognized over a
      weighted-average period of 2.6 years.


F-12




**NOTE
      5 - NET INCOME (LOSS) PER SHARE**




Basic
      net
      income per common share is calculated by dividing net income (loss) by the
      weighted-average number of common shares outstanding during the reporting
      period. Diluted net income per common share reflects the effects of potentially
      dilutive securities. A reconciliation of the numerator and denominator used
      in
      the calculation of basic and diluted net income per share
      follows:


**For
                  the quarter ended June 30,****2007**
              
              **2006**Numerator:Net
                  loss available to common stockholders
              
              $
              (1,454,000
              )
              $
              (4,805,000
              )Denominator:Denominator
                  for basic net income per share--weighted average shares
              
              
              112,469,385
              
              
              93,011,484Dilutive
                  potential securities
              
              
              —
              
              
              —Denominator
                  for diluted net income per share--adjusted weighted average
                  shares
              
              
              112,469,385
              
              
              93,011,484Basic
                  net income per share
              
              $
              (.01
              )
              $
              (.05
              )Diluted
                  net income per share
              
              $
              (.01
              )
              $
              (.05
              )




For
      the
      quarters ended June 30, 2007 and 2006, certain potential shares of common stock
      have been excluded from diluted loss per share because the exercise price was
      greater than the average market price of TXP’s common stock, and therefore, the
      effect on diluted loss per share would have been anti-dilutive. Other
      convertible securities and employee stock options were excluded because their
      inclusion was anti-dilutive.  The following table sets forth the number of
      potential shares of common stock that have been excluded from diluted net loss
      per share because their effect was anti-dilutive:


**For
                  the quarter ended June 30,****2007**
              
              **2006**Warrants
                  to purchase common shares
              
              
              13,198,000
              
              
              3,700,000Stock
                  options issued under the 2006 Incentive Stock Plan
              
              
              2,808,929
              
              
              —Convertible
                  note
              
              
              9,905,246
              
              
              10,264,00025,912,175
              
              
              13,964,000


F-13




**NOTE
      6 - LINES OF CREDIT**





***Line
      of Credit June 1, 2007***





On
      June
      1, 2007 TXP renewed its revolving line of credit for $500,000. The line of
      credit has a one-year term with a variable interest rate of prime plus 2%.
      The
      line of credit is secured by all assets of the Company. The majority shareholder
      and Chief Executive Officer of the Company, Michael C. Shores, has provided
      his
      personal guarantee on this loan (See NOTE 3). Interest payments are due monthly
      beginning July 1, 2007 and the principal is due when the one-year term expires.
      The line of credit has provisions that the maximum TXP may have outstanding
      is
      $500,000 or 70% of the borrowing base, whichever is less. The borrowing base
      is
      defined as the value of accounts receivable less than 90 days past their invoice
      date. TXP was in compliance with these provisions as of June 30, 2007 and
      December 31, 2006. The revolving line of credit also has financial and
      non-financial covenants. A summary of the significant covenants are as
      follows:





·
            Maintain
                a Debt-to-Net Worth Ratio of not greater than 2:1. This ratio is
                calculated by dividing Total Liabilities by Net Worth (total stockholders'
                equity). Net worth is to include the subordinated debt in the form
                of debt
                owed Cornell Capital and likewise is to be excluded from total
                liabilities.




·
            Maintain
                a Current Ratio of not less than 1.1:1. This ratio is to be calculated
                by
                dividing Total Current Assets by Total Current
                Liabilities.




·
            Maintain
                a Debt Coverage Ratio of not less than 1.25:1. This ratio is to be
                calculated by dividing Earnings before Interest, Depreciation, and
                Taxes
                by all principal and interest payments for the
                period.




At
      June
      30, 2007, the Company was in default due to failure to maintain a Debt Coverage
      ratio as provided for in the loan agreement. Any default under the loan
      agreement permits the bank to demand immediate payment of the debt under this
      note including principal and accrued interest. However, the lending institution
      and TXP entered into a forbearance agreement on August 3, 2006 which waived
      non-compliance of this covenant so long as the company maintained the
      Debt-to-net-worth ratio and Current Ratio as provided for in the loan agreement.
      As of June 30, 2007, the Debt-to-net-worth and Current Ratio were in
      compliance with the loan agreement. The balance outstanding on the note at
      June
      30, 2007 and December 31, 2006 was $400,000 and $400,000
      respectively.





***Line
      of Credit November 15, 2006***





The
      Company consummated a loan agreement dated as of August 3, 2006 with a financial
      institution pursuant to which the institution extended a line of credit to
      the
      Company in an aggregate amount of $1,000,000 to be used by the Company for
      working capital and general corporate purposes. On December 21, 2006, the
      Company consummated a second Loan Agreement with the same financial institution
      dated as of November 15, 2006 which renews and supersedes the prior Loan
      Agreement dated as of August 3, 2006 and increased the Company's line of credit
      from $1,000,000 to $3,000,000 to be used by the Company for working capital
      and
      general corporate purposes. The Loan pays interest at a rate of 8.00% per annum
      and all principal, and accrued and unpaid interest is due on August 3, 2008.
      The
      Company's obligations under the Loan Agreement are secured by a pledge of an
      aggregate of $3,875,000 in free-trading shares of Fossil Incorporated by an
      Investor of the Company (As more fully discussed in **NOTE 10 - CONVERTIBLE DEBENTURES, WARRANTS, AND SECURITIES** under
      the subheadings “July 2006 Warrants” and “October 2006 Warrants”). In addition,
      the Company's obligations under the Loan Agreement are further guaranteed
      personally and through the pledge of an aggregate of 8,520,000 shares of common
      stock beneficially owned by Michael C. Shores, the Company's Chief Executive
      Officer. As of June 30, 2007 and December 31, 2006, the balance outstanding
      on the line of credit was $1,050,000 and $1,000,000,
      respectively.


F-14




**NOTE
      7 - NOTES PAYABLE**





On
      March
      15, 2004, TXP entered into a standard bank loan agreement for $45,000 to
      purchase equipment and issued a promissory note to evidence such loan. The
      note
      has a three-year term with a variable interest rate of prime plus 2%. The note
      is secured by the equipment. The majority shareholder and Chief Executive
      Officer of the Company, Michael C. Shores, has provided his personal guarantee
      on this loan (See NOTE 3). Monthly payments of $1,400 began May 15, 2004. The
      loan was repaid in full during Q2 2007. The balance outstanding on the note
      at
      December 31, 2006 was $5,000.





In
      December 2003, TXP entered into a standard bank loan agreement for $350,000
      to
      purchase equipment. The note has a three-year term with a 6.5% interest rate
      and
      is secured by accounts receivable and equipment. The majority shareholder and
      Chief Executive Officer of the Company, Michael C. Shores, has provided his
      personal guarantee on this loan (See NOTE 3). Monthly payments for this note
      are
      $11,000 and began February 18, 2004. The loan was repaid in full in Q1 2007.
      The
      balance outstanding on the note at December 31, 2006 was $10,000.





In
      May of
      2006, TXP entered into a loan agreement with the majority shareholder and Chief
      Executive Officer of the Company, Michael C. Shores, for $150,000 (See Note
      3).
      The note has a one year term with a 10% interest rate and is unsecured.
      Principal and interest are contractually due at maturity. The Company repaid
      $37,500 of principal in 2006. The loan was repaid in full during Q2 2007. The
      balance outstanding on the note December 31, 2006 was $112,500.





In
      November of 2006, TXP entered into a standard bank loan agreement for $300,000
      to purchase equipment from Global Investments, Inc., a Texas corporation,
      pursuant to which the Company purchased all of the SMT line production assets
      of
      G3. G3 is 100% owned and controlled by Mr. Michael C. Shores, the Company’s
      Chief Executive Officer. The two year note bears interest at 9.25% and requires
      monthly payments of approximately $14,000. The loan is secured by the purchased
      assets, in addition to all of the assets of the Company. The balance outstanding
      on this note at June 30, 2007 and December 31, 2006 was $218,000 and $288,000,
      respectively.





**NOTE
      8 - CAPITAL LEASE OBLIGATIONS**





In
      June
      of 2005, TXP entered into a standard lease agreement for $62,000 to lease
      certain operating and production equipment. The lease has a three-year term
      and
      is secured by the equipment. The majority shareholder and Chief Executive
      Officer of the Company, Michael C. Shores, has provided his personal guarantee
      on this lease (See NOTE 3). Monthly lease payments are $2,000 and began in
      June
      of 2005. The balance outstanding at June 30, 2007 and December 31, 2006 was
      $22,000 and $33,000, respectively. The lease has been accounted for as
      capitalized lease in accordance with generally accepted accounting
      policies.





In
      March
      of 2006, TXP entered into a standard lease agreement for $25,000 to lease
      certain computer equipment. The lease has a three-year term and is secured
      by
      the computer equipment. The majority shareholder and Chief Executive Officer
      of
      the Company, Michael C. Shores, has provided his personal guarantee on this
      lease (See NOTE 3). Monthly lease payments are $1,000 and began in March of
      2006. The balance outstanding at June 30, 2007 and December 31, 2006 was $16,000
      and $20,000, respectively. The lease has been accounted for as capitalized
      lease
      in accordance with generally accepted accounting policies.





In
      March
      of 2006, TXP entered into a standard lease agreement for $37,000 to lease
      certain software. The lease has a thirty-month term and is secured by the
      software. The majority shareholder and Chief Executive Officer of the Company,
      Michael C. Shores, has provided his personal guarantee on this lease (See NOTE
      3). Monthly lease payments are $1,000 and began in March of 2006. The balance
      outstanding at June 30, 2007 and December 31, 2006 was $17,000 and $25,000,
      respectively. The lease has been accounted for as capitalized lease in
      accordance with generally accepted accounting policies.





In
      March
      of 2007, TXP entered into a standard lease agreement for $52,000 to lease
      certain software. The lease has a thirty-six month term and is secured by the
      software. Monthly lease payments are $2,000 and began in March of 2007. The
      balance outstanding at June 30, 2007 was $48,000. The lease has been accounted
      for as capitalized lease in accordance with generally accepted accounting
      policies.





In
      March
      of 2007, TXP entered into a standard lease agreement for $52,000 to lease
      certain equipment. The lease has a thirty-six month term and is secured by
      the
      equipment. Monthly lease payments are $2,000 and began in March of 2007. The
      balance outstanding at June 30, 2007 was $48,000. The lease has been accounted
      for as capitalized lease in accordance with generally accepted accounting
      policies.





In
      April
      of 2007, TXP entered into a standard lease agreement for $31,000 to lease
      certain software. The lease has a thirty-six month term and is secured by the
      software. Monthly lease payments are $1,000 and began in April of 2007. The
      balance outstanding at June 30, 2007 was $29,000. The lease has been accounted
      for as capitalized lease in accordance with generally accepted accounting
      policies.





The
      following is a schedule by years of future minimum lease payments under the
      capital lease together with the present value of the net minimum lease payments
      as of June 30, 2007:


Year
              
              Amount07/01/07
                  - 12/31/07
              
              $
              57,00001/01/08
                  - 12/31/08
              
              
              94,00001/01/09
                  - 12/31/09
              
              
              64,00001/01/10
                  - 12/31/10
              
              
              12,000Total
                  Minimum Lease Payments
              
              
              227,000Less
                  Amounts Representing Interest
              
              
              47,000Present
                  Value of Minimum Lease Payments
              
              $
              180,000




F-15


**NOTE
      9 - STANDBY EQUITY DISTRIBUTION AGREEMENT**





In
      August
      2004, TXP entered into a Standby Equity Distribution Agreement. Under this
      agreement, TXP may issue and sell common stock to Cornell Capital Partners
      ("Cornell") for a total purchase price of up to $15.0 million. Subject to
      certain conditions, TXP will be entitled to commence drawing down on the Standby
      Equity Distribution Agreement when common stock issued under the Standby Equity
      Distribution Agreement is registered with the SEC and TXP is within the
      commitment period as defined under the terms of the agreement. The commitment
      period is the period commencing on the earlier to occur of the effective date
      (which is the date on which the SEC first declares effective a registration
      statement registering the resale of the common stock under the Standby Equity
      Distribution Agreement), or such earlier date as TXP and Cornell may mutually
      agree in writing, and expiring on the earliest to occur of the date on which
      the
      Cornell shall have made payment of advances pursuant to the agreement in the
      aggregate amount of $15,000,000, or the date occurring 24 months after the
      effective date.





The
      purchase price for the shares will be equal to 100% of the market price, which
      is defined as the lowest closing bid price of the common stock during the five
      trading days following the notice date. A cash fee equal to 5% of the cash
      proceeds of the draw down is also payable at the time of funding. To date,
      TXP
      has not drawn down on the Standby Equity Distribution Agreement.





TXP
      is
      currently unable to register the shares of common stock issuable to Cornell
      under the Standby Equity Distribution Agreement because the terms of the
      agreement are not consistent with the SEC's guidance regarding the terms of
      equity line financings that may be registered. TXP and Cornell Capital have
      not
      taken any steps to date to revise the standby equity distribution agreement,
      or
      any other applicable transaction documents in connection with the equity line,
      so that the resale of the shares issuable under the equity line may be
      registered with the SEC in accordance with such guidance.





In
      conjunction with the Standby Equity Distribution Agreement, TXP issued a
      $400,000 compensation debenture to Cornell Capital. In June of 2006, the Company
      issued 1,700,000 shares of common stock in the exchange for full settlement
      of
      this $400,000 compensation debenture and another $240,000 convertible debenture
      that was issued to Cornell Capital by YTXP (f/k/a Stock Market Solutions Inc)
      for separate standby equity distribution agreement that was terminated prior
      to
      the merger in April of 2006. The combined carrying value of both debentures
      amounted to $685,000 which included the fair value of an embedded conversion
      option and accrued interest. The fair market value of the stock was $850,000
      on
      the date of settlement. The Company realized a $165,000 loss on early
      extinguishment of debt as a result of the settlement. At the time of issuance,
      the $400,000 debenture was recorded as a liability and as a deferred offering
      cost on the balance sheet of the Company. This cost and other costs consisting
      of related legal, and accounting were charged to expense on April 28, 2006
      upon
      consummation of the merger and recapitalization (See Note 2) when the Company
      became subject to SAB Topic 5A. SAB TOPIC 5A considers significant delays in
      offerings to be aborted and that the offering costs should be
      expensed.





**NOTE
      10 - CONVERTIBLE DEBENTURES, WARRANTS, AND SECURITIES**





***August
      2004 Secured Convertible Debt***





In
      August
      of 2004, Texas Prototypes, Inc. entered into Securities Purchase Agreements
      with
      Cornell and Mobilepro Corp. for the sale of a secured convertible debenture
      in
      the principal amount of $1,400,000 ($700,000 to each), bearing interest at
      5%.
      The terms of this debenture require the Company to obtain prior written consent
      from the holder, Cornell Capital, so long as any of the principal or interest
      on
      this debenture remains unpaid and unconverted before issuing or selling any
      common stock or preferred stock without consideration or for a consideration
      per
      share less than its lowest bid price determined immediately prior to its
      issuance, or issuing or selling any preferred stock, warrant, option, right,
      contract, call, or other security or instrument granting the holder thereof
      the
      right to acquire common stock without consideration or for a consideration
      per
      share less than such common stock's fair market value determined immediately
      prior to its issuance, or file any registration statement on Form S-8 for more
      than 10,000,000 shares of common stock. The debentures are secured by a second
      priority security interest in all of the Company’s goods, inventory, contractual
      rights and general intangibles, receivables, documents, instruments, and chattel
      paper In the event of default, Cornell may cause the obligation to become
      immediately due and payable. In addition, upon the occurrence of an event of
      default, Cornell shall: (i) be entitled to receive all distributions with
      respect to the pledged property, (ii) to cause the pledged property to be
      transferred into the name of the secured party or its nominee, (iii) to
      dispose of the pledged property, and (iv) to realize upon any and all
      rights in the pledged property then held by Cornell; provided however, that
      Cornell security interest is second in priority behind First Bank Canyon
      Creek . These convertible debentures have a term of three years and are
      convertible at the holder's option. If the convertible debentures have not
      been
      converted on the third anniversary they will be automatically converted into
      common stock of TXP. Interest is due at maturity or conversion in cash or common
      stock at the holder's option. If the holder elects the interest to be paid
      in
      common stock it will be valued based upon the closing bid price of the Company's
      stock at time paid. At any time TXP may elect to redeem all or any portion
      of
      the convertible debentures at the price of 120% of the amount redeemed plus
      accrued interest. If TXP uses this option, it must then issue the holder of
      the
      debenture 50,000 warrants for every $100,000 redeemed. The warrants will have
      a
      two-year term and will be excisable at the fixed price of $.157 per share.
      The
      convertible debentures were assumed by TXP Corporation upon completion of the
      merger in April of 2006.


F-16




There
      are
      two ways this convertible debenture can be converted to common stock of TXP.
      First, the debentures are convertible at a fixed price of $0.157 per shares
      (“Fixed Price”) as provided for under the secured debenture agreement.
      Specifically, the Fixed Price was calculated at 110% of a post-money market
      capitalization of $15 million (which shall be calculated by dividing the product
      of 110% times 15,000,000 by the total outstanding capital stock of TXP on a
      fully-diluted basis as of the date TXP's common stock is first quoted on the
      principal market). Second, the debentures are convertible at an amount equal
      to
      80% of the volume weighted average price of TXP's common stock, as quoted by
      Bloomberg, LP, for the five days immediately preceding the conversion date
      (“Variable Price”). The conversion price elected will be the lower of fixed or
      variable price at the date of election to convert by the holder. The conversion
      term expires August 25, 2007.




In
      Q2 of
      2006, upon completion of the merger and assumption of all liabilities of Texas
      Prototypes, Inc., including the secured debentures, the contingencies related
      to
      the future event of TXP common stock being quoted and traded on either the
      over-the-counter bulletin board, NASDAQ small cap market or American Stock
      Exchange was resolved. The conversion option, the option to convert at an amount
      equal to 80% of the volume weighted average price of TXP's common stock, as
      quoted by Bloomberg, LP, for the five days immediately preceding the conversion
      date, was then deemed to be financial derivatives under SFAS 133 and EITF 00-19.
      Specifically, the variable conversion pricing aspects of the convertible
      debenture as discussed above were analyzed under paragraph 12 SFAS 133 and
      determined to be an embedded derivative that should be separated from the host
      contract since all of the following criteria were met:





·
            The
                economic characteristics and risks of the embedded derivative instrument
                are not clearly and closely related to the economic characteristics
                and
                risks of the host contract.




·
            The
                contract ("the hybrid instrument") that embodies both the embedded
                derivative instrument and the host contract is not re-measured at
                fair
                value under otherwise applicable generally accepted accounting principles
                with changes in fair value reported in earnings as they
                occur.




·
            A
                separate instrument with the same terms as the embedded derivative
                instrument would, pursuant to paragraphs 6-11, be a derivative instrument
                subject to the requirements of this
                Statement.





The
      embedded derivative was then evaluated using EITF 00-19 paragraphs 12 -32 to
      determine whether the embedded derivative should be classified as a liability
      or
      as equity. The Company concluded that the conversion option should be recorded
      as a liability at fair value since all of the criteria for recording as equity
      were not met under EITF 00-19 including the ability to have sufficient
      authorized shares to fulfill the Company’s potential obligations under the
      convertible debentures. If a company could be required to obtain shareholder
      approval to increase the company's authorized shares in order to net-share
      or
      physically settle a contract, share settlement is not controlled by the
      company.





At
      the
      time of the merger, the derivatives were bifurcated and recorded at fair value
      and reflected on the Company's balance sheet. The derivatives are adjusted
      to
      fair value at each reporting period.




In
      June
      of 2006, the Company issued 923,657 shares of common stock to Cornell Capital
      in
      conversion of $145,000 of this convertible debenture. The conversion price
      was
      equal to $0.157 per share in accordance with the debenture
      agreement.





In
      October of 2006, the Company issued 2,324,841 shares of common stock to Cornell
      Capital in conversion of $365,000 of this convertible debenture. The conversion
      price was equal to $0.157 per share in accordance with the debenture
      agreement.





In
      March
      of 2007, the Company issued 6,730,032 shares of common stock in full conversion
      of this convertible debenture and accrued interest. The conversion price was
      equal to $0.157 per share in accordance with debenture agreement.




F-17




***June
      5, 2006 Secured Convertible Debentures and
      Warrants***





On
      June
      5, 2006, the Company consummated a securities purchase agreement dated June
      5,
      2006 with Cornell providing for the sale by the Company to Cornell of its 10%
      secured convertible debentures in the aggregate principal amount of $1,127,000
      with principal and interest due on or before June 5, 2009. The terms of this
      debenture require the Company to obtain prior written consent from the holder,
      Cornell Capital, so long as any of the principal or interest on this debenture
      remains unpaid and unconverted before issuing or selling any common stock or
      preferred stock without consideration or for a consideration per share less
      than
      its lowest bid price determined immediately prior to its issuance, or issuing
      or
      selling any preferred stock, warrant, option, right, contract, call, or other
      security or instrument granting the holder thereof the right to acquire common
      stock without consideration or for a consideration per share less than such
      common stock's fair market value determined immediately prior to its issuance,
      or file any registration statement on Form S-8 for more than 10,000,000 shares
      of common stock. Additionally, the terms of this debenture provide holder,
      Cornell Capital, with a right of first refusal on capital raises by the Company.
      Specifically, for a period if 18 months after the Closing Date, if the Company
      intends to raise additional capital by the issuance or sale of capital stock
      of
      the Company, including without limitation shares of any class of common stock,
      any class of preferred stock, options, warrants or any other securities
      convertible or exercisable into shares of common stock (whether the offering
      is
      conducted by the Company, underwriter, placement agent or any third party)
      the
      Company shall be obligated to offer to the Holder such issuance or sale of
      capital stock, by providing in writing the principal amount of capital it
      intends to raise and outline of the material terms of such capital raise, prior
      to the offering such issuance or sale of capital stock  to any third
      parties including, but not limited to, current or former officers or directors,
      current or former shareholders and/or investors of the obligor, underwriters,
      brokers, agents or other third parties.  Cornell shall have 10 business
      days from receipt of such notice of the sale or issuance of capital stock to
      accept or reject all or a portion of such capital raising offer. The debenture
      is secured by a second priority security interest in all of our goods,
      inventory, contractual rights and general intangibles, receivables, documents,
      instruments, and chattel paper. In the event of default, Cornell may cause
      the
      obligation to become immediately due and payable. In addition, upon the
      occurrence of an event of default, Cornell shall: (i) be entitled to
      receive all distributions with respect to the pledged property, (ii) to
      cause the pledged property to be transferred into the name of the secured party
      or its nominee, (iii) to dispose of the pledged property, and (iv) to
      realize upon any and all rights in the pledged property then held by Cornell;
      provided however, that Cornell security interest is second in priority behind
      First Bank Canyon Creek.





The
      Company also issued to Cornell warrants to purchase 1,850,000 and 1,850,000
      shares of common stock at a price equal to $0.50 and $0.70 per share,
      respectively. The warrants expire five years from the date of issuance. Cornell
      may exercise the warrants on a cashless basis if the shares of common stock
      underlying the warrants are not then registered pursuant to an effective
      registration statement. In the event Cornell exercises the warrants on a
      cashless basis, then the Company will not receive any proceeds. In addition,
      the
      exercise price of the warrants will be adjusted in the event the Company issues
      common stock at a price below market, with the exception of any securities
      issued as of the date of the warrants or issued in connection with the secured
      convertible notes issued pursuant to securities purchase agreement. There can
      be
      no assurance to how many, if any, of these warrants will be exercised. The
      exercise price of the warrants may be adjusted in certain circumstances such
      as
      if the Company pays a stock dividend, subdivides or combines outstanding shares
      of common stock into a greater or lesser number of shares, or takes such other
      actions as would otherwise result in dilution of the selling stockholders'
      position.





The
      first
      debenture amounting to $550,000 matures on the third anniversary of the date
      of
      issuance and the Company is not required to make any payments until the maturity
      date. The debentures are convertible at any time into shares of common stock
      of
      the company at a conversion price per share equal to the lesser of (i) $0.50,
      or
      (ii) 95% of the lowest daily volume weighted average price of the common stock,
      as quoted by Bloomberg, LP, for the 30 trading days immediately preceding the
      date of conversion (“Variable Market Price”). Unless waived by the Company, the
      holders may not, together with their affiliates, convert more than an aggregate
      of $150,000 in any 30-day period of principal amount of the debentures at the
      Variable Market Price. The conversion option to convert at an amount equal
      to
      95% of the lowest daily volume weighted average price of the common stock,
      as
      quoted by Bloomberg, LP, for the 30 trading days immediately preceding the
      date
      of conversion is deemed to be a financial derivative under SFAS 133 and EITF
      00-19 Specifically, the conversion option was analyzed under paragraph 12 SFAS
      133 and determined to be an embedded derivative that should be separated from
      the host contract and then further evaluated using EITF 00-19 paragraphs 12
      -32
      which required the conversion option to be recorded as liability at fair value.
      Specifically, the variable conversion pricing aspects of the convertible
      debenture as discussed above were analyzed under paragraph 12 SFAS 133 and
      determined to be an embedded derivative that should be separated from the host
      contract since all of the following criteria were met:





·
            The
                economic characteristics and risks of the embedded derivative instrument
                are not clearly and closely related to the economic characteristics
                and
                risks of the host contract.




·
            The
                contract ("the hybrid instrument") that embodies both the embedded
                derivative instrument and the host contract is not re-measured at
                fair
                value under otherwise applicable generally accepted accounting principles
                with changes in fair value reported in earnings as they
                occur.




·
            A
                separate instrument with the same terms as the embedded derivative
                instrument would, pursuant to paragraphs 6-11, be a derivative instrument
                subject to the requirements of this
                Statement.




F-18




The
      embedded derivative was then evaluated using EITF 00-19 paragraphs 12 -32 to
      determine whether the embedded derivative should be classified as a liability
      or
      as equity. The Company concluded that the conversion option should be recorded
      as a liability at fair value since all of the criteria for recording as equity
      were not met under EITF 00-19 including the ability to have sufficient
      authorized shares to fulfill our potential obligations under the convertible
      debentures. If a company could be required to obtain shareholder approval to
      increase the company's authorized shares in order to net-share or physically
      settle a contract, share settlement is not controlled by the
      company.





The
      Company has the right to redeem a portion or all amounts outstanding under
      the
      debentures prior to the maturity date at a 20% redemption premium provided
      that
      the closing bid price of the common stock is less than $0.50. The convertible
      debentures are secured by substantially all the Company's assets. On October
      11,
      2006, the Company exercised its right to redeem the June 5, 2006 convertible
      debenture.




In
      addition, on June 5, 2006 the Company issued to Cornell an amended and restated
      convertible debenture, on the same terms and conditions as set forth above
      which
      consolidates all outstanding amounts of the convertible debenture issued by
      Texas Prototypes, Inc. to Cornell on June 15, 2005 in the amount of $550,000,
      plus accrued and unpaid interest in the amount of $27,000 through June 5, 2006,
      for the principal sum of $577,000. The Company reviewed EITF 05-07 “Accounting
      for Modifications to Conversion Options Embedded in Debt Instruments and Related
      Issues” and EIFT 96-19 “Debtor's Accounting for a Modification or Exchange of
      Debt Instruments” and deemed that the modifications and amendments were
      substantial and determined that debt extinguishment had occurred as the cash
      flow effect (including the changes in fair value of the embedded conversion
      option) on a present value basis exceeded 10%. The Company recorded a gain
      on extinguishment debt of $630,000 in the consolidated statements of operations
      as a result of the modification. On October 11, 2006, the Company exercised
      its
      right to redeem the June 5, 2006 convertible debenture.





On
      October 11, 2006, the Company exercised its right to redeem both debentures
      issued on June 5, 2006. The Company paid Cornell Capital $1,392,000 which was
      calculated by multiplying the principal balance of both debentures by 120%
      plus
      the accrued interest on the debentures. The combined carrying value of both
      debentures amounted to $1,088,000. The Company recorded a $304,000 loss in
      the
      consolidated statements of operations on extinguishment of debt related to
      the
      redemption in October of 2006.





***Cornell
      Capital Registration Rights Agreement***





In
      connection with all of the above secured convertible debentures and warrants
      issued to Cornell Capital prior to the year 2007, the Company entered into
      registration rights agreements providing for the filing of a registration
      statement with the Securities and Exchange Commission registering the common
      stock issuable upon conversion of the debentures and exercise of the warrants.
      The Company is obligated to file the registration statement no later than 45
      days from the date of closing and to use its best efforts to cause the
      registration statement to be declared effective no later than 120 days after
      filing and to insure that the registration statement remains in effect until
      all
      of the shares of common stock issuable upon conversion of the debentures and
      exercise of the warrants have been sold. In the event of a default of its
      obligations under the registration rights agreement, including its agreement
      to
      file the registration Statement with the Securities and Exchange Commission
      no
      later than 45 days from the date of closing, or if the registration statement
      is
      not declared effective within 120 days of filing, it is required that the
      Company pay to Cornell, as liquidated damages, for each month that the
      registration statement has not been filed or declared effective, as the case
      may
      be, either a cash amount or shares of the Company's common stock equal
      to 2% of the liquidated value of the debentures. The Company obtained a
      waiver from Cornell Capital waiving any claim or payment of liquidated damages
      up through and including May 15, 2007. On May 14, 2007, the SEC declared TXP's
      registration statement effective for the aforementioned shares of common stock
      issuable upon conversion of the debentures and exercise of the
      warrants




***July
      2006 Warrants***





On
      July
      28, 2006, TXP Corporation entered into an Agreement (the "Agreement") with
      James
      Von Ehr, II, an accredited investor (the "Investor"), pursuant to which the
      Company issued to the Investor five-year warrants to purchase an aggregate
      of
      320,000 shares of common stock (the "Warrants") as consideration for the
      Investor agreeing to pledge an aggregate of $2,000,000 in free-trading shares
      of
      common stock of Adobe Systems Incorporated (NASDAQ:ADBE), Fossil Incorporated
      (NASDAQ:FOSL) or such other shares of free-trading common stock having a value
      of $2,000,000 in the aggregate beneficially owned by the Investor as may be
      agreed upon between the parties (the “Collateral”).





The
      Collateral is to be pledged on behalf of the Company in favor of First Bank
      of
      Canyon Creek, or such other lending or financing institution as may be agreed
      upon between the parties (a “Lender”), as Collateral for a loan to be obtained
      by the Company from a Lender in an amount up to $2,000,000 with a term of up
      to
      2 years (the “Term”), which will be further guaranteed personally and through
      the pledge of common stock beneficially owned by the Company's Chief Executive
      Officer.





The
      warrants are exercisable into shares of the Company's common stock at a price
      equal to $0.50 per share. The investor may exercise the warrants on a cashless
      basis at his option. In the event the investor exercises the warrants on a
      cashless basis, then the Company will not receive any proceeds. The exercise
      price of the warrants may be adjusted in certain circumstances such as if the
      Company pay a stock dividend, subdivide or combine outstanding shares of common
      stock into a greater or lesser number of shares, or take such other actions
      as
      would otherwise result in dilution of the selling stockholders'
      position.




F-19




In
      addition, the Company shall prepare and file with the SEC a separate
      registration statement on Form SB-2 covering the resale of all of the warrant
      shares with no later than 45 days from closing. The Company shall use its best
      efforts to have the registration statement declared effective by the SEC as
      soon
      as practicable, but in no event later than 120 days after the initial filing.
      There are no liquidating damages clauses related to the warrant or agreement
      with the investor. On May 14, 2007, the SEC declared TXP's registration
      statement effective for the aforementioned shares of common stock issuable
      upon
      exercise of the warrants





As
      additional consideration of the Investor's agreement to pledge the Collateral
      to
      a Lender, the Company agreed to pay to the Investor a one-time commitment fee,
      during the Term, of $40,000 (the “Commitment Fee”) no later than 90 days after
      the Collateral is deposited into the account of a Lender; provided, however,
      that the Company shall pay an additional Commitment Fee within 90 days after
      the
      renewal of the Loan by a Lender. TXP consummated the loan facility with the
      First Bank of Canyon Creek in early Q3 2006 (See Note 6).





The
      Company accounted for these warrants pursuant to SFAS No. 133, "Accounting
      for
      Derivative Instruments and Hedging Activities", and EITF 00-19, “Accounting for
      Derivative Financial Instruments Indexed to and Potentially Settled in, a
      Company's Own Stock,” (“EITF 00-19”) which requires freestanding contracts that
      are settled in a company's own stock, including common stock warrants, to be
      designated as an equity instrument, asset or a liability. On the date the
      warrants were issued the Company had convertible debenture instruments that
      did
      not have limits on the net shares that potentially would have to have been
      delivered in a net share settlement, the Company was precluded from concluding
      it had sufficient shares authorized and unissued to net-share settle the
      warrants and fair valued the warrants as a liability. Accordingly, under the
      provisions of EITF 00-19, these warrants were initially designated as a
      liability to be carried at fair value on a company's balance sheet, with any
      changes in fair value recorded in the company's results of
      operations.





EITF
      00-19 also requires that the classification of a contract should be reassessed
      at each balance sheet date. If the classification required under this issue
      changes as a result of events during the period, the contract should be
      reclassified as of the date of the event that caused the reclassification.
      At
      March 31, 2007, the Company reviewed the contracts, in its case the warrants,
      and determined because the convertible debenture that did not have limits on
      the
      net shares that would have to be delivered in net share settlement was fully
      converted during the period, that the Company now had sufficient authorized
      and
      unissued shares to net-share settle the warrants. Accordingly, these warrants
      and all other warrants were reclassified from liabilities to equity and no
      gains
      or losses recorded during the period that warrants were classified as
      liabilities were reversed. The Company reassessed the classification of all
      contracts at June 30, 2007 and determined that there were no events that
      occurred during the period that required contract reclassification.





***October
      2006 Warrants***





On
      October 12, 2006, the Company entered into an Agreement (the "Agreement") with
      James Von Ehr, II, an accredited investor pursuant to which the Company issued
      to the Investor five-year warrants to purchase an aggregate of 640,000 shares
      of
      common stock (the "Warrants") as consideration for the Investor agreeing to
      pledge an aggregate of $2,000,000 in free-trading shares of common stock of
      Adobe Systems Incorporated (NASDAQ:ADBE), Fossil Incorporated (NASDAQ:FOSL)
      or
      such other shares of free-trading common stock having a value of $2,000,000
      in
      the aggregate beneficially owned by the Investor as may be agreed upon between
      the parties (the “Collateral”).





The
      Collateral is to be pledged on behalf of the Company in favor of First Bank
      of
      Canyon Creek, or such other lending or financing institution as may be agreed
      upon between the parties (a “Lender”), as Collateral for a loan to be obtained
      by the Company from a Lender in an amount up to $2,000,000 with a term of up
      to
      1 year (the “Term”), which will be further guaranteed personally and through the
      pledge of common stock beneficially owned by Michael C. Shores, the Company's
      Chief Executive Officer.




The
      warrants are exercisable into shares of the Company's common stock at a price
      equal to $0.50 per share. The investor may exercise the warrants on a cashless
      basis at his option. In the event the investor exercises the warrants on a
      cashless basis, then the Company will not receive any proceeds. The exercise
      price of the warrants may be adjusted in certain circumstances such as if the
      Company pay a stock dividend, subdivide or combine outstanding shares of common
      stock into a greater or lesser number of shares, or take such other actions
      as
      would otherwise result in dilution of the selling stockholders'
      position.





In
      addition, the agreement provides for the filing of a registration statement
      by
      the Company with the Securities and Exchange Commission registering the common
      stock issuable upon exercise of the warrants and the common stock issued for
      the
      commitment fee. The Company is obligated to file the registration statement
      no
      later than 65 days from the date of closing and to use its best efforts to
      cause
      the registration statement to be declared effective no later than 120 days
      after
      filing and to insure that the registration statement remains in effect until
      all
      of the shares of common stock issuable upon exercise of the warrants have been
      sold. There are no liquidating damages clauses related to the warrant or
      agreement with the investor. On May 14, 2007, the SEC declared TXP's
      registration statement effective for the aforementioned shares of common stock
      issuable upon exercise of the Warrants





As
      additional consideration of the Investor's agreement to pledge the collateral
      to
      a Lender, the Company agreed to pay to the Investor a one-time commitment fee
      during the Term of 125,000 shares of the Company's common stock (the “Commitment
      Fee”) no later than 90 days after the Collateral is deposited into the account
      of a Lender; provided, however, that the Company shall pay an additional
      Commitment Fee within 90 days after the renewal of the Loan by a Lender. TXP
      increased its Line of Credit from $1 million to $3 million with the First Bank
      of Canyon Creek in Q4 2006 (See Note 6).




F-20




The
      Company accounted for these warrants pursuant to SFAS No. 133, "Accounting
      for
      Derivative Instruments and Hedging Activities", and EITF 00-19, “Accounting for
      Derivative Financial Instruments Indexed to and Potentially Settled in, a
      Company's Own Stock,” (“EITF 00-19”) which requires freestanding contracts that
      are settled in a company's own stock, including common stock warrants, to be
      designated as an equity instrument, asset or a liability. On the date the
      warrants were issued the Company had convertible debenture instruments that
      did
      not have limits on the net shares that potentially would have to have been
      delivered in a net share settlement, the Company was precluded from concluding
      it had sufficient shares authorized and unissued to net-share settle the
      warrants and fair valued the warrants as a liability. Accordingly, under the
      provisions of EITF 00-19, these warrants were initially designated as a
      liability to be carried at fair value on a company's balance sheet, with any
      changes in fair value recorded in the company's results of
      operations.





EITF
      00-19 also requires that the classification of a contract should be reassessed
      at each balance sheet date. If the classification required under this issue
      changes as a result of events during the period, the contract should be
      reclassified as of the date of the event that caused the reclassification.
      At
      March 31, 2007, the Company reviewed the contracts, in its case the warrants,
      and determined because the convertible debenture that did not have limits on
      the
      net shares that would have to be delivered in net share settlement was fully
      converted during the period, that the Company now had sufficient authorized
      and
      unissued shares to net-share settle the warrants. Accordingly, these warrants
      and all other warrants were reclassified from liabilities to equity and no
      gains
      or losses recorded during the period that warrants were classified as
      liabilities were reversed. The Company reassessed the classification of all
      contracts at June 30, 2007 and determined that there were no events that
      occurred during the period that required contract
      reclassification.





***October
      2006 Securities Purchase Agreement***





On
      October 11, 2006, TXP entered into a securities purchase agreement (the
“Purchase Agreement”) with an qualified institutional buyer pursuant to which
      the Company sold an aggregate of $1,500,000 in shares (the “Shares”) of the
      Company's common stock, par value $.001 per share, at a per share purchase
      price
      of $.32, together with five year warrants to purchase 2,343,750 shares of common
      stock at an exercise price equal to $0.50 per share and five year warrants
      to
      purchase 2,343,750 shares of common stock at an exercise price equal to $0.70
      per share (collectively, the “Warrants”). The entire purchase price of the
      shares and the warrants was used by the Company to redeem its principal amount
      $550,000 and $577,000 10% secured convertible debentures issued to Cornell
      Capital Partners, L.P. in June 2005 and June 2006, respectively, each at a
      20%
      premium, for a total redemption price of approximately $1,392,000.





The
      exercise prices of the warrants are subject to adjustment in certain events,
      including, without limitation, upon the Company's consolidation, merger or
      sale
      of all of substantially all of its assets, a reclassification of the Company's
      common stock, or any stock splits, combinations or dividends with respect to
      the
      Company's common stock. In addition, the Company has the option to call all
      or a
      portion of the Warrants so long as (i) the closing bid price of the Company's
      common stock is trading at or above $1.50 for 20 consecutive trading days
      immediately preceding the call date, and (ii) the shares of common stock
      underlying the Warrants are registered under an effective registration statement
      on the call date.





Further,
      the purchase agreement provides for the filing of a registration statement
      by
      the Company with the Securities and Exchange Commission registering the shares
      and the shares common stock issuable upon exercise of the warrants. The Company
      is obligated to file the registration statement no later than December 15,
      2006
      and to use its best efforts to cause the registration statement to be declared
      effective no later than 90 days after filing. If the Company does not meet
      the
      aforementioned filing and effectiveness deadlines, it shall pay to the investor
      an amount equal to 1% of the purchase price for the first 60 days or part
      thereof of the pendency of such non-registration event and 2% for each 30 days
      or part thereof thereafter, of the purchase price of the shares and the
      warrants; provided, however, that the aforementioned liquidated damages shall
      only accrue, if at all, for 12 months after the closing date.  The Company
      obtained a waiver from the investor waiving any claim or payment of liquidated
      damages up through and including May 15, 2007. On May 14, 2007, the SEC declared
      TXP's registration statement effective for the aforementioned shares and the
      shares common stock issuable upon exercise of the warrants.





The
      Company accounted for these warrants pursuant to SFAS No. 133, "Accounting
      for
      Derivative Instruments and Hedging Activities", and EITF 00-19, “Accounting for
      Derivative Financial Instruments Indexed to and Potentially Settled in, a
      Company's Own Stock,” (“EITF 00-19”) which requires freestanding contracts that
      are settled in a company's own stock, including common stock warrants, to be
      designated as an equity instrument, asset or a liability. On the date the
      warrants were issued the Company had convertible debenture instruments that
      did
      not have limits on the net shares that potentially would have to have been
      delivered in a net share settlement, the Company was precluded from concluding
      it had sufficient shares authorized and unissued to net-share settle the
      warrants and fair valued the warrants as a liability. Accordingly, under the
      provisions of EITF 00-19, these warrants were initially designated as a
      liability to be carried at fair value on a company's balance sheet, with any
      changes in fair value recorded in the Company's results of
      operations.





EITF
      00-19 also requires that the classification of a contract should be reassessed
      at each balance sheet date. If the classification required under this issue
      changes as a result of events during the period, the contract should be
      reclassified as of the date of the event that caused the reclassification.
      At
      March 31, 2007, the Company reviewed the contracts, in our case the warrants,
      and determined because the convertible debenture that did not have limits on
      the
      net shares that would have to be delivered in net share settlement was fully
      converted during the period, that the Company now had sufficient authorized
      and
      unissued shares to net-share settle the warrants. Accordingly, these warrants
      and all other warrants were reclassified from liabilities to equity and no
      gains
      or losses recorded during the period that warrants were classified as
      liabilities were reversed. The Company reassessed the classification of all
      contracts at June 30, 2007 and determined that there were no events that
      occurred during the period that required contract reclassification.




F-21




***March
      2007 Securities Purchase Agreement***





On
      March
      30, 2007, TXP consummated a securities purchase agreement with Cornell providing
      for the sale by the Company to Cornell of its 6% secured convertible notes
      in
      the aggregate principal amount of $5,000,000. Under the Purchase Agreement,
      the
      Company also issued to Cornell five-year warrants to purchase (i) 1,500,000
      shares of common stock at a price equal to $0.60 per share; (ii) 1,000,000
      shares of common stock at a price equal to $0.75 per share; (iii) 750,000 shares
      of common stock at a price equal to $0.85 per share; and 600,000 shares of
      common stock at a price equal to $1.00 per share.





The
      notes
      mature on the third anniversary of the date of issuance and bear interest at
      a
      rate equal to 6% per annum. Beginning 12 months after the date of issuance,
      the
      Company shall make monthly payments of interest, and beginning 18 months after
      the date of issuance, the Company shall make monthly payments of interest plus
      principal payments in the amount of $100,000; provided however, that Cornell
      has
      the option to deliver a written notice to the Company within 2 days prior to
      the
      scheduled payment date electing to have all or any portion of scheduled payment
      deferred to the maturity date. Any amount deferred to the maturity date shall
      continue to accrue interest through the maturity date.





In
      addition, the notes are convertible at any time into shares of common stock
      of
      the Company at a conversion price per share equal to $0.41; provided however,
      that in the event that the Company has not raised at least $1,000,000 in
      additional equity capital between the closing date and the date that is 120
      days
      after the closing date, the conversion price shall automatically become $0.25
      per share. The Company has the right to redeem a portion or all amounts
      outstanding under the notes prior to the maturity date at a 20% redemption
      premium provided that the closing bid price of the common stock is less than
      the
      conversion price, the registration statement (as defined below) is effective,
      and no event of default has occurred or is continuing. The Company's obligations
      under the purchase agreement and the notes are secured by substantially all
      of
      the Company's assets; provided however, such security interest is second in
      priority to certain liens granted by the Company in favor of First Bank of
      Canyon Creek. Under the terms of the convertible note, the Company is considered
      to be default upon occurrence of any of the following events:




·
            Any
                default in the payment of the principal of, interest on or other
                charges
                in respect of this Note, free of any claim of subordination, as and
                when
                the same shall become due and payable whether upon an Optional Redemption
                (as defined in*Section 3(a)*),
                the Maturity Date, by acceleration, or
                otherwise;




·
            The
                Company or any subsidiary of the Company shall commence, or there
                shall be
                commenced against the Company or any subsidiary of the Company under
                any
                applicable bankruptcy or insolvency laws as now or hereafter in effect
                or
                any successor thereto, or the Company or any subsidiary of the Company
                commences any other proceeding under any reorganization, arrangement,
                adjustment of debt, relief of debtors, dissolution, insolvency or
                liquidation or similar law of any jurisdiction whether now or hereafter
                in
                effect relating to the Company or any subsidiary of the Company or
                there
                is commenced against the Company or any subsidiary of the Company
                any such
                bankruptcy, insolvency or other proceeding which remains undismissed
                for a
                period of 61 days; or the Company or any subsidiary of the Company
                is
                adjudicated insolvent or bankrupt; or any order of relief or other
                order
                approving any such case or proceeding is entered; or the Company
                or any
                subsidiary of the Company suffers any appointment of any custodian,
                private or court appointed receiver or the like for it or any substantial
                part of its property which continues undischarged or unstayed for
                a period
                of sixty one (61) days; or the Company or any subsidiary of the Company
                makes a general assignment for the benefit of creditors; or the Company
                or
                any subsidiary of the Company shall fail to pay, or shall state that
                it is
                unable to pay, or shall be unable to pay, its debts generally as
                they
                become due; or the Company or any subsidiary of the Company shall
                call a
                meeting of its creditors with a view to arranging a composition,
                adjustment or restructuring of its debts; or the Company or any subsidiary
                of the Company shall by any act or failure to act expressly indicate
                its
                consent to, approval of or acquiescence in any of the foregoing;
                or any
                corporate or other action is taken by the Company or any subsidiary
                of the
                Company for the purpose of effecting any of the
                foregoing;




·
            The
                Company or any subsidiary of the Company shall default in any of
                its
                obligations under any other debenture or any mortgage, credit agreement
                or
                other facility, indenture agreement, factoring agreement or other
                instrument under which there may be issued, or by which there may
                be
                secured or evidenced any indebtedness for borrowed money or money
                due
                under any long term leasing or factoring arrangement of the Company
                or any
                subsidiary of the Company in an amount exceeding $100,000, whether
                such
                indebtedness now exists or shall hereafter be created and such default
                shall result in such indebtedness becoming or being declared due
                and
                payable prior to the date on which it would otherwise become due
                and
                payable;




·
            The
                Common Stock shall cease to be quoted for trading or listing for
                trading
                on any of (a) the American Stock Exchange, (b) New York Stock Exchange,
                (c) the Nasdaq National Market, (d) the Nasdaq Capital Market, or
                (e) the
                Nasdaq OTC Bulletin Board (“OTC”)
                (each, a “Primary
                Market”)
                and shall not again be quoted or listed for trading on any Primary
                Market
                within five (5) Trading Days of such
                delisting;





F-22




·
            The
                Company or any subsidiary of the Company shall be a party to any
                Change of
                Control Transaction (as defined in*Section 6*);




·
            The
                Company shall fail to file the Underlying Shares Registration Statement
                (as defined in*Section 6*)
                with the Commission (as defined in*Section 6*),
                or the Underlying Shares Registration Statement shall not have been
                declared effective by the Commission, in each case within the time
                periods
                set forth in the Investor Registration Rights Agreement (“Registration
                Rights Agreement”)
                of even date herewith, between the Company and the
                Holder;




·
            If
                the effectiveness of the Underlying Shares Registration Statement
                lapses
                for any reason or the Holder shall not be permitted to resell the
                shares
                of Common Stock underlying this Note under the Underlying Shares
                Registration Statement, in either case, for more than five (5) consecutive
                Trading Days or an aggregate of eight Trading Days (which need not
                be
                consecutive Trading Days);




·
            The
                Company shall fail for any reason to deliver Common Stock certificates
                to
                a Holder prior to the fifth (5th)
                Trading Day after a Conversion Date, or the Company shall provide
                notice
                to the Holder, including by way of public announcement, at any time,
                of
                its intention not to comply with requests for conversions in accordance
                with the terms hereof;




·
            The
                Company shall fail for any reason to deliver the payment in cash
                pursuant
                to a Buy-In (as defined herein) within three (3) days after notice
                is
                claimed delivered hereunder;




·
            The
                Company shall fail to observe or perform any other covenant, agreement
                or
                warranty contained in, or otherwise commit any breach or default
                of any
                provision of this Note (except as may be covered by*Section 2(a)(i) through 2(a)(ix)*hereof) or any Transaction Document (as defined in*Section 6*)
                which is not cured with in the time prescribed, or an Event of Default
                under any other debenture issued to the Holder in connection with
                the
                Securities Purchase Agreement shall
                occur;




During
      the time that any portion of the note is outstanding, if any event of default
      has occurred and shall continue for a period of 10 days after a notice of such
      default has been delivered by the Holder to the Company (the “Notice
      Period ”),
      the
      full principal amount of the note, together with interest and other amounts
      owing in respect thereof, to the date of acceleration shall become at the
      holder's election, immediately due and payable in cash, *provided however* , the
      holder may request (but shall have no obligation to request) payment of such
      amounts in common stock of the Company. If an event of default shall occur
      the
      conversion price shall be reduced to 20% of the lowest volume weighted average
      price, as quoted by Bloomberg, LP, of the common stock during the 30 trading
      days immediately preceding the date upon which the event of default occurred
      (the “ Default
      Conversion Price ”),
      provided however, that the default conversion price may not be lower than $0.10,
      as adjusted pursuant to this note.





The
      securities purchase agreement places certain restrictions on the issuance of
      capital stock by the company. Specifically, so long as any convertible notes
      are
      outstanding, the Company shall not, without the prior written consent of the
      Buyer(s), (i) issue or sell shares of common stock or preferred stock without
      consideration or for a consideration per share less than the bid price of the
      common stock determined immediately prior to its issuance, (ii) issue any
      preferred stock, warrant, option, right, contract, call, or other security
      or
      instrument granting the holder thereof the right to acquire common stock without
      consideration or for a consideration less than such common stock's bid price
      determined immediately prior to it's issuance, (iii) enter into any security
      instrument granting the holder a security interest in any and all assets of
      the
      Company, or (iv) file any registration statement on Form S-8, except in
      connection with the registration of common stock issued pursuant to a bona
      fide
      approved stock plan up to a maximum of 10,000,000 shares of common stock. These
      restrictions on the issuance of capital stock do not apply to excluded
      securities which is defined as follows:





“
(a)
      shares issued or deemed to have been issued by the Company pursuant to an
      approved stock plan (b) shares of common stock issued or deemed to be issued
      by
      the Company upon the conversion, exchange or exercise of any right, option,
      obligation or security outstanding on the date prior to date of the securities
      purchase agreement, provided that the terms of such right, option, obligation
      or
      security are not amended or otherwise modified on or after the date of the
      securities purchase agreement, and provided that the conversion price, exchange
      price, exercise price or other purchase price is not reduced, adjusted or
      otherwise modified and the number of shares of common stock issued or issuable
      is not increased (whether by operation of, or in accordance with, the relevant
      governing documents or otherwise) on or after the date of the securities
      purchase agreement, (c) the shares of common stock issued or deemed to be
      issued by the Company upon conversion of this note, (d) any issuance by the
      Company of securities in connection with a strategic partnership or a joint
      venture (the primary purpose of which is not to raise equity capital), (e)
      any
      issuance by the Company of securities as consideration for a merger or
      consolidation or the acquisition of a business, product, license, or other
      assets of another person or entity, (f) securities which may be issued by the
      Company for aggregate gross proceeds not to exceed Two Million Dollars
      ($2,000,000) from sources other than the Buyer(s) in the next six (6) months
      from the date hereof."




F-23




The
      securities purchase agreement provides Cornell with rights of first refusal.
      From the date of the first closing until twenty-four (24) months thereafter,
      if
      the Company intends to raise additional capital by the issuance or sale of
      capital stock of the Company, including without limitation shares of any class
      of common stock, any class of preferred stock, options, warrants or any other
      securities convertible or exercisable into shares of common stock (whether
      the
      offering is conducted by the Company, underwriter, placement agent or any third
      party) the Company shall be obligated to offer to the buyers such issuance
      or
      sale of capital stock, by providing in writing the principal amount of capital
      it intends to raise and outline of the material terms of such capital raise,
      prior to the offering such issuance or sale of capital stock  to any third
      parties including, but not limited to, current or former officers or directors,
      current or former shareholders and/or investors of the obligor, underwriters,
      brokers, agents or other third parties.  The Buyers shall have 10 business
      days from receipt of such notice of the sale or issuance of capital stock to
      accept or reject all or a portion of such capital raising offer.





In
      connection with the purchase agreement, the Company also entered into a
      registration rights agreement (the “Registration Rights Agreement”) providing
      for the filing of a registration statement (the “Registration Statement”) with
      the Securities and Exchange Commission registering 100% of the shares of common
      stock issuable upon conversion of the notes and exercise of the warrants within
      30 days of receipt of written demand of Cornell. The Company is obligated to
      use
      its best efforts to cause the registration statement to be declared effective
      no
      later than 90 days after filing and to insure that the registration statement
      remains in effect until all of the shares of common stock issuable upon
      conversion of the notes and exercise of the warrants have been sold. In the
      event of a default of its obligations under the registration rights agreement,
      including its agreement to file the registration statement with the Securities
      and Exchange Commission no later than 30 days from receipt of a written demand
      from Cornell, or if the registration statement is not declared effective within
      90 days of filing, it is required pay to Cornell, as liquidated damages for
      each
      month that the registration statement has not been filed or declared effective,
      as the case may be, a cash amount equal to 2% of the liquidated value of the
      notes. Notwithstanding the foregoing, the Company shall not be liable for
      liquidated damages with respect to any warrants or warrant shares and the
      maximum aggregate Liquidated Damages payable to Cornell by the Company, if
      any,
      shall be 15% of the aggregate purchase price paid by Cornell pursuant to the
      purchase agreement. As of June 30, 2007, the Company had not received
      written demand from Cornell to file a registration statement with the Securities
      and Exchange Commission registering the shares of common stock issuable upon
      conversion of the notes and exercise of the warrants as set forth in the March
      30, 2007 securities purchase agreement.





The
      conversion option to convert the convertible note into equity is deemed to
      be a
      financial derivative under SFAS 133 and EITF 00-19. Specifically, the conversion
      option was analyzed under paragraph 12 SFAS 133 and determined to be an embedded
      derivative that should be separated from the host contract and then further
      evaluated using EITF 00-19 paragraphs 12 -32 which required the conversion
      option to be recorded as liability at fair value. Specifically, the variable
      conversion option pricing aspects of the convertible debenture as discussed
      above were analyzed under paragraph 12 SFAS 133 and determined to be an embedded
      derivative that should be separated from the host contract since all of the
      following criteria were met:





·
            The
                economic characteristics and risks of the embedded derivative instrument
                are not clearly and closely related to the economic characteristics
                and
                risks of the host contract.




·
            The
                contract ("the hybrid instrument") that embodies both the embedded
                derivative instrument and the host contract is not re-measured at
                fair
                value under otherwise applicable generally accepted accounting principles
                with changes in fair value reported in earnings as they
                occur.




·
            A
                separate instrument with the same terms as the embedded derivative
                instrument would, pursuant to paragraphs 6-11, be a derivative instrument
                subject to the requirements of this
                Statement.




Under
      EITF 00-19, paragraph four provides that if an embedded derivative is indexed
      to
      the reporting entity's own stock and would be classified in stockholders' equity
      if it was a freestanding derivative, that embedded derivative is not considered
      a derivative for purposes of Statement 133. The Task Force reached a consensus
      that for purposes of evaluating under Statement 133 whether an embedded
      derivative indexed to a company's own stock would be classified in stockholders'
      equity if freestanding, the requirements of paragraphs 12-32 of this issue
      do
      not apply if the hybrid contract is a conventional convertible debt instrument
      in which the holder may only realize the value of the conversion option by
      exercising the option and receiving the entire proceeds in a fixed number of
      shares or the equivalent amount of cash (at the discretion of the issuer).
      Since
      the conversion ratio may be modified under certain events, including that the
      Company has not raised at least $1,000,000 in additional equity capital between
      the closing date and the date that is 120 days after the closing date, the
      conversion price shall automatically become $0.25 per share; and that in the
      event of default, the conversion price may be adjusted down, but not below
      $0.10, based on the market price of the stock as discussed above. Accordingly,
      the Company believes this note is not considered “conventional convertible debt”
as defined by EITF 00-19. The embedded conversion option was then evaluated
      using EITF 00-19 paragraphs 12 -32 to determine whether the embedded derivative
      should be classified as a liability or as equity. The Company concluded that
      the
      conversion option should be recorded as a liability at fair value since all
      of
      the criteria for recording as equity were not met under EITF 00-19 including
      that there was no requirement in the contract to post collateral at any point
      or
      for any reason.




F-24




This
      convertible note was originally discounted by $3,826,000. The discount included
      $350,000 in fees paid to the lender and 195,122 shares of common stock issued
      valued at $76,000 based on the closing price of common stock on the date of
      issuance. Additionally, the note was further discounted by $2,603,000 upon
      bifurcation and recording at fair value the embedded conversion option, and
      by
      $797,000 representing the fair value of the warrants issued in conjunction
      the
      note. The discount is being amortized over the life of the notes of three years.
      At June 30, 2007 the convertible debenture had balance of $493,000 net
      $3,507,000 of unamortized discount. The effective interest rate on the
      debenture is 10.2% compared to the stated interest of 6% which takes
      into account the debt discount and issue costs related to the
      debenture.




F-25




***Summary
      of Secured Convertible Note***





Presented
      below is summary of the secured convertible note at June 30, 2007:





Description
            
            Principal
                balance
            
            Unamortized
                discount
            
            Fair
                value of derivative instrument
            
            Accrued
                interestMarch
                2007 secured convertible note
            
            $
            4,000,000
            
            $
            3,507,000
            
            $
            2,542,000
            
            $
            61,000**Total**
            
            **$**
            **4,000,000**
            
            **$**
            **3,507,000**
            
            **$**
            **2,542,000**
            
            **$**
            **61,000**




The
      Company uses the Black Scholes Pricing Model to determine fair values of its
      derivatives. Valuations derived from this model are subject to ongoing internal
      and external verification and review. The model uses market-sourced inputs
      such
      as interest rates, exchange rates and option volatilities. Selection of these
      inputs involves management's judgment and may impact net income. The fair value
      of the derivative liabilities are subject to the changes in the trading value
      of
      the Company's common stock. As a result, TXP's financial statements may
      fluctuate from quarter-to-quarter based on factors, such as the price of the
      Company's stock at the balance sheet date, the amount of shares converted by
      note holders and/or exercised by warrant holders. Consequently, the Company’s
      financial position and results of operations may vary from quarter-to-quarter
      based on conditions other than the Company's operating revenues and
      expenses.




The
      fair
      value of derivatives was determined using the Black-Scholes option-pricing
      model
      with the following assumptions:





Expected
                volatility
            
            
            108
            %Expected
                term (years)
            
            
            2.75Risk-free
                interest rate
            
            
            4.9
            %Expected
                dividend yield
            
            
            0
            %





Expected
      volatility is based solely on historical volatility of the
      Company's common stock over the period commensurate with the expected term
      of the stock options. The Company relies solely on historical volatility because
      its traded options do not have sufficient trading activity to allow the Company
      to incorporate the mean historical implied volatility from traded options
      into the Company's estimate of future volatility. The expected term
      calculation for stock options is based on the “simplified” method described in
      Staff Accounting Bulletin No. 107, Share-Based Payment. The risk-free
      interest rate is based on the U.S. Treasury yield in effect at the time of
      grant
      for an instrument with a maturity that is commensurate with the expected term
      of
      the stock options. The dividend yield of zero is based on the fact that the
      Company has never paid cash dividends on its common stock, and the Company
      has no present intention to pay cash dividends.





***Reclassification
      of derivative financial instruments***





EITF
      00-19 also requires that the classification of a contract should be reassessed
      at each balance sheet date. If the classification required under this issue
      changes as a result of events during the period, the contract should be
      reclassified as of the date of the event that caused the reclassification.
      At
      the end of Q1 2007, the Company reviewed the contracts, in its case the
      warrants, and determined because the convertible debenture that did not have
      limits on the net shares that would have to be delivered in net share settlement
      was fully converted during the period, that the Company now had sufficient
      authorized and unissued shares to net-share settle the warrants. Accordingly,
      these warrants and all other warrants were reclassified from liabilities to
      equity and no gains or losses recorded during the period that warrants were
      classified as liabilities were reversed. The warrants were re-valued and marked
      to market immediately prior to the reclassification. The total amount
      reclassified on March 30, 2007 from derivative financials instruments to
      additional paid in capital was $2,684,000. In accordance with EITF 00-19, the
      Company reassessed all of the contract classifications at the end of each
      balance sheet date and determined no reclassification was necessary as of June
      30, 2007.




F-26




**NOTE
      11 - COMMON STOCK**





On
      April
      28, 2006, the Company completed a recapitalization transaction which resulted
      in
      new common shares outstanding of 94,295,715, after giving effect of cancellation
      of shares in the transaction and reissuance per the related merger agreement.
      As
      required by accounting guidance, authorized shares, issued and outstanding
      shares and per share amounts have been retroactively restated throughout these
      consolidated financial statements and the accompanying notes.





In
      June
      of 2006, the Company issued an aggregate of 1,700,000 shares of its common
      stock
      to Cornell in consideration for the cancellation of the convertible debenture
      issued by the Company dated June 14, 2004 in the amount of $240,000 issued
      in
      connection with the Standby Equity Distribution Agreement dated June 14, 2004
      and the cancellation of the convertible debenture issued by TXP dated August
      25,
      2004 in the amount of $400,000 issued in connection with the Standby Equity
      Distribution Agreement dated August 25, 2004. The combined carrying value of
      the
      debentures amounted to $685,000 which included the fair value of an embedded
      conversion option and accrued interest. The fair market value the stock was
      $850,000 on the date of settlement. The Company realized a $165,000 loss on
      early extinguishment of debt as a result of the settlement.





In
      June
      of 2006, the Company issued 923,657 shares of common stock to Cornell Capital
      in
      conversion of $145,000 of convertible debentures. The conversion price was
      equal
      to $0.157 per share in accordance with debenture agreement.





In
      June
      of 2006, the Company amended its articles of incorporation and increased the
      authorized shares from 100,000,000 to 300,000,000.





In
      August
      of 2006, the Company issued a combined 149,000 free-trading shares of common
      stock registered by the Company on a registration statement on Form S-8 to
      all
      of its employees who were employed as of April 28, 2006 except for the CFO
      and
      CEO.





In
      September of 2006, the Company awarded 1,543,334 options to purchase common
      stock at $.30 to generally all of its employees except for the CEO and CFO.
      The
      options have a term of approximately 3 years with 1/3 vesting each
      year.





In
      October of 2006, the Company awarded 863,995 options to purchase common stock
      at
      $.34 to a group on newly hired employees. The options have a term of
      approximately 3 years with 1/3 vesting each year.





In
      October of 2006, the Company issued 2,324,841 shares of common stock to Cornell
      Capital in conversion of $365,000 of convertible debentures. The conversion
      price was equal to $0.157 per share in accordance with debenture
      agreement.





In
      November of 2006, the Company issued 4,687,500 shares of common stock for
      $1,500,000 to an investor in a private placement pursuant to a securities
      purchased agreement dated October 11, 2006.





In
      March
      of 2007, the Company issued 6,730,032 shares of common stock in full conversion
      of convertible debentures issued in August of 2004 and accrued interest. The
      conversion price was equal to $0.157 per share in accordance with debenture
      agreement. (See Note 10).




In
      March
      of 2007, the Company issued 195,122 shares of common stock which were related
      to
      fees paid to Cornell Capital in conjunction with the securities purchase
      agreement consummated on March 30, 2007 between the company and Cornell. (See
      Note 10).





In
      April
      of 2007, the Company issued 1,404,870 shares of common stock to certain
      employees who were hired as of October 2, 2006, none of whom were officers
      or
      directors. The agreement between the Company and employees provided that the
      stock would vest 50% on January 1, 2007 with the remaining 50% vesting daily
      through April 2, 2007.





In
      May of
      2007, the Company issued 125,000 share of common stock to an accredited investor
      to settle a commitment fee (See Note 10).





**NOTE
      12 - COMMITMENTS**





TXP
      executed a new lease with its landlord in December 2004. The new lease began
      March 15, 2005 and will last for five years. The Company’s lease was amended
      effective November 15, 2006 to include approximately 16,500 additional square
      feet. The incremental monthly lease payment is approximately $7,000 per month
      for the term of the lease. The lease required a deposit in the amount of
      $13,000. The annual rent payments increase each year as outlined
      below:


Year
              
              Amount07/01/07
                  - 12/31/07
              
              $
              161,00001/01/08
                  - 12/31/08
              
              
              327,00001/01/09
                  - 12/31/09
              
              
              334,00001/01/10
                  - 12/31/10
              
              
              84,000Total
              
              $
              906,000


Rent
      expense for the six months ended June 30, 2007 and 2006 amounted to $152,000
      and
      $95,000, respectively.




F-27




**NOTE
      13- MAJOR CUSTOMERS**





During
      the six months ending June 30, 2007 and June 30, 2006, TXP had sales to five
      customers which amounted to 61% and 63% of net sales, respectively. Tellabs
      Inc
      and AMX Corporation accounted for 29% and 13% respectively of net sales in
      2007
      while no other customer accounted for more than 10% of net sales for
      2007. AMX Corporation, Flextronics and Essex Corporation accounted for 18%,
      18%, and 11% of net sales in 2006, respectively, while no other customer
      accounted for more than 10% of net sales for 2006.





**NOTE
      14 - STOCK INCENTIVE PLAN**





In
      June
      of 2006, the majority of shareholders approved the "2006 Stock Incentive Plan."
      The plan provides for up to 10,000,000 shares of TXP's common stock to be issued
      in the form of incentive and/or non-qualified common stock for employees,
      directors and consultants to TXP. As of June 30, 2007, 2,808,929stock options and 1,553,870 shares of common stock have been issued
      to
      employees, directors or consultants under this plan of which the Company
      recognized $60,000 of stock compensation expense in SGA in the statement of
      operations for quarter ended June 30, 2007.





In
      Q4
      2006, the Company agreed to issue a combined 1,404,870 free-trading shares
      on
      April 2, 2007 to certain employees who were hired as of October 2, 2006. The
      agreement between the Company and employees provided that the stock would vest
      50% on January 1, 2007 with the remaining 50% vesting daily through April 2,
      2007. In accordance with the agreement, 1,404,870 shares of common stock were
      issued to these employees in April of 2007.




**NOTE
      15 - NONMONETARY EXCHANGE TRANSACTION**





In
      December of 2006, TXP completed a reciprocal exchange transaction with Siemens
      Networks GmbH Co. KG, “Siemens” pursuant to a Transfer and License Agreement
      executed by both TXP and Siemens. TXP received the following as a result of
      the
      exchange:





·
            Component
                inventory intended for the manufacture of Optical Network Terminals
                (“ONT”);·
            Fixed
                assets including technical equipment, machinery, tooling used in
                the
                design of ONT products and related operational
                software;·
            Computer
                servers, personal computers, and computer peripherals;
                and·
            Siemens
                granted TXP non-exclusive, non-transferable and non-sub licensable
                right
                and license to use, modify or otherwise deploy documents, data, software
                code related to the ONT business. Siemens granted TXP non-exclusive,
                non-transferable and non-sub licensable right and license under the
                pertinent patents related to the ONT
                business.




TXP
      agreed to complete development releases for certain ONT's for Siemens in
      exchange for the assets received. The development of those releases required
      substantially all of the time of our 35 employee ONT development group from
      October 2, 2006 through January 31, 2007.





The
      exchange transaction was accounted for as a non-monetary exchange as provided
      for under Statement of Financial Accounting Standards No. 153, “Exchanges of
      Non-Monetary Assets”, an amendment of APB Opinion No. 29. Thus, the cost of the
      non-monetary assets acquired by TXP in the exchange was recorded at the fair
      value of the services provided to obtain it. The fair value of the development
      services was calculated as the four months of personnel costs TXP would pay
      its
      development team which amounted to approximately $1,329,000. Therefore, the
      assets acquired were recorded at approximately $1,329,000. In addition, TXP
      recognized $997,000 in design and development services revenue as of December
      31, 2006 and recognized the remaining $332,000 in deferred revenue as of
      December 31, 2006 in Q1 2007. TXP recognizes design and development services
      revenue using the percentage-of-completion method of accounting, in accordance
      with SOP 81-1, “Accounting for Performance of Construction-Type and Certain
      Production-Type Contracts.” Revenues are recognized primarily based on costs
      incurred to date compared with total estimated contract costs. Generally, the
      Company’s design services costs consist of engineering labor costs.





**NOTE
      16 - SUBSEQUENT EVENTS**





On
      July
      3, 2007, Mr. Robert Bruce resigned as a director of the Company, but will remain
      as the Company’s Chief Financial Officer. There was no disagreement or dispute
      between Mr. Bruce and the Company which led to his resignation from the Board
      of
      Directors.




In
      addition, on July 3, 2007 the Board of Directors appointed Mr. Pasquale M.
      LaVecchia and Mr. William L. Martin III as directors of the Company. There
      are
      no understandings or arrangements between Messrs. LaVecchia and Martin and
      any
      other person pursuant to which Messrs. LaVecchia and Martin were selected as
      directors of the Company. Messrs. LaVecchia and Martin do not have any family
      relationship with any director, executive officer or person nominated or chosen
      by the Company to become a director or executive officer. It is anticipated
      that
      Mr. LaVecchia will serve as the Chairman of the Audit Committee of the Board
      of
      Directors of the Company when such committee is established by the Board.





As
      previously reported by the Company in its Current Report on Form 8-K filed
      with
      the Securities and Exchange Commission on April 5, 2007, on March 30, 2007
      the
      Company consummated a securities purchase agreement with Cornell Capital
      Partners L.P. providing for the sale by the Company to Cornell of its 6% secured
      convertible notes in the aggregate principal amount of $5,000,000 (the “Notes”).
      Under the purchase agreement, the Company also issued to Cornell five-year
      warrants to purchase (i) 1,500,000 shares of common stock at a price equal
      to
      $0.60 per share; (ii) 1,000,000 shares of common stock at a price equal to
      $0.75
      per share; (iii) 750,000 shares of common stock at a price equal to $0.85 per
      share; and (iv) 600,000 shares of common stock at a price equal to $1.00 per
      share.





The
      Notes
      bear interest at a rate equal to 6% per annum and are convertible at any time
      into shares of common stock of the Company at a conversion price per share
      equal
      to $0.41 (the “Conversion Price”); *provided
      however* ,
      that in
      the event that the Company has not raised at least $1,000,000 in additional
      equity capital between the closing date and the date that is 120 days after
      the
      closing date, the Conversion Price shall automatically become $0.25 per share.





On
      July
      13, 2007, the Company and Cornell entered into an amendment to the Notes
      pursuant to which the Company was granted 210 days after the closing date to
      raise at least $1,000,000 in additional equity capital. In exchange, the Company
      agreed that the Notes will bear interest at a rate equal to 10% per annum
      beginning on July 29, 2007, which represents the 121 st day from
      March 30, 2007, until such date as the additional equity capital is raised
      in
      full, at which such time the interest rate shall revert back to 6% per annum.


F-28





**Item
      2. Management's Discussion and Analysis or Plan of Operation**





**Cautionary
      and Forward Looking Statements**





Our
      representatives and we may from time to time make written or oral statements
      that are "forward-looking," including statements contained in this 10-QSB and
      other filings with the Securities and Exchange Commission, reports to our
      stockholders and news releases. All statements that express expectations,
      estimates, forecasts or projections are forward-looking statements within the
      meaning of the Act. In addition, other written or oral statements which
      constitute forward-looking statements may be made by us or on our behalf. Words
      such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
      "estimates," "projects," "forecasts," "may," "should," variations of such words
      and similar expressions are intended to identify such forward-looking
      statements. These statements are not guarantees of future performance and
      involve risks, uncertainties and assumptions which are difficult to predict.
      Therefore, actual outcomes and results may differ materially from what is
      expressed or forecasted in or suggested by such forward-looking statements.
      We
      undertake no obligation to update publicly any forward-looking statements,
      whether as a result of new information, future events or otherwise. Important
      factors on which such statements are based are assumptions concerning
      uncertainties, including but not limited to uncertainties associated with the
      following:





(a)
      volatility or decline of our stock price;





(b)
      potential fluctuation in quarterly results;





(c)
      our
      failure to earn revenues or profits;





(d)
      inadequate capital and barriers to raising the additional capital or to
      obtaining the financing needed to implement its business plans;





(e)
      inadequate capital to continue business;





(f)
      changes in demand for our products and services;





(g)
      rapid
      and significant changes in markets;





(h)
      litigation with or legal claims and allegations by outside parties;
      or





(i)
      insufficient revenues to cover operating costs.




There
      is
      no assurance that we will be profitable, we may not be able to successfully
      develop, manage or market our products and services, we may not be able to
      attract or retain qualified executives and technology personnel, our products
      and services may become obsolete, government regulation may hinder our business,
      additional dilution in outstanding stock ownership may be incurred due to the
      issuance of more shares, warrants and stock options, or the exercise of warrants
      and stock options, and other risks inherent in the our businesses.




We
      undertake no obligation to publicly revise these forward-looking statements
      to
      reflect events or circumstances that arise after the date hereof. Readers should
      carefully review the factors described in other documents we file from time
      to
      time with the Securities and Exchange Commission, including the Quarterly
      Reports on Form 10-QSB and Annual Report on Form 10-KSB filed by us in 2007
      and
      any Current Reports on Form 8-K filed by us.





**Overview**





We
      are a
      Nevada corporation formed in June 1994 under the name Cyber Synergy, Inc. to
      develop stock market related software applications. In November 1999, we changed
      our name to Jesse Livermore.com, Inc. In December 2001, we changed our name
      to
      Stock Market Solutions, Inc.





Our
      company was originally founded to assist professional mutual and hedge fund
      traders and managers, as well as individual investors, to more skillfully trade
      in the stock market. We were inactive until entering the development stage
      in
      January 1999. We intended to offer a teaching and a computer-trading program
      designed to provide educational/instructional assistance and aid to those stock
      market traders who wish to learn how to trade in the stock market using a system
      previously developed by an early 20 th century
      stock market trader, Jesse Livermore.





On
      June
      13, 2005, we and a wholly-owned subsidiary of Stock Market Solutions, Inc.
      (“SMS”) entered into an Agreement and Plan of Merger with Texas Prototypes, Inc.
      (“TXP”) whereby SMS, following the effectuation of a 1 for 10 reverse stock
      split, issued shares of its common stock to TXP on May 4, 2006 equal to 94.7%
      of
      its total outstanding shares of common stock, or 89,298,042 shares, within
      ten
      days after completion of the closing conditions under the Merger Agreement,
      the
      principal requirement being the completion of the reverse stock split. In
      exchange, TXP issued 100% of the outstanding shares of common stock, or
      221,051,400 shares, to SMS. TXP merged into a wholly owned subsidiary of SMS
      and
      the separate corporate existence of such subsidiary ceased. TXP continued as
      the
      surviving corporation.




1




On
      March
      31, 2006, SMS obtained the majority vote of its shareholders necessary to
      effectuate the 1 for 10 reverse stock split. On April 26, 2006, the Certificate
      of Merger between TXP and a wholly owned subsidiary of SMS was filed with the
      Secretary of State of the State of Texas. The directors and officers of TXP
      were
      appointed directors and officers of the surviving corporation pursuant to which
      Michael C. Shores and Robert Bruce, the President and CFO of TXP, respectively,
      were appointed as directors and officers of SMS, and Richard Smitten resigned
      as
      the Chief Executive Officer and sole director of SMS. The parties completed
      the
      merger and satisfied all closing conditions as set forth in the Merger Agreement
      on April 28, 2006.




On
      April
      21, 2006, we changed our name to YTXP Corporation, in anticipation of a reverse
      merger with a wholly owned subsidiary of SMS and Texas Prototypes, Inc., and
      our
      stock symbol was changed to “YTXO”. In addition, on July 14, 2006 we changed our
      name to TXP Corporation and our stock symbol was changed to “TXPO”. Further, on
      July 14, 2006 we amended our articles of incorporation to increase the number
      of
      authorized shares of our common stock from 100,000,000 shares to 300,000,000
      shares





For
      accounting purposes, the acquisition has been treated as recapitalization of
      Texas Prototypes, Inc. with Texas Prototypes, Inc. as the acquirer and as the
      continuing reporting entity. Accordingly, financial statements filed for
      post-merger periods will depict the acquisition of YTXP by the accounting
      acquirer and will include financial statements of the accounting acquirer for
      the pre-merger comparable periods.





We
      are a
      provider of Pre-Manufacturing Services for the global electronics industry,
      supporting original equipment manufacturers, original design manufacturers,
      contract manufacturers and new technology innovators. Pre-Manufacturing, also
      referred to as pre-production, consists of the initial activities required
      to
      prepare a product for manufacturing. The success of these early activities
      directly impacts the speed with which a product can be brought to market.
      Pre-Manufacturing Services generally include: electrical design of the product,
      design and fabrication of the printed circuit board (PCB) based on the design,
      development of the material supply chain for parts required to build the desired
      electronic product, manufacture of a small number of initial prototype boards,
      development of procedures and protocol for testing the proper functioning of
      the
      assembled boards, manufacture of another small set of PCB's (referred to as
      a
      pilot production) to effectively confirm the manufacturing process, and then
      the
      transfer of all product build data into a production environment.





In
      December of 2006, TXP created a new business unit, iPhotonics, which focuses
      primarily on the development and sale of Optical Network Terminals (“ONT's”) and
      related accessories and to a lesser extent related design and development
      services. The iPhotonics business unit intends to operate as an Original Design
      Manufacturer (“ODM”) which means we will manufacture products that are
      ultimately branded by another organization for sale. A primary attribute of
      this
      business model is that the ODM owns and/or designs in-house the products that
      are branded by the buying firm. ONTs are the customer premise located devices
      used by a carrier to serve residential and business customers over a PON-based
      (Passive Optical Networking) system. PON is a maturing point-to-multipoint
      technology which is being adopted by telephone companies globally because of
      its
      cost effectiveness in extending fiber-based service delivery all the way to
      the
      customer premise (Fiber-to-the-Home [FTTH] or Fiber-to-the-Premise [FTTP]).
      TXP's ONTs will sit at each customer premise and will be connected over fiber
      to
      an Optical Line Terminal (OLT) generally located in the carrier's central
      office. A single OLT can deliver services to thousands of ONTs.





For
      the
      year ended December 31, 2006 and 2005, we generated revenues of $8,228,000
      and
      $9,400,000, respectively, and incurred a net loss of $4,592,000 and $595,000,
      respectively. For the quarters ended June 30, 2007 and 2006, we generated
      revenues of $3,262,000 and $1,940,000, respectively, and incurred a net loss
      of
      $1,488,000 and $4,805,000, respectively.




Our
      principal executive offices are located at 1299 Commerce Drive Richardson,
      Texas 75081and our telephone number is (214) 575-9300.





**Critical
      Accounting Policies**





Our
      consolidated financial statements are prepared in accordance with accounting
      principles generally accepted in the United States. The preparation of these
      consolidated financial statements requires us to make estimates and assumptions
      that affect the reported amounts of assets, liabilities, revenues, costs and
      expenses, and related disclosures. We evaluate our estimates and assumptions
      on
      an ongoing basis. Actual results may differ from these estimates under different
      assumptions or conditions.





Our
      significant accounting policies are described in Note 2 of the notes to our
      consolidated financial statements contained herein. The following accounting
      policies involve a greater degree of judgment and complexity. Accordingly,
      these
      are the policies we believe are the most critical to aid in fully understanding
      and evaluating our consolidated financial condition and results of
      operations.




***Accounting
      for Convertible Debentures, Warrants and Derivative
      Instruments***





The
      Company accounts for its embedded conversion features and freestanding warrants
      pursuant to SFAS No. 133, "Accounting for Derivative Instruments and Hedging
      Activities", and EITF 00-19, “Accounting for Derivative Financial Instruments
      Indexed to and Potentially Settled in, a Company's Own Stock,” (“EITF 00-19”)
      which requires freestanding contracts that are settled in a company's own stock,
      including common stock warrants, to be designated as an equity instrument,
      asset
      or a liability. Under the provisions of EITF 00-19, a contract designated as
      an
      asset or a liability must be carried at fair value on a company's balance sheet,
      with any changes in fair value recorded in the company's results of operations.
      In accordance with EITF 00-19, certain warrants to purchase common stock and
      embedded conversion options are accounted for as liabilities at fair value
      and
      the unrealized changes in the values of these derivatives are recorded in our
      consolidated statement of operations as “Changes in Fair Value of Derivative
      Financial Instruments”. The recognition of derivative liabilities is applied
      first to the proceeds of such issuance, at the date of issuance, and the excess
      of derivative liabilities over the proceeds is recognized in our consolidated
      statement of operations as “Changes in Fair Value of Derivative Financial
      Instruments.”




2




We
      use
      the Black Scholes Pricing Model to determine fair values of our derivatives.
      Valuations derived from this model are subject to ongoing internal and external
      verification and review. The model uses market-sourced inputs such as interest
      rates, exchange rates and option volatilities. Selection of these inputs
      involves management's judgment and may impact net income. The fair value of
      the
      derivative liabilities are subject to the changes in the trading value of the
      Company's common stock. As a result, the TXP's financial statements may
      fluctuate from quarter-to-quarter based on factors, such as the price of the
      Company's stock at the balance sheet date, the amount of shares converted by
      note holders and/or exercised by warrant holders. Consequently, our financial
      position and results of operations may vary from quarter-to-quarter based on
      conditions other than our operating revenues and expenses.





We
      have
      penalty provisions in the registration rights agreement executed prior to the
      year 2007 of our Cornell debentures and warrants (See NOTE 10-CONVERTIBLE
      DEBENTURES, WARRANTS, AND SECURITIES) that require us to file the registration
      statement no later than 45 days from the date of closing and to use its best
      efforts to cause the registration statement to be declared effective no later
      than 120 days after filing and to insure that the registration statement remains
      in effect until all of the shares of common stock issuable upon conversion
      of
      the debentures and exercise of the warrants have been sold. In the event of
      a
      default of its obligations under the registration rights agreements, including
      its agreement to file the registration statement for the shares of common stock
      issuable upon conversion of the debentures and exercise of the warrants with
      the
      Securities and Exchange Commission no later than 45 days from the date of
      closing, or if the registration statement is not declared effective within
      120
      days of filing, it is required that we pay to Cornell, as liquidated damages,
      for each month that the registration statement has not been filed or declared
      effective, as the case may be, either a cash amount or shares of our common
      stock at Cornell's option equal to 2% of the liquidated value of the debentures.
      The agreement does not specify whether the liquidated damages may be satisfied
      in unregistered shares or how the payment in shares would be valued should
      Cornell elect to be paid liquidated damages in common stock. The Company
      obtained a waiver from Cornell Capital waiving any claim or payment of
      liquidated damages up through and including May 15, 2007. On May 14, 2007,
      the
      SEC declared TXP's registration statement effective for the aforementioned
      shares of common stock issuable upon conversion of the debentures and exercise
      of the warrants.





On
      October 11, 2006, we entered into a Securities Purchase Agreement which provided
      for the filing of a registration statement by the Company with the Securities
      and Exchange Commission registering the shares and the shares common stock
      issuable upon exercise of the warrants. (See NOTE 10 - CONVERTIBLE DEBENTURES,
      WARRANTS, AND SECURITIES) The Company is obligated to file the registration
      statement no later than December 15, 2006 and to use its best efforts to cause
      the registration statement to be declared effective no later than 90 days after
      filing. If the Company does not meet the aforementioned filing and effectiveness
      deadlines, it shall pay to the investor an amount equal to 1% of the purchase
      price for the first 60 days or part thereof of the pendency of such
      non-registration event and 2% for each 30 days or part thereof thereafter,
      of
      the purchase price of the shares and the warrants; provided, however, that
      the
      aforementioned liquidated damages shall only accrue, if at all, for 12 months
      after the closing date.  The Company obtained a waiver from the investor
      waiving any claim or payment of liquidated damages up through and including
      May
      15, 2007. On May 14, 2007, the SEC declared TXP's registration statement
      effective for the aforementioned shares and the shares of common stock issuable
      upon exercise of the warrants.





On
      March
      30, 2007, we entered into a securities purchase agreement which provided for
      the
      filing of a registration statement with the Securities and Exchange Commission
      registering 100% of the shares of common stock issuable upon conversion of
      the
      notes and exercise of the warrants within 30 days of receipt of written demand
      of Cornell. The Company is obligated to use its best efforts to cause the
      registration statement to be declared effective no later than 90 days after
      filing and to insure that the registration statement remains in effect until
      all
      of the shares of common stock issuable upon conversion of the notes and exercise
      of the warrants have been sold. In the event of a default of its obligations
      under the registration rights agreements, including its agreement to file the
      registration statement with the Securities and Exchange Commission no later
      than
      30 days from receipt of a written demand from Cornell, or if the registration
      statement is not declared effective within 90 days of filing, it is required
      pay
      to Cornell, as liquidated damages, for each month that the registration
      statement has not been filed or declared effective, as the case may be, a cash
      amount equal to 2% of the liquidated value of the notes. Notwithstanding the
      foregoing, the Company shall not be liable for liquidated damages with respect
      to any warrants or warrant shares and the maximum aggregate liquidated damages
      payable to Cornell by the Company, if any, shall be 15% of the aggregate
      purchase price paid by Cornell pursuant to the purchase agreement. As of June
      30, 2007, we had not received written demand from Cornell to file a registration
      statement with the Securities and Exchange Commission registering the shares
      of
      common stock issuable upon conversion of the notes and exercise of the warrants
      as set forth in the March 30, 2007 securities purchase
      agreement.





We
      account for these penalties as contingent liabilities, applying the accounting
      guidance of Financial Accounting Standard No. 5, “Accounting for Contingencies”
(“FAS 5”). This accounting is consistent with views established by the Emerging
      Issues Task Force in its consensus set forth in EITF 05-04 and FASB Staff
      Positions FSP EITF 00-19-2 “Accounting for Registration Payment Arrangements”,
      which was issued December 21, 2006. Accordingly, we recognize the damages when
      it becomes probable that they will be incurred and amounts are reasonably
      estimable.




3




**Revenue
      Recognition**





Revenues
      are derived from the following sources:





·
            Prototyping
                and assembly services;





·
            Prototyping
                - Photonics/Optoelectronics
                services;





·
            Material
                supply chain management services;





·
            Turn-key
                solution - consists of material supply chain management services
                and one
                of the other services listed above;





·
            Optical
                Network Terminal (ONT) product and accessory sales;
                and





·
            ONT
                design and development services





The
      following is a description of each revenue source and our revenue recognition
      policy for each source:





Prototyping
      and assembly services typically consist of assembling and designing surface
      mount technology and other build-to-order products to the customer provided
      design specifications. These services are priced based on the complexity,
      time-to turn and unit volume of the customer project. The majority of our
      prototyping and assembly services projects are completed in less than three
      weeks. We recognize revenue when persuasive evidence of an arrangement exists,
      delivery has occurred, services have been performed, the sales price is fixed
      or
      determinable and collectibility is probable. These criteria are generally met
      after an internal quality control review of the product and at the time product
      is shipped.





Prototyping
      - Photonics/Optoelectronics services typically consists of assembling and
      designing optical and optical related products to the customer provided design
      specifications. We recognize revenue when persuasive evidence of an arrangement
      exists, delivery has occurred, services have been performed, the sales price
      is
      fixed or determinable and collectibility is probable. These criteria are
      generally met after an internal quality control review of the product and at
      the
      time product is shipped.





Material
      supply chain management services consists of locating and procuring materials
      according to customer design specifications, qualifying components and auditing
      vendors, inventorying materials, and providing dual vendor sourcing if
      necessary. Material supply chain management services are priced at the cost
      of
      the material plus 5% to 25%. The pricing is solely dependent on the complexity
      and volume of the services performed. We recognize revenue when persuasive
      evidence of an arrangement exists, delivery has occurred, services have been
      performed, the sales price is fixed or determinable and collectibility is
      probable. These criteria are generally met at the time materials have been
      received and inventoried, and the materials have shipped.





Turn-key
      solution is a combination of material supply chain management and one of the
      other service revenue sources described above. Revenue is generally recognized
      after both services have been performed and the products have
      shipped.





Optical
      Network Terminal (ONT) product and accessory sales. In December of 2006, TXP
      created a new business unit, iPhotonics, which focuses primarily on the
      development and sale of ONT's and related accessories. ONTs are the customer
      premise located devices used by a carrier to serve residential and business
      customers over a PON-based (Passive Optical Networking) system. PON is a
      maturing point-to-multipoint technology which is being adopted by telephone
      companies globally because of its cost effectiveness in extending fiber-based
      service delivery all the way to the customer premise (Fiber-to-the-Home [FTTH]
      or Fiber-to-the-Premise [FTTP]). TXP's ONTs will sit at each customer premise
      and will be connected over fiber to an Optical Line Terminal (OLT) generally
      located in the carrier's central office. A single OLT can deliver services
      to
      thousands of ONTs. We recognize revenue when persuasive evidence of an
      arrangement exists, delivery has occurred, services have been performed, the
      sales price is fixed or determinable and collectibility is probable. These
      criteria are generally met after an internal quality control review of the
      product and at the time product is shipped.





ONT
      design and development services. TXP offers contract services related to the
      design and development of ONT products and accessories. TXP recognizes design
      and development services revenue using the percentage-of-completion method
      of
      accounting, in accordance with SOP 81-1, “Accounting for Performance of
      Construction-Type and Certain Production-Type Contracts.” Revenues are
      recognized primarily based on costs incurred to date compared with total
      estimated contract costs. Generally our design and development service costs
      consist of engineering labor costs.





**Allowance
      for Doubtful Accounts**





Our
      allowance for doubtful accounts relates to trade accounts receivable. The
      allowance for doubtful accounts is an estimate prepared by management based
      on
      identification of the collectibility of specific accounts and the overall
      condition of the receivable portfolios. We specifically analyze individual
      customer balances in trade receivables, historical bad debts, customer credits,
      customer concentrations, customer credit-worthiness, current economic trends
      and
      changes in customer payment terms when evaluating the adequacy of the allowance
      for doubtful accounts. If the financial condition of our customers were to
      deteriorate, resulting in an impairment of their ability to make payments,
      additional allowances may be required. Likewise, should we determine that we
      would be able to realize more of its receivables in the future than previously
      estimated, an adjustment to the allowance would increase income in the period
      such determination was made. The allowance for doubtful accounts is reviewed
      on
      a quarterly basis and adjustments are recorded as deemed necessary.




4


**Property
      and Equipment**




Property
      and equipment are stated at cost less accumulated depreciation. Major renewals
      and improvements are capitalized; minor replacements, maintenance and repairs
      are charged to current operations. Depreciation is computed by applying the
      straight-line method over estimated useful lives, which are generally three
      to
      seven years.





**COMPARISON
      OF QUARTER ENDED JUNE 30, 2007 ("2007") TO THE QUARTER ENDED JUNE 30, 2006
      ("2006")**





***Revenues***




TXP
      currently derives the majority of its revenue from our prototyping and assembly
      and material supply chain management services. Prototyping services are priced
      based on the complexity, time-to turn and volume of the customer project. TXP's
      material supply chain management services are priced at the cost of the material
      plus 5% to 25%. Prototyping and assembly and material supply chain services
      projects are typically purchase order driven rather than long-term contracts
      and
      vary significantly from customer to customer. Thus our revenues can be difficult
      to predict and may vary significantly from quarter to quarter. Total revenues
      increased 70% from $1,940,000 in 2006 to $3,296,000 in 2007 or by $1,356,000.
      Material supply chain management services increased 153% from $557,000 in 2006
      to $1,409,000 in 2007. Prototyping and assembly services increased 33% from
      $1,383,000 in 2006 to $1,838,000 in 2007 or $455,000. Included in this increase
      were sales of $294,000 in 2007 to customers related to build-to-order
      tele-communications product assemblies compared to sales of $520,000 in 2006.
      TXP also had revenues of $49,000 related to GPON and BPON ONT product and
      accessory sales in 2007 compared to $0 in 2006 as the Iphotonics group was
      not
      formed until late Q4 2006. The overall increase in revenues is attributed to
      an
      increasing customer base, continued demand from existing customers, and our
      new
      iPhotonic's offerings including GPON and BPON development services and product
      and accessory sales. TXP expanded its customer base from 93 in 2006 to 129
      in
      2007. Total active customers for the quarters ending June 30, 2007 and 2006
      were
      44 and 33, respectively. TXP's top five customers accounted for 64% of revenue
      in 2007 and 62% of revenue in 2006





***Cost
      of Sales and Gross Profit***




Cost
      of
      sales consists of direct material, manufacturing overhead, labor costs,
      depreciation expense on machinery and equipment, equipment lease, and set-up
      and
      tooling charges associated with performing our services. Cost of sales increased
      from $1,172,000 in 2006 to $2,008,000 in 2007 or $836,000. Other direct material
      costs and production supplies increased from $791,000 in 2006 to $1,450,000
      in
      2007 or $659,000. Manufacturing overhead and labor cost increased from $296,000
      in 2006 to $506,000 in 2007 or $210,000 due to increased headcount and higher
      manufacturing overhead allocations due to expanded operations. Equipment lease
      decreased from $45,000 in 2006 to $0 in 2007 as we terminated an equipment
      lease
      in Q4 2006 and purchased the equipment. Depreciation charged to cost of sales
      increased from $41,000 in 2006 to $52,000 in 2007 in-line with capital
      expenditures on equipment and other fixed assets used in the manufacturing
      process.





Gross
      profit is dependent on the scope and the nature of the customer project and
      thus
      can vary significantly. Customer projects requiring a turnkey solution which
      includes both prototyping and material supply chain management services
      typically results in a lower margin than prototyping services only. Margins
      on
      prototyping services can range from 30% to 85% while margins on material supply
      chain management services can range from 5% to 25%.





Gross
      profit increased from $768,000 in 2006 to $1,288,000 in 2007 or $520,000.
      Revenues increased for the same period by $1,356,000. During the same period
      the
      gross margin decreased from 40% in 2006 to 39% in 2007 due to a slightly
      negative change in revenue mix compared to 2006.





***Selling,
      General and Administrative Expenses***




Selling
      general administrative expense (“SGA”) consists of personnel costs including
      taxes and benefits, rent and utilities, contract labor, insurance, professional
      fees, marketing, telecommunication, internet costs, and other administrative
      expenses. SGA expenses decreased by $374,000 from $1,422,000 in 2006 to
      $1,048,000 in 2007. During 2006, TXP had merger costs and aborted offering
      costs
      of $52,000 and $697,000, respectively, that did not recur in 2007. Personnel
      costs increased as costs increased from $506,000 in 2006 to $620,000 in 2007
      or
      by $114,000. Included in this personnel increase was a net increase of
      approximately $60,000 of stock compensation expense incurred as result of
      employee stock and stock option awards in 2007 compared to 2006. The remaining
      increase in personnel costs reflect salary increases for certain employees,
      addition of employees, and increases in company paid benefits including medical
      and dental insurance from 2006 to 2007. Contract labor increased $36,000
      compared to 2006 as the company retained a business consultant to support and
      assist management in the sales, strategy and operations of the newly formed
      iPhotonics business unit. Sales and Marketing increased $58,000 due to expanded
      efforts to promote the company since becoming public in April of 2006.
      Professional fees increased by $53,000 as legal, accounting, printing, investor
      relations, and transfer agent fees increased due to our becoming public in
      April
      of 2006. Travel and entertainment costs increased from $27,000 in 2006 to
      $62,000 in 2007 because of increased international and domestic travel related
      to establishing and developing our iPhotonics business unit. Provision for
      bad
      debt increased from $0 in 2006 to $10,000 in 2007.




5




***Research
      and Development***





Research
      and development (“RD”) consists of materials, wages, contract services and other
      reasonable allocation of indirect costs that have no future alternative use
      and
      which are consumed in the research and development of our Optical Network
      Terminals. RD increased from $0 in 2006 to $1,261,000 in 2007 as TXP's
      iPhotonics' business unit was established in Q4 2006 which included the hiring
      of 35 full-time employees and prior to that no RD was performed.





***Depreciation
      Expense***





Depreciation
      expense, net amounts included as a component of cost of sales, increased from
      $22,000 in 2006 to $37,000 in 2007. The increase was in-line with capital
      expenditures and depreciable asset base.




***Net
      Interest Expense***





Net
      interest expense increased from $271,000 in 2006 to $457,000 in 2007 or by
      $186,000. Approximately $124,000 of the increase relates to additional
      amortization of note discounts and accrued interest on our secured convertible
      debentures issued to Cornell Capital. TXP amortized $30,000 of debt issue costs
      to interest expense in 2007 related to its $3 million line of credit which
      originated in subsequent to Q2 2006. Interest expense on our lines of credit
      increased from $5,000 in 2006 to $28,000 in 2007 or by $23,000. The remaining
      increase in interest expense relates to increases on the outstanding balances
      of
      our loans and capital lease obligations from 2006 to 2007.





***Change
      in Fair Value of Derivative Financial Instruments***





Income
      from change in fair value of derivative financial instruments **** was
      $61,000 in 2007 compared to $4,323,000 of expense in 2006. We account for all
      derivative financial instruments in accordance with SFAS No. 133. Derivative
      financial instruments are initially recorded as liabilities in the consolidated
      balance sheet, at fair value. Derivative instrument liabilities are
      re-valued at the end of each reporting period, with changes in the fair value
      of
      the derivative liability recorded in our consolidated statement of operations
      as
“Changes in Fair Value of Derivative Financial Instruments” in the period in
      which the changes occur. As a result, our financial statements may fluctuate
      from quarter-to-quarter based on factors, such as the price of our stock at
      the
      balance sheet date, the amount of shares converted by note holders and/or
      exercised by warrant holders. Consequently, our financial position and results
      of operations may vary from quarter-to-quarter based on conditions other than
      our operating revenues and expenses.




**COMPARISON
      OF THE 6 MONTHS ENDED JUNE 30, 2007 ("2007") TO THE 6 MONTHS ENDED JUNE 30,
      2006
      ("2006")**





***Revenues***




TXP
      currently derives the majority of its revenue from our prototyping and assembly
      and material supply chain management services. Prototyping services are priced
      based on the complexity, time-to turn and volume of the customer project. TXP's
      material supply chain management services are priced at the cost of the material
      plus 5% to 25%. Prototyping and assembly and material supply chain services
      projects are typically purchase order driven rather than long-term contracts
      and
      vary significantly from customer to customer. Thus our revenues can be difficult
      to predict and may vary significantly from quarter to quarter. Total revenues
      increased 59% from $3,442,000 in 2006 to $5,480,000 in 2007 or by $2,038,000.
      Material supply chain management services increased 66% from $1,187,000 in
      2006
      to $1,974,000 in 2007. Prototyping and assembly services increased 38% from
      $2,255,000 in 2006 to $3,106,000 in 2007 or $851,000. Included in this increase
      were sales of $478,000 in 2007 to customers related to build-to-order
      tele-communications product assemblies compared to sales of $672,000 in 2006.
      In
      addition, TXP had revenues of $332,000 in 2007 related to design and development
      services performed by its iPhotonics group which was formed in Q4 of 2006.
      TXP
      does not expect to generate significant future design and development revenues.
      The entire $332,000 of design and development services revenue is attributable
      to design and development work performed for Siemens related to completing
      certain Optical Network Terminal (“ONT”) development hardware and software
      releases. The Siemens design and development project was consideration given
      by
      TXP in a non-monetary transaction whereby we received certain ONT assets from
      Siemens (See Note 15 of the financial statements included herein for further
      discussion of the non-monetary transaction). TXP also had revenues of $68,000
      related to GPON and BPON ONT product and accessory sales in 2007 compared to
      $0
      in 2006 as the Iphotonics group was not formed until late Q4 2006. The overall
      increase in revenues is attributed to an increasing customer base, continued
      demand from existing customers, and our new iPhotonic's offerings including
      GPON
      and BPON development services and product and accessory sales. TXP expanded
      its
      customer base from 93 in 2006 to 129 in 2007. Total active customers for the
      six
      months ending June 30, 2007 and 2006 were 40 and 32, respectively. TXP's top
      five customers accounted for 61% of revenue in 2007 and 63% of revenue in
      2006.





***Cost
      of Sales and Gross Profit***




Cost
      of
      sales consists of direct material, manufacturing overhead, labor costs,
      depreciation expense on machinery and equipment, equipment lease, and set-up
      and
      tooling charges associated with performing our services. Cost of sales increased
      from $2,215,000 in 2006 to $3,457,000 in 2007 or $1,242,000. Other direct
      material costs and production supplies increased from $1,432,000 in 2006 to
      $2,099,000 in 2007 or $667,000. Manufacturing overhead and labor cost increased
      from $611,000 in 2006 to $921,000 in 2007 or $310,000 due to increased headcount
      and higher manufacturing overhead allocations due to expanded operations.
      Equipment lease decreased from $90,000 in 2006 to $0 in 2007 as we terminated
      an
      equipment lease in Q4 2006 and purchased the equipment. Depreciation charged
      to
      cost of sales increased from $81,000 in 2006 to $104,000 in 2007 in-line with
      capital expenditures on equipment and other fixed assets used in the
      manufacturing process. Direct labor and personnel costs attributable to design
      and development services performed by our iPhotonic's business unit increased
      to
      $332,000 compared to $0 in 2006.




Gross
      profit is dependent on the scope and the nature of the customer project and
      thus
      can vary significantly. Customer projects requiring a turnkey solution which
      includes both prototyping and material supply chain management services
      typically results in a lower margin than prototyping services only. Margins
      on
      prototyping services can range from 30% to 85% while margins on material supply
      chain management services can range from 5% to 25%. Margins on our design and
      development services were 0% as the revenues were recorded at our costs which
      consisted of labor and personnel costs.





Gross
      profit increased from $1,227,000 in 2006 to $2,023,000 in 2007 or $796,000.
      Revenues increased for the same period by $2,038,000. During the same period
      the
      gross margin increased from 36% in 2006 to 37% in 2007 due to a slightly
      positive change in revenue mix compared to 2006. Additionally, overall margins
      were negatively impacted by 2 percentage points in 2007 since our development
      and services revenues of $332,000 were not marked up and reflected our costs
      and
      thus had no margin.





***Selling,
      General and Administrative Expenses***




Selling
      general administrative expense (“SGA”) consists of personnel costs including
      taxes and benefits, rent and utilities, contract labor, insurance, professional
      fees, marketing, telecommunication, internet costs, and other administrative
      expenses. SGA expenses decreased by $236,000 from $2,014,000 in 2006 to
      $2,250,000 in 2007. During 2006, TXP had merger costs and aborted offering
      costs
      of $52,000 and $697,000, respectively, that did not recur in 2007. Personnel
      costs increased as costs increased from $971,000 in 2006 to $1,463,000 in 2007
      or by $492,000. Included in this personnel increase was a net increase of
      approximately $345,000 of stock compensation expense incurred as result of
      employee stock and stock option awards in 2007 compared to 2006. The remaining
      increase in personnel costs reflect salary increases for certain employees,
      addition of employees and increases in company paid benefits including medical
      and dental insurance from 2006 to 2007. Contract labor increased $95,000
      compared to 2006 as the company retained a business consultant to support and
      assist management in the sales, strategy and operations of the newly formed
      iPhotonics business unit. Sales and Marketing increased $70,000 due to expanded
      efforts to promote the company since becoming public in April of 2006.
      Professional fees increased by $134,000 as legal, accounting, printing, investor
      relations, and transfer agent fees increased due to our becoming public in
      April
      of 2006. Travel and entertainment costs increased from $48,000 in 2006 to
      $115,000 in 2007 because of increased international and domestic travel related
      to establishing and developing our iPhotonics business unit. Provision for
      bad
      debt increased from $0 in 2006 to $10,000 in 2007.




6




***Research
      and Development***





Research
      and development (“RD”) consists of materials, wages, contract services and other
      reasonable allocation of indirect costs that have no future alternative use
      and
      which are consumed in the research and development of our Optical Network
      Terminals. RD increased from $0 in 2006 to $2,007,000 in 2007 as TXP's
      iPhotonics' business unit was established in Q4 2006 which included the hiring
      of 35 full-time employees and prior to that no RD was performed.





***Depreciation
      Expense***





Depreciation
      expense, net amounts included as a component of cost of sales, increased from
      $42,000 in 2006 to $69,000 in 2007. The increase was in-line with capital
      expenditures and depreciable asset base.




***Net
      Interest Expense***





Net
      interest expense increased from $326,000 in 2006 to $701,000 in 2007 or by
      $375,000. Approximately $247,000 of the increase relates to additional
      amortization of note discounts and accrued interest on our secured convertible
      debentures issued to Cornell Capital. TXP amortized $59,000 of debt issue costs
      to interest expense in 2007 related to its $3 million line of credit which
      originated in subsequent to Q2 2006. Interest expense on our lines of credit
      increased from $11,000 in 2006 to $61,000 in 2007 or by $50,000. The remaining
      increase in interest expense relates to increases on the outstanding balances
      of
      our loans and capital lease obligations from 2006 to 2007.





***Change
      in Fair Value of Derivative Financial Instruments***





Income
      from Change in fair value of derivative financial instruments **** was
      $1,172,000 in 2007 compared to $4,323,000 in expense in 2006. We account for
      all
      derivative financial instruments in accordance with SFAS No. 133. Derivative
      financial instruments are initially recorded as liabilities in the consolidated
      balance sheet, at fair value. Derivative instrument liabilities are re-valued
      at
      the end of each reporting period, with changes in the fair value of the
      derivative liability recorded in our consolidated statement of operations as
      “Changes in Fair Value of Derivative Financial Instruments” in the period in
      which the changes occur. As a result, our financial statements may fluctuate
      from quarter-to-quarter based on factors, such as the price of our stock at
      the
      balance sheet date, the amount of shares converted by note holders and/or
      exercised by warrant holders. Consequently, our financial position and results
      of operations may vary from quarter-to-quarter based on conditions other than
      our operating revenues and expenses.




**Liquidity
      and Capital Resources**





TXP's
      principal potential sources of liquidity are cash on hand, cash generated from
      current revenues and cash provided from financing activities. As of June 30,
      2007, TXP had cash and cash equivalents of $351,000.





During
      2007, TXP used $3,198,000 in operating activities compared to using $735,000
      during 2006. Cash used in operating activities during 2007 reflects $1,832,000
      in net loss, $245,000 in depreciation, $10,000 in provision for bad debt,
      $478,000 in debt discount amortization, $345,000 in stock compensation,
      $1,172,000 in change (credit) in fair value of derivative financial instruments
      and $319,000 in deferred revenue. Accounts receivable and Inventory increased
      by
      $260,000 and $963,000, respectively, to decrease working capital by $1,189,000.
      TXP obtained cash from working capital changes of $270,000 consisting of
      increases in accounts payable and accrued expenses of $168,000 and $74,000,
      respectively, and a decrease in other current assets of $28,000.





Cash
      used
      in operating activities during 2006 reflects $4,995,000 in net loss, $123,000
      in
      depreciation, $248,000 in debt discount amortization, $465,000 in gain on
      extinguishment of debt, $18,000 in gain on sale of fixed assets, $697,000 in
      aborted offering costs, and $4,323,000 in change in fair value of derivative
      financial instruments. Accounts receivable, inventory, other current assets,
      deferred offering costs, and other assets increased by $553,000, $99,000,
      $32,000, $9,000 and $1,000 respectively decreasing working capital. The Company
      obtained cash for working capital changes consisting of increases in accounts
      payable and accrued expenses of $29,000 and $17,000, respectively.





During
      2007, TXP used $113,000 in investing activities reflecting capital expenditures
      for plant, property and equipment and software.





During
      2006, TXP used $95,000 in investing activities reflecting capital expenditures
      for plant, property and equipment and software of $155,000 net of $60,000 in
      proceeds received from the sale of fixed assets.





During
      2007, financing activities provided net cash of $3,434,000 as the result of
      issuances of $4,000,000 in convertible debentures to Cornell Capital partially
      offset by fees and offering costs incurred of $385,000 to secure the
      transaction. We received net proceeds from draw downs on our lines of credit
      of
      $50,000. Total repayments on loans and capital lease obligations amounted to
      $231,000.




7




During
      2006, financing activities provided net cash of $693,000 as the result of
      issuances of $550,000 in convertible debentures to Cornell Capital partially
      offset by fees paid of $70,000 to secure the transaction as well as proceeds
      from an unsecured note payable from the majority shareholder for $150,000 and
      a
      draw down on our line of credit for $150,000. Total repayments on debt amounted
      to $87,000.




**STANDBY
      EQUITY DISTRIBUTION AGREEMENT**





In
      August
      2004, TXP entered into a Standby Equity Distribution Agreement. Under this
      agreement, TXP may issue and sell common stock to Cornell Capital Partners
      ("Cornell") for a total purchase price of up to $15.0 million. Subject to
      certain conditions, TXP will be entitled to commence drawing down on the Standby
      Equity Distribution Agreement when common stock issued under the Standby Equity
      Distribution Agreement is registered with the SEC and TXP is within the
      commitment period as defined under the terms of the agreement. The commitment
      period is the period commencing on the earlier to occur of the effective date
      (which is the date on which the SEC first declares effective a registration
      statement registering the resale of the common stock under the Standby Equity
      Distribution Agreement), or such earlier date as TXP and Cornell may mutually
      agree in writing, and expiring on the earliest to occur of the date on which
      the
      Cornell shall have made payment of advances pursuant to the agreement in the
      aggregate amount of $15,000,000, or the date occurring 24 months after the
      effective date.





The
      purchase price for the shares will be equal to 100% of the market price, which
      is defined as the lowest closing bid price of the common stock during the five
      trading days following the notice date. A cash fee equal to 5% of the cash
      proceeds of the draw down is also payable at the time of funding. To date,
      TXP
      has not drawn down on the Standby Equity Distribution Agreement.





TXP
      is
      currently unable to register the shares of common stock issuable to Cornell
      under the Standby Equity Distribution Agreement because the terms of the
      agreement are not consistent with the SEC's guidance regarding the terms of
      equity line financings that may be registered. TXP and Cornell Capital have
      not
      taken any steps to date to revise the standby equity distribution agreement,
      or
      any other applicable transaction documents in connection with the equity line,
      so that the resale of the shares issuable under the equity line may be
      registered with the SEC in accordance with such guidance.





In
      conjunction with the Standby Equity Distribution Agreement, TXP issued a
      $400,000 compensation debenture to Cornell Capital. In June of 2006, the Company
      issued 1,700,000 shares of common stock in the exchange for full settlement
      of
      this $400,000 compensation debenture and another $240,000 convertible debenture
      that was issued to Cornell Capital by YTXP (f/k/a Stock Market Solutions Inc)
      for separate standby equity distribution agreement that was terminated prior
      to
      the merger in April of 2006. The combined carrying value of both debentures
      amounted to $685,000 which included the fair value of an embedded conversion
      option and accrued interest. The fair market value of the stock was $850,000
      on
      the date of settlement. The Company realized a $165,000 loss on early
      extinguishment of debt as a result of the settlement. At the time of issuance,
      the $400,000 debenture was recorded as a liability and as a deferred offering
      cost on the balance sheet of the Company. This cost and other costs consisting
      of related legal, and accounting were charged to expense on April 28, 2006
      upon
      consummation of the merger and recapitalization (See Note 2) when the Company
      became subject to SAB Topic 5A. SAB TOPIC 5A considers significant delays in
      offerings to be aborted and that the offering costs should be
      expensed.





***June
      5, 2006 Secured Convertible Debentures and
      Warrants***





On
      June
      5, 2006, the Company consummated a securities purchase agreement dated June
      5,
      2006 with Cornell providing for the sale by the company to Cornell of its 10%
      secured convertible debentures in the aggregate principal amount of $1,127,000
      with principal and interest due on or before June 5, 2009. The terms of this
      debenture require the Company to obtain prior written consent from the holder,
      Cornell Capital, so long as any of the principal or interest on this debenture
      remains unpaid and unconverted before issuing or selling any common stock or
      preferred stock without consideration or for a consideration per share less
      than
      its lowest bid price determined immediately prior to its issuance, or issuing
      or
      selling any preferred stock, warrant, option, right, contract, call, or other
      security or instrument granting the holder thereof the right to acquire common
      stock without consideration or for a consideration per share less than such
      common stock's fair market value determined immediately prior to its issuance,
      or file any registration statement on Form S-8 for more than 10,000,000 shares
      of common stock. Additionally, the terms of this debenture provide holder,
      Cornell Capital, with a right of first refusal on capital raises by the Company.
      Specifically, for a period if 18 months after the Closing Date, if the Company
      intends to raise additional capital by the issuance or sale of capital stock
      of
      the Company, including without limitation shares of any class of common stock,
      any class of preferred stock, options, warrants or any other securities
      convertible or exercisable into shares of common stock (whether the offering
      is
      conducted by the Company, underwriter, placement agent or any third party)
      the
      Company shall be obligated to offer to the Holder such issuance or sale of
      capital stock, by providing in writing the principal amount of capital it
      intends to raise and outline of the material terms of such capital raise, prior
      to the offering such issuance or sale of capital stock  to any third
      parties including, but not limited to, current or former officers or directors,
      current or former shareholders and/or investors of the obligor, underwriters,
      brokers, agents or other third parties.  Cornell shall have 10 business
      days from receipt of such notice of the sale or issuance of capital stock to
      accept or reject all or a portion of such capital raising offer. The debenture
      is secured by a second priority security interest in all of our goods,
      inventory, contractual rights and general intangibles, receivables, documents,
      instruments, and chattel paper. In the event of default, Cornell may cause
      the
      obligation to become immediately due and payable. In addition, upon the
      occurrence of an event of default, Cornell shall: (i) be entitled to
      receive all distributions with respect to the pledged property, (ii) to
      cause the pledged property to be transferred into the name of the secured party
      or its nominee, (iii) to dispose of the pledged property, and (iv) to
      realize upon any and all rights in the pledged property then held by Cornell;
      provided however, that Cornell security interest is second in priority behind
      First Bank Canyon Creek.




8




The
      Company also issued to Cornell warrants to purchase 1,850,000 and 1,850,000
      shares of common stock at a price equal to $0.50 and $0.70 per share,
      respectively. The warrants expire five years from the date of issuance. Cornell
      may exercise the warrants on a cashless basis if the shares of common stock
      underlying the warrants are not then registered pursuant to an effective
      registration statement. In the event Cornell exercises the warrants on a
      cashless basis, then the Company will not receive any proceeds. In addition,
      the
      exercise price of the warrants will be adjusted in the event the Company issues
      common stock at a price below market, with the exception of any securities
      issued as of the date of the warrants or issued in connection with the secured
      convertible notes issued pursuant to securities purchase agreement. There can
      be
      no assurance to how many, if any, of these warrants will be exercised. The
      exercise price of the warrants may be adjusted in certain circumstances such
      as
      if the Company pays a stock dividend, subdivides or combines outstanding shares
      of common stock into a greater or lesser number of shares, or takes such other
      actions as would otherwise result in dilution of the selling stockholders'
      position.





The
      first
      debenture amounting to $550,000 matures on the third anniversary of the date
      of
      issuance and the Company is not required to make any payments until the maturity
      date. The debentures are convertible at any time into shares of common stock
      of
      the company at a conversion price per share equal to the lesser of (i) $0.50,
      or
      (ii) 95% of the lowest daily volume weighted average price of the common stock,
      as quoted by Bloomberg, LP, for the 30 trading days immediately preceding the
      date of conversion (“Variable Market Price”). Unless waived by the Company, the
      holders may not, together with their affiliates, convert more than an aggregate
      of $150,000 in any 30-day period of principal amount of the debentures at the
      Variable Market Price. The conversion option to convert at an amount equal
      to
      95% of the lowest daily volume weighted average price of the common stock,
      as
      quoted by Bloomberg, LP, for the 30 trading days immediately preceding the
      date
      of conversion is deemed to be a financial derivative under SFAS 133 and EITF
      00-19. Specifically, the conversion option was analyzed under paragraph 12
      SFAS
      133 and determined to be an embedded derivative that should be separated from
      the host contract and then further evaluated using EITF 00-19 paragraphs 12
      -32
      which required the conversion option to be recorded as liability at fair value.
      Specifically, the variable conversion pricing aspects of the convertible
      debenture as discussed above were analyzed under paragraph 12 SFAS 133 and
      determined to be an embedded derivative that should be separated from the host
      contract since all of the following criteria were met:





·
            The
                economic characteristics and risks of the embedded derivative instrument
                are not clearly and closely related to the economic characteristics
                and
                risks of the host contract.




·
            The
                contract ("the hybrid instrument") that embodies both the embedded
                derivative instrument and the host contract is not re-measured at
                fair
                value under otherwise applicable generally accepted accounting principles
                with changes in fair value reported in earnings as they
                occur.




·
            A
                separate instrument with the same terms as the embedded derivative
                instrument would, pursuant to paragraphs 6-11, be a derivative instrument
                subject to the requirements of this
                Statement.




The
      embedded derivative was then evaluated using EITF 00-19 paragraphs 12 -32 to
      determine whether the embedded derivative should be classified as a liability
      or
      as equity. The Company concluded that the conversion option should be recorded
      as a liability at fair value since all of the criteria for recording as equity
      were not met under EITF 00-19 including the ability to have sufficient
      authorized shares to fulfill our potential obligations under the convertible
      debentures. If a company could be required to obtain shareholder approval to
      increase the company's authorized shares in order to net-share or physically
      settle a contract, share settlement is not controlled by the
      company.





The
      Company has the right to redeem a portion or all amounts outstanding under
      the
      debentures prior to the maturity date at a 20% redemption premium provided
      that
      the closing bid price of the common stock is less than $0.50. The convertible
      debentures are secured by substantially all the Company's assets. On October
      11,
      2006, the Company exercised its right to redeem the June 5, 2006 convertible
      debenture.




In
      addition, on June 5, 2006 the Company issued to Cornell an amended and restated
      convertible debenture, on the same terms and conditions as set forth above
      which
      consolidates all outstanding amounts of the convertible debenture issued by
      Texas Prototypes, Inc. to Cornell on June 15, 2005 in the amount of $550,000,
      plus accrued and unpaid interest in the amount of $27,000 through June 5, 2006,
      for the principal sum of $577,000. The Company reviewed EITF 05-07 “Accounting
      for Modifications to Conversion Options Embedded in Debt Instruments and Related
      Issues” and EIFT 96-19 “Debtor's Accounting for a Modification or Exchange of
      Debt Instruments” and deemed that the modifications and amendments were
      substantial and determined that debt extinguishment had occurred as the cash
      flow effect (including the changes in fair value of the embedded conversion
      option) on a present value basis exceeded 10%. The Company recorded a gain
      on extinguishment debt of $630,000 in the consolidated statements of operations
      as a result of the modification. On October 11, 2006, the Company exercised
      its
      right to redeem the June 5, 2006 convertible debenture.





On
      October 11, 2006, the Company exercised its right to redeem both debentures
      issued on June 5, 2006. The Company paid Cornell Capital $1,392,000 which was
      calculated by multiplying the principal balance of both debentures by 120%
      plus
      the accrued interest on the debentures. The combined carrying value of both
      debentures amounted to $1,088,000. The Company recorded a $304,000 loss in
      the
      consolidated statements of operations on extinguishment of debt related to
      the
      redemption in October of 2006.




9




***Cornell
      Capital Registration Rights Agreement***





In
      connection with all of the above secured convertible debentures and warrants
      issued to Cornell Capital prior to the year 2007, the Company entered into
      registration rights agreements providing for the filing of a registration
      statement with the Securities and Exchange Commission registering the common
      stock issuable upon conversion of the debentures and exercise of the warrants.
      The Company is obligated to file the Registration Statement no later than 45
      days from the date of closing and to use its best efforts to cause the
      registration statement to be declared effective no later than 120 days after
      filing and to insure that the registration statement remains in effect until
      all
      of the shares of common stock issuable upon conversion of the debentures and
      exercise of the warrants have been sold. In the event of a default of its
      obligations under the registration rights agreements, including its agreement
      to
      file the registration Statement with the Securities and Exchange Commission
      no
      later than 45 days from the date of closing, or if the registration statement
      is
      not declared effective within 120 days of filing, it is required that the
      Company pay to Cornell, as liquidated damages, for each month that the
      registration statement has not been filed or declared effective, as the case
      may
      be, either a cash amount or shares of our common stock equal to 2% of the
      liquidated value of the debentures. The Company obtained a waiver from
      Cornell Capital waiving any claim or payment of liquidated damages up through
      and including May 15, 2007. On May 14, 2007, the SEC declared TXP's registration
      statement effective for the aforementioned shares of common stock issuable
      upon
      conversion of the debentures and exercise of the warrants.





***July
      2006 Warrants***





On
      July
      28, 2006, TXP Corporation entered into an Agreement (the "Agreement") with
      James
      Von Ehr, II, an accredited investor (the "Investor"), pursuant to which the
      Company issued to the Investor five-year warrants to purchase an aggregate
      of
      320,000 shares of common stock (the "Warrants") as consideration for the
      Investor agreeing to pledge an aggregate of $2,000,000 in free-trading shares
      of
      common stock of Adobe Systems Incorporated (NASDAQ:ADBE), Fossil Incorporated
      (NASDAQ:FOSL) or such other shares of free-trading common stock having a value
      of $2,000,000 in the aggregate beneficially owned by the Investor as may be
      agreed upon between the parties (the “Collateral”).





The
      Collateral is to be pledged on behalf of the Company in favor of First Bank
      of
      Canyon Creek, or such other lending or financing institution as may be agreed
      upon between the parties (a “Lender”), as Collateral for a loan to be obtained
      by the Company from a Lender in an amount up to $2,000,000 with a term of up
      to
      2 years (the “Term”), which will be further guaranteed personally and through
      the pledge of common stock beneficially owned by the Company's Chief Executive
      Officer.





The
      warrants are exercisable into shares of the Company's common stock at a price
      equal to $0.50 per share. The investor may exercise the warrants on a cashless
      basis at his option. In the event the investor exercises the warrants on a
      cashless basis, then the Company will not receive any proceeds. The exercise
      price of the warrants may be adjusted in certain circumstances such as if the
      Company pay a stock dividend, subdivide or combine outstanding shares of common
      stock into a greater or lesser number of shares, or take such other actions
      as
      would otherwise result in dilution of the selling stockholders'
      position.




In
      addition, the Company shall prepare and file with the SEC a separate
      registration statement on Form SB-2 covering the resale of all of the warrant
      shares with no later than 45 days from closing. The Company shall use its best
      efforts to have the registration statement declared effective by the SEC as
      soon
      as practicable, but in no event later than 120 days after the initial filing.
      There are no liquidating damages clauses related to the warrant or agreement
      with the investor. On May 14, 2007, the SEC declared TXP's registration
      statement effective for the aforementioned shares of common stock issuable
      upon
      exercise of the warrants.




As
      additional consideration of the Investor's agreement to pledge the Collateral
      to
      a Lender, the Company agreed to pay to the Investor a one-time commitment fee,
      during the Term, of $40,000 (the “Commitment Fee”) no later than 90 days after
      the Collateral is deposited into the account of a Lender; provided, however,
      that the Company shall pay an additional Commitment Fee within 90 days after
      the
      renewal of the Loan by a Lender. TXP consummated the loan facility with the
      First Bank of Canyon Creek in early Q3 2006 (See Note 6).





The
      Company accounted for these warrants pursuant to SFAS No. 133, "Accounting
      for
      Derivative Instruments and Hedging Activities", and EITF 00-19, “Accounting for
      Derivative Financial Instruments Indexed to and Potentially Settled in, a
      Company's Own Stock,” (“EITF 00-19”) which requires freestanding contracts that
      are settled in a company's own stock, including common stock warrants, to be
      designated as an equity instrument, asset or a liability. On the date the
      warrants were issued the Company had convertible debenture instruments that
      did
      not have limits on the net shares that potentially would have to have been
      delivered in a net share settlement, the Company was precluded from concluding
      it had sufficient shares authorized and unissued to net-share settle the
      warrants and fair valued the warrants as a liability. Accordingly, under the
      provisions of EITF 00-19, these warrants were initially designated as a
      liability to be carried at fair value on a company's balance sheet, with any
      changes in fair value recorded in the company's results of
      operations.





EITF
      00-19 also requires that the classification of a contract should be reassessed
      at each balance sheet date. If the classification required under this issue
      changes as a result of events during the period, the contract should be
      reclassified as of the date of the event that caused the reclassification.
      At
      March 31, 2007, the Company reviewed the contracts, in its case the warrants,
      and determined because the convertible debenture that did not have limits on
      the
      net shares that would have to be delivered in net share settlement was fully
      converted during the period, that the Company now had sufficient authorized
      and
      unissued shares to net-share settle the warrants. Accordingly, these warrants
      and all other warrants were reclassified from liabilities to equity and no
      gains
      or losses recorded during the period that warrants were classified as
      liabilities were reversed. The Company reassessed the classification of all
      contracts at June 30, 2007 and determined that there were no events that
      occurred during the period that required contract reclassification




10




***October
      2006 Warrants***





On
      October 12, 2006, the Company entered into an Agreement (the "Agreement") with
      James Von Ehr, II, an accredited investor pursuant to which the Company issued
      to the investor five-year warrants to purchase an aggregate of 640,000 shares
      of
      common stock (the "Warrants") as consideration for the investor agreeing to
      pledge an aggregate of $2,000,000 in free-trading shares of common stock of
      Adobe Systems Incorporated (NASDAQ:ADBE), Fossil Incorporated (NASDAQ:FOSL)
      or
      such other shares of free-trading common stock having a value of $2,000,000
      in
      the aggregate beneficially owned by the Investor as may be agreed upon between
      the parties (the “Collateral”).





The
      Collateral is to be pledged on behalf of the Company in favor of First Bank
      of
      Canyon Creek, or such other lending or financing institution as may be agreed
      upon between the parties (a “Lender”), as Collateral for a loan to be obtained
      by the Company from a Lender in an amount up to $2,000,000 with a term of up
      to
      1 year (the “Term”), which will be further guaranteed personally and through the
      pledge of common stock beneficially owned by Michael C. Shores, the Company's
      Chief Executive Officer.




The
      warrants are exercisable into shares of the Company's common stock at a price
      equal to $0.50 per share. The investor may exercise the warrants on a cashless
      basis at his option. In the event the investor exercises the warrants on a
      cashless basis, then the Company will not receive any proceeds. The exercise
      price of the warrants may be adjusted in certain circumstances such as if the
      Company pay a stock dividend, subdivide or combine outstanding shares of common
      stock into a greater or lesser number of shares, or take such other actions
      as
      would otherwise result in dilution of the selling stockholders'
      position.





In
      addition, the agreement provides for the filing of a registration statement
      by
      the Company with the Securities and Exchange Commission registering the common
      stock issuable upon exercise of the warrants and the common stock issued for
      the
      commitment fee. The Company is obligated to file the registration statement
      no
      later than 65 days from the date of closing and to use its best efforts to
      cause
      the registration statement to be declared effective no later than 120 days
      after
      filing and to insure that the registration statement remains in effect until
      all
      of the shares of common stock issuable upon exercise of the warrants have been
      sold. There are no liquidating damages clauses related to the warrant or
      agreement with the investor. On May 14, 2007, the SEC declared TXP's
      registration statement effective for the aforementioned shares of common stock
      issuable upon exercise of the Warrants




As
      additional consideration of the investor's agreement to pledge the collateral
      to
      a Lender, the Company agreed to pay to the investor a one-time commitment fee
      during the Term of 125,000 shares of the Company's common stock (the “Commitment
      Fee”) no later than 90 days after the Collateral is deposited into the account
      of a Lender; provided, however, that the Company shall pay an additional
      Commitment Fee within 90 days after the renewal of the Loan by a Lender. TXP
      increased its Line of Credit from $1 million to $3 million with the First Bank
      of Canyon Creek in Q4 2006 (See Note 6).




The
      Company accounted for these warrants pursuant to SFAS No. 133, "Accounting
      for
      Derivative Instruments and Hedging Activities", and EITF 00-19, “Accounting for
      Derivative Financial Instruments Indexed to and Potentially Settled in, a
      Company's Own Stock,” (“EITF 00-19”) which requires freestanding contracts that
      are settled in a company's own stock, including common stock warrants, to be
      designated as an equity instrument, asset or a liability. On the date the
      warrants were issued the Company had convertible debenture instruments that
      did
      not have limits on the net shares that potentially would have to have been
      delivered in a net share settlement, the Company was precluded from concluding
      it had sufficient shares authorized and unissued to net-share settle the
      warrants and fair valued the warrants as a liability. Accordingly, under the
      provisions of EITF 00-19, these warrants were initially designated as a
      liability to be carried at fair value on a company's balance sheet, with any
      changes in fair value recorded in the company's results of
      operations.





EITF
      00-19 also requires that the classification of a contract should be reassessed
      at each balance sheet date. If the classification required under this issue
      changes as a result of events during the period, the contract should be
      reclassified as of the date of the event that caused the reclassification.
      At
      March 31, 2007, the Company reviewed the contracts, in its case the warrants,
      and determined because the convertible debenture that did not have limits on
      the
      net shares that would have to be delivered in net share settlement was fully
      converted during the period, that the Company now had sufficient authorized
      and
      unissued shares to net-share settle the warrants. Accordingly, these warrants
      and all other warrants were reclassified from liabilities to equity and no
      gains
      or losses recorded during the period that warrants were classified as
      liabilities were reversed. The Company reassessed the classification of all
      contracts at June 30, 2007 and determined that there were no events that
      occurred during the period that required contract reclassification.





***October
      2006 Securities Purchase Agreement***





On
      October 11, 2006, TXP entered into a securities purchase agreement (the
“Purchase Agreement”) with an qualified institutional buyer pursuant to which
      the Company sold an aggregate of $1,500,000 in shares (the “Shares”) of the
      Company's common stock, par value $.001 per share, at a per share purchase
      price
      of $.32, together with five year warrants to purchase 2,343,750 shares of common
      stock at an exercise price equal to $0.50 per share and five year warrants
      to
      purchase 2,343,750 shares of common stock at an exercise price equal to $0.70
      per share (collectively, the “Warrants”). The entire purchase price of the
      shares and the warrants was used by the Company to redeem its principal amount
      $550,000 and $577,000 10% secured convertible debentures issued to Cornell
      Capital Partners, L.P. in June 2005 and June 2006, respectively, each at a
      20%
      premium, for a total redemption price of approximately $1,392,000.




11




The
      exercise prices of the warrants are subject to adjustment in certain events,
      including, without limitation, upon the Company's consolidation, merger or
      sale
      of all of substantially all of its assets, a reclassification of the Company's
      common stock, or any stock splits, combinations or dividends with respect to
      the
      Company's common stock. In addition, the Company has the option to call all
      or a
      portion of the Warrants so long as (i) the closing bid price of the Company's
      common stock is trading at or above $1.50 for 20 consecutive trading days
      immediately preceding the call date, and (ii) the shares of common stock
      underlying the Warrants are registered under an effective registration statement
      on the call date.





Further,
      the purchase agreement provides for the filing of a registration statement
      by
      the Company with the Securities and Exchange Commission registering the shares
      and the shares common stock issuable upon exercise of the warrants. The Company
      is obligated to file the registration statement no later than December 15,
      2006
      and to use its best efforts to cause the registration statement to be declared
      effective no later than 90 days after filing. If the Company does not meet
      the
      aforementioned filing and effectiveness deadlines, it shall pay to the investor
      an amount equal to 1% of the purchase price for the first 60 days or part
      thereof of the pendency of such non-registration event and 2% for each 30 days
      or part thereof thereafter, of the purchase price of the shares and the
      warrants; provided, however, that the aforementioned liquidated damages shall
      only accrue, if at all, for 12 months after the closing date.  The Company
      obtained a waiver from the investor waiving any claim or payment of liquidated
      damages up through and including May 15, 2007. On May 14, 2007, the SEC declared
      TXP's registration statement effective for the aforementioned shares and the
      shares common stock issuable upon exercise of the warrants.





The
      Company accounted for these warrants pursuant to SFAS No. 133, "Accounting
      for
      Derivative Instruments and Hedging Activities", and EITF 00-19, “Accounting for
      Derivative Financial Instruments Indexed to and Potentially Settled in, a
      Company's Own Stock,” (“EITF 00-19”) which requires freestanding contracts that
      are settled in a company's own stock, including common stock warrants, to be
      designated as an equity instrument, asset or a liability. On the date the
      warrants were issued the Company had convertible debenture instruments that
      did
      not have limits on the net shares that potentially would have to have been
      delivered in a net share settlement, the Company was precluded from concluding
      it had sufficient shares authorized and unissued to net-share settle the
      warrants and fair valued the warrants as a liability. Accordingly, under the
      provisions of EITF 00-19, these warrants were initially designated as a
      liability to be carried at fair value on a company's balance sheet, with any
      changes in fair value recorded in the Company's results of
      operations.





EITF
      00-19 also requires that the classification of a contract should be reassessed
      at each balance sheet date. If the classification required under this issue
      changes as a result of events during the period, the contract should be
      reclassified as of the date of the event that caused the reclassification.
      At
      March 31, 2007, the Company reviewed the contracts, in our case the warrants,
      and determined because the convertible debenture that did not have limits on
      the
      net shares that would have to be delivered in net share settlement was fully
      converted during the period, that the company now had sufficient authorized
      and
      unissued shares to net-share settle the warrants. Accordingly, these warrants
      and all other warrants were reclassified from liabilities to equity and no
      gains
      or losses recorded during the period that warrants were classified as
      liabilities were reversed. The Company reassessed the classification of all
      contracts at June 30, 2007 and determined that there were no events that
      occurred during the period that required contract reclassification.





***Line
      of Credit June 1, 2007***





On
      June
      1, 2007 TXP renewed its revolving line of credit for $500,000. The line of
      credit has a one-year term with a variable interest rate of prime plus 2%.
      The
      line of credit is secured by all assets of the Company. The majority shareholder
      and Chief Executive Officer of the Company, Michael C. Shores, has provided
      his
      personal guarantee on this loan (See NOTE 3). Interest payments are due monthly
      beginning July 1, 2007 and the principal is due when the one-year term expires.
      The line of credit has provisions that the maximum TXP may have outstanding
      is
      $500,000 or 70% of the borrowing base, whichever is less. The borrowing base
      is
      defined as the value of accounts receivable less than 90 days past their invoice
      date. TXP was in compliance with these provisions as of June 30, 2007 and
      December 31, 2006. The revolving line of credit also has financial and
      non-financial covenants. A summary of the significant covenants are as
      follows:





·
            Maintain
                a Debt-to-Net Worth Ratio of not greater than 2:1. This ratio is
                calculated by dividing Total Liabilities by Net Worth (total stockholders'
                equity). Net worth is to include the subordinated debt in the form
                of debt
                owed Cornell Capital and likewise is to be excluded from total
                liabilities.




·
            Maintain
                a Current Ratio of not less than 1.1:1. This ratio is to be calculated
                by
                dividing Total Current Assets by Total Current
                Liabilities.




·
            Maintain
                a Debt Coverage Ratio of not less than 1.25:1. This ratio is to be
                calculated by dividing Earnings before Interest, Depreciation, and
                Taxes
                by all principal and interest payments for the
                period.




At
      June
      30, 2007, the Company was in default due to failure to maintain a Debt Coverage
      ratio as provided for in the loan agreement. Any default under the loan
      agreement permits the bank to demand immediate payment of the debt under this
      note including principal and accrued interest. However, the lending institution
      and TXP entered into a forbearance agreement on August 3, 2006 which waived
      non-compliance of this covenant so long as the company maintained the
      Debt-to-net-worth ratio and Current Ratio as provided for in the loan agreement.
      As of June 30, 2007, the Debt-to-net-worth and Current Ratio were in
      compliance with the loan agreement. The balance outstanding on the note at
      June
      30, 2007 and December 31, 2006 was $400,000 and $400,000
      respectively.




***Line
      of Credit November 15, 2006***





The
      Company consummated a loan agreement dated as of August 3, 2006 with a financial
      institution pursuant to which the institution extended a line of credit to
      the
      Company in an aggregate amount of $1,000,000 to be used by the Company for
      working capital and general corporate purposes. On December 21, 2006, the
      Company consummated a second Loan Agreement with the same financial institution
      dated as of November 15, 2006 which renews and supersedes the prior Loan
      Agreement dated as of August 3, 2006 and increased the Company's line of credit
      from $1,000,000 to $3,000,000 to be used by the Company for working capital
      and
      general corporate purposes. The Loan pays interest at a rate of 8.00% per annum
      and all principal, and accrued and unpaid interest is due on August 3, 2008.
      The
      Company's obligations under the Loan Agreement are secured by a pledge of an
      aggregate of $3,875,000 in free-trading shares of Fossil Incorporated by an
      Investor of the Company (As more fully discussed in **NOTE 10 - CONVERTIBLE DEBENTURES, WARRANTS, AND SECURITIES** under
      the subheadings “July 2006 Warrants” and “October 2006 Warrants”). In addition,
      the Company's obligations under the Loan Agreement are further guaranteed
      personally and through the pledge of an aggregate of 8,520,000 shares of common
      stock beneficially owned by Michael C. Shores, the Company's Chief Executive
      Officer. As of June 30, 2007 and December 31, 2006, the balance outstanding
      on the line of credit was $1,050,000 and $1,000,000,
      respectively.




12




**Formation
      of iPhotonics business unit in Q4 2006**





We
      hired
      Siemens' former ONT development team effective at the beginning of Q4 2006.
      As a
      result, TXP has added 35 full-time employees and amended its lease in November
      of 2006 and expanded the operating facility by 16,000 square feet. Incremental
      personnel cost and lease payments are expected to average approximately $290,000
      and $7,000, respectively, per month.





In
      Q4
      2006, we executed a Transfer and License Agreement with Siemens AG in which
      we
      acquired certain assets including fixed assets and component inventory and
      were
      granted non-exclusive, non-transferable, and non-sub licensable rights and
      license to use, copy and otherwise deploy software and code and know-how related
      to its Optical Network Terminal (ONT) technology, supporting both Broadband
      Passive Optical Network (BPON) and Gigabit Passive Optical Network (GPON)
      standards. TXP was also granted non-exclusive, non-transferable, and non-sub
      licensable rights and license to use under the pertinent patents related to
      BPON
      and GPON ONT to manufacture, market and further develop the BPON and GPON ONT
      products. Further, any intellectual property created or made on behalf TXP
      related to BPON or GPON ONTs would become vested to TXP.





TXP
      did
      not pay cash, issue stock or incur financial obligations to acquire the ONT
      assets or use of intellectual property. However, the Transfer and License
      Agreement did provide that we complete development of a release of certain
      GPON
      ONT products by January 31, 2007 and provide Siemens with all pertinent
      documentation, data, software code and files which will enable Siemens to
      manufacture, distribute and further develop or have manufactured, developed
      and
      distributed these releases (See **Note 15** for full
      details of accounting for this transaction). Further that TXP grant Siemens
      a
      non-exclusive, non-transferable, non-sub licensable right and license under
      any
      copyrights and intellectual property to manufacture, distribute and further
      develop or have manufactured, developed and distributed these particular
      releases.





The
      Transfer and License Agreement also provided that the TXP pay to Siemens a
      license fee for three years equal to 5% of revenue generated for any TXP BPON
      products sales in accordance with current BPON design or 2.5% of revenues should
      TXP create a variant of the current BPON design. Additionally, TXP will pay
      Siemens a license fee for three years or $20,000,000, whichever comes first,
      equal to 5% of revenue generated for any TXP GPON products sales in accordance
      with current GPON design or 2.5% of revenues should TXP create a variant of
      the
      current GPON design. The license fees will be payable within twenty (20) days
      of
      the end of each calendar quarter and receipt of Siemens invoice.





The
      BPON
      technology acquired is immediately available for sale to telecommunication
      service providers and Other Equipment Manufacturers (“OEM”). The GPON technology
      acquired is now ready for sale to telecommunication service providers and OEMs
      We expect to have ongoing development related to cost reductions and feature
      enhancements to address customer specific requirements. We completed an ONT
      supply agreement with Siemens and are aggressively marketing our services to
      other service providers, OEM's and distributors. To date BPON and GPON sales
      have been immaterial.




***March
      2007 Securities Purchase Agreement***





On
      March
      30, 2007, TXP consummated a securities purchase agreement with Cornell providing
      for the sale by the Company to Cornell of its 6% secured convertible notes
      in
      the aggregate principal amount of $5,000,000. Under the Purchase Agreement,
      the
      Company also issued to Cornell five-year warrants to purchase (i) 1,500,000
      shares of common stock at a price equal to $0.60 per share; (ii) 1,000,000
      shares of common stock at a price equal to $0.75 per share; (iii) 750,000 shares
      of common stock at a price equal to $0.85 per share; and 600,000 shares of
      common stock at a price equal to $1.00 per share.





The
      notes
      mature on the third anniversary of the date of issuance and bear interest at
      a
      rate equal to 6% per annum. Beginning 12 months after the date of issuance,
      the
      Company shall make monthly payments of interest, and beginning 18 months after
      the date of issuance, the Company shall make monthly payments of interest plus
      principal payments in the amount of $100,000; provided however, that Cornell
      has
      the option to deliver a written notice to the Company within 2 days prior to
      the
      scheduled payment date electing to have all or any portion of scheduled payment
      deferred to the maturity date. Any amount deferred to the maturity date shall
      continue to accrue interest through the maturity date.





In
      addition, the notes are convertible at any time into shares of common stock
      of
      the Company at a conversion price per share equal to $0.41; provided however,
      that in the event that the Company has not raised at least $1,000,000 in
      additional equity capital between the closing date and the date that is 120
      days
      after the closing date, the conversion price shall automatically become $0.25
      per share. The Company has the right to redeem a portion or all amounts
      outstanding under the notes prior to the maturity date at a 20% redemption
      premium provided that the closing bid price of the common stock is less than
      the
      conversion price, the registration statement (as defined below) is effective,
      and no event of default has occurred or is continuing. The Company's obligations
      under the purchase agreement and the notes are secured by substantially all
      of
      the Company's assets; provided however, such security interest is second in
      priority to certain liens granted by the Company in favor of First Bank of
      Canyon Creek. Under the terms of the convertible note, the Company is considered
      to be default upon occurrence of any of the following events:





·
            Any
                default in the payment of the principal of, interest on or other
                charges
                in respect of this Note, free of any claim of subordination, as and
                when
                the same shall become due and payable whether upon an Optional Redemption
                (as defined in*Section 3(a)*),
                the Maturity Date, by acceleration, or
                otherwise;




13




·
            The
                Company or any subsidiary of the Company shall commence, or there
                shall be
                commenced against the Company or any subsidiary of the Company under
                any
                applicable bankruptcy or insolvency laws as now or hereafter in effect
                or
                any successor thereto, or the Company or any subsidiary of the Company
                commences any other proceeding under any reorganization, arrangement,
                adjustment of debt, relief of debtors, dissolution, insolvency or
                liquidation or similar law of any jurisdiction whether now or hereafter
                in
                effect relating to the Company or any subsidiary of the Company or
                there
                is commenced against the Company or any subsidiary of the Company
                any such
                bankruptcy, insolvency or other proceeding which remains undismissed
                for a
                period of 61 days; or the Company or any subsidiary of the Company
                is
                adjudicated insolvent or bankrupt; or any order of relief or other
                order
                approving any such case or proceeding is entered; or the Company
                or any
                subsidiary of the Company suffers any appointment of any custodian,
                private or court appointed receiver or the like for it or any substantial
                part of its property which continues undischarged or unstayed for
                a period
                of sixty one (61) days; or the Company or any subsidiary of the Company
                makes a general assignment for the benefit of creditors; or the Company
                or
                any subsidiary of the Company shall fail to pay, or shall state that
                it is
                unable to pay, or shall be unable to pay, its debts generally as
                they
                become due; or the Company or any subsidiary of the Company shall
                call a
                meeting of its creditors with a view to arranging a composition,
                adjustment or restructuring of its debts; or the Company or any subsidiary
                of the Company shall by any act or failure to act expressly indicate
                its
                consent to, approval of or acquiescence in any of the foregoing;
                or any
                corporate or other action is taken by the Company or any subsidiary
                of the
                Company for the purpose of effecting any of the
                foregoing;




·
            The
                Company or any subsidiary of the Company shall default in any of
                its
                obligations under any other debenture or any mortgage, credit agreement
                or
                other facility, indenture agreement, factoring agreement or other
                instrument under which there may be issued, or by which there may
                be
                secured or evidenced any indebtedness for borrowed money or money
                due
                under any long term leasing or factoring arrangement of the Company
                or any
                subsidiary of the Company in an amount exceeding $100,000, whether
                such
                indebtedness now exists or shall hereafter be created and such default
                shall result in such indebtedness becoming or being declared due
                and
                payable prior to the date on which it would otherwise become due
                and
                payable;




·
            The
                Common Stock shall cease to be quoted for trading or listing for
                trading
                on any of (a) the American Stock Exchange, (b) New York Stock Exchange,
                (c) the Nasdaq National Market, (d) the Nasdaq Capital Market, or
                (e) the
                Nasdaq OTC Bulletin Board (“OTC”)
                (each, a “Primary
                Market”)
                and shall not again be quoted or listed for trading on any Primary
                Market
                within five (5) Trading Days of such
                delisting;




·
            The
                Company or any subsidiary of the Company shall be a party to any
                Change of
                Control Transaction (as defined in*Section 6*);




·
            The
                Company shall fail to file the Underlying Shares Registration Statement
                (as defined in*Section 6*)
                with the Commission (as defined in*Section 6*),
                or the Underlying Shares Registration Statement shall not have been
                declared effective by the Commission, in each case within the time
                periods
                set forth in the Investor Registration Rights Agreement (“Registration
                Rights Agreement”)
                of even date herewith, between the Company and the
                Holder;




·
            If
                the effectiveness of the Underlying Shares Registration Statement
                lapses
                for any reason or the Holder shall not be permitted to resell the
                shares
                of Common Stock underlying this Note under the Underlying Shares
                Registration Statement, in either case, for more than five (5) consecutive
                Trading Days or an aggregate of eight Trading Days (which need not
                be
                consecutive Trading Days);




·
            The
                Company shall fail for any reason to deliver Common Stock certificates
                to
                a Holder prior to the fifth (5th)
                Trading Day after a Conversion Date, or the Company shall provide
                notice
                to the Holder, including by way of public announcement, at any time,
                of
                its intention not to comply with requests for conversions in accordance
                with the terms hereof;




·
            The
                Company shall fail for any reason to deliver the payment in cash
                pursuant
                to a Buy-In (as defined herein) within three (3) days after notice
                is
                claimed delivered hereunder;




14




·
            The
                Company shall fail to observe or perform any other covenant, agreement
                or
                warranty contained in, or otherwise commit any breach or default
                of any
                provision of this Note (except as may be covered by*Section 2(a)(i) through 2(a)(ix)*hereof) or any Transaction Document (as defined in*Section 6*)
                which is not cured with in the time prescribed, or an Event of Default
                under any other debenture issued to the Holder in connection with
                the
                Securities Purchase Agreement shall
                occur;




During
      the time that any portion of the note is outstanding, if any event of default
      has occurred and shall continue for a period of 10 days after a notice of such
      default has been delivered by the Holder to the Company (the “Notice
      Period ”),
      the
      full principal amount of the note, together with interest and other amounts
      owing in respect thereof, to the date of acceleration shall become at the
      holder's election, immediately due and payable in cash, *provided however* , the
      holder may request (but shall have no obligation to request) payment of such
      amounts in common stock of the Company. If an event of default shall occur
      the
      conversion price shall be reduced to 20% of the lowest volume weighted average
      price, as quoted by Bloomberg, LP, of the common stock during the 30 trading
      days immediately preceding the date upon which the event of default occurred
      (the “ Default
      Conversion Price ”),
      provided however, that the default conversion price may not be lower than $0.10,
      as adjusted pursuant to this note.





The
      securities purchase agreement places certain restrictions on the issuance of
      capital stock by the company. Specifically, so long as any convertible notes
      are
      outstanding, the Company shall not, without the prior written consent of the
      Buyer(s), (i) issue or sell shares of common stock or preferred stock without
      consideration or for a consideration per share less than the bid price of the
      common stock determined immediately prior to its issuance, (ii) issue any
      preferred stock, warrant, option, right, contract, call, or other security
      or
      instrument granting the holder thereof the right to acquire common stock without
      consideration or for a consideration less than such common stock's bid price
      determined immediately prior to it's issuance, (iii) enter into any security
      instrument granting the holder a security interest in any and all assets of
      the
      Company, or (iv) file any registration statement on Form S-8, except in
      connection with the registration of common stock issued pursuant to a bona
      fide
      approved stock plan up to a maximum of 10,000,000 shares of common stock. These
      restrictions on the issuance of capital stock do not apply to excluded
      securities which is defined as follows:





“(a)
      shares issued or deemed to have been issued by the Company pursuant to an
      approved stock plan (b) shares of common stock issued or deemed to be issued
      by
      the Company upon the conversion, exchange or exercise of any right, option,
      obligation or security outstanding on the date prior to date of the securities
      purchase agreement, provided that the terms of such right, option, obligation
      or
      security are not amended or otherwise modified on or after the date of the
      securities purchase agreement, and provided that the conversion price, exchange
      price, exercise price or other purchase price is not reduced, adjusted or
      otherwise modified and the number of shares of common stock issued or issuable
      is not increased (whether by operation of, or in accordance with, the relevant
      governing documents or otherwise) on or after the date of the securities
      purchase agreement, (c) the shares of common stock issued or deemed to be
      issued by the Company upon conversion of this note, (d) any issuance by the
      Company of securities in connection with a strategic partnership or a joint
      venture (the primary purpose of which is not to raise equity capital), (e)
      any
      issuance by the Company of securities as consideration for a merger or
      consolidation or the acquisition of a business, product, license, or other
      assets of another person or entity, (f) securities which may be issued by the
      Company for aggregate gross proceeds not to exceed Two Million Dollars
      ($2,000,000) from sources other than the Buyer(s) in the next six (6) months
      from the date hereof."





The
      securities purchase agreement provides Cornell with rights of first refusal.
      From the date of the first closing until twenty-four (24) months thereafter,
      if
      the Company intends to raise additional capital by the issuance or sale of
      capital stock of the Company, including without limitation shares of any class
      of common stock, any class of preferred stock, options, warrants or any other
      securities convertible or exercisable into shares of common stock (whether
      the
      offering is conducted by the Company, underwriter, placement agent or any third
      party) the Company shall be obligated to offer to the buyers such issuance
      or
      sale of capital stock, by providing in writing the principal amount of capital
      it intends to raise and outline of the material terms of such capital raise,
      prior to the offering such issuance or sale of capital stock  to any third
      parties including, but not limited to, current or former officers or directors,
      current or former shareholders and/or investors of the obligor, underwriters,
      brokers, agents or other third parties.  The Buyers shall have 10 business
      days from receipt of such notice of the sale or issuance of capital stock to
      accept or reject all or a portion of such capital raising offer.





In
      connection with the purchase agreement, the Company also entered into
      registration a rights agreement (the “Registration Rights Agreement”) providing
      for the filing of a registration statement (the “Registration Statement”) with
      the Securities and Exchange Commission registering 100% of the shares of common
      stock issuable upon conversion of the notes and exercise of the warrants within
      30 days of receipt of written demand of Cornell. The Company is obligated to
      use
      its best efforts to cause the registration statement to be declared effective
      no
      later than 90 days after filing and to insure that the registration statement
      remains in effect until all of the shares of common stock issuable upon
      conversion of the notes and exercise of the warrants have been sold. In the
      event of a default of its obligations under the registration rights agreements,
      including its agreement to file the registration statement with the Securities
      and Exchange Commission no later than 30 days from receipt of a written demand
      from Cornell, or if the registration statement is not declared effective within
      90 days of filing, it is required pay to Cornell, as liquidated damages for
      each
      month that the registration statement has not been filed or declared effective,
      as the case may be, a cash amount equal to 2% of the liquidated value of the
      notes. Notwithstanding the foregoing, the Company shall not be liable for
      liquidated damages with respect to any warrants or warrant shares and the
      maximum aggregate Liquidated Damages payable to Cornell by the Company, if
      any,
      shall be 15% of the aggregate purchase price paid by Cornell pursuant to the
      purchase agreement. As of June 30, 2007, we had not received written demand
      from
      Cornell to file a registration statement with the Securities and Exchange
      Commission registering the shares of common stock issuable upon conversion
      of
      the notes and exercise of the warrants as set forth in the March 30, 2007
      securities purchase agreement.




15




The
      conversion option to convert the convertible note into equity is deemed to
      be a
      financial derivative under SFAS 133 and EITF 00-19. Specifically, the conversion
      option was analyzed under paragraph 12 SFAS 133 and determined to be an embedded
      derivative that should be separated from the host contract and then further
      evaluated using EITF 00-19 paragraphs 12 -32 which required the conversion
      option to be recorded as liability at fair value. Specifically, the variable
      conversion option pricing aspects of the convertible debenture as discussed
      above were analyzed under paragraph 12 SFAS 133 and determined to be an embedded
      derivative that should be separated from the host contract since all of the
      following criteria were met:





·
            The
                economic characteristics and risks of the embedded derivative instrument
                are not clearly and closely related to the economic characteristics
                and
                risks of the host contract.




·
            The
                contract ("the hybrid instrument") that embodies both the embedded
                derivative instrument and the host contract is not re-measured at
                fair
                value under otherwise applicable generally accepted accounting principles
                with changes in fair value reported in earnings as they
                occur.




·
            A
                separate instrument with the same terms as the embedded derivative
                instrument would, pursuant to paragraphs 6-11, be a derivative instrument
                subject to the requirements of this
                Statement.




Under
      EITF 00-19, paragraph four provides that if an embedded derivative is indexed
      to
      the reporting entity's own stock and would be classified in stockholders' equity
      if it was a freestanding derivative, that embedded derivative is not considered
      a derivative for purposes of Statement 133. The Task Force reached a consensus
      that for purposes of evaluating under Statement 133 whether an embedded
      derivative indexed to a company's own stock would be classified in stockholders'
      equity if freestanding, the requirements of paragraphs 12-32 of this issue
      do
      not apply if the hybrid contract is a conventional convertible debt instrument
      in which the holder may only realize the value of the conversion option by
      exercising the option and receiving the entire proceeds in a fixed number of
      shares or the equivalent amount of cash (at the discretion of the issuer).
      Since
      the conversion ratio may be modified under certain events, including that the
      Company has not raised at least $1,000,000 in additional equity capital between
      the closing date and the date that is 120 days after the closing date, the
      conversion price shall automatically become $0.25 per share; and that in the
      event of default, the conversion price may be adjusted down, but not below
      $0.10, based on the market price of the stock as discussed above. Accordingly,
      the Company believes this note is considered “conventional convertible debt” as
      defined by EITF 00-19. The embedded conversion option was then evaluated using
      EITF 00-19 paragraphs 12 -32 to determine whether the embedded derivative should
      be classified as a liability or as equity. The Company concluded that the
      conversion option should be recorded as a liability at fair value since all
      of
      the criteria for recording as equity were not met under EITF 00-19 including
      that there was no requirement in the contract to post collateral at any point
      or
      for any reason.




This
      convertible note was originally discounted by $3,826,000. The discount included
      $350,000 in fees paid to the lender and 195,122 shares of common stock issued
      valued at $76,000 based on the closing price of common stock on the date of
      issuance. Additionally, the note was further discounted by $2,603,000 upon
      bifurcation and recording at fair value the embedded conversion option, and
      by
      $797,000 representing the fair value of the warrants issued in conjunction
      the
      note. The discount is being amortized over the life of the notes of three years.
      At June 30, 2007 the convertible debenture had balance of $493,000 net
      $3,507,000 of unamortized discount. The effective interest rate on the
      debenture is 10.2% compared to the stated interest of 6% which takes
      into account the debt discount and issue costs related to the
      debenture.





**Cash
      Requirements**





Except
      for the financing agreements with Cornell Capital and other investors discussed
      above, existing financing arrangements, borrowing capacity created by one of
      our
      investors agreeing to pledge collateral on our behalf, and revenue generated
      through its operations, TXP has no other significant sources of working capital
      or cash commitments.





We
      are
      currently unable to register the shares of common stock issuable to Cornell
      under the Standby Equity Distribution Agreement because the terms of the
      agreement are not consistent with the SEC's guidance regarding the terms of
      equity line financings that may be registered. We and Cornell Capital have
      not
      taken any steps to date to revise the standby equity distribution agreement,
      or
      any other applicable transaction documents in connection with the equity line,
      so that the resale of the shares issuable under the equity line may be
      registered with the SEC in accordance with such guidance. Accordingly, TXP
      cannot currently rely upon access to the $15,000,000 standby equity distribution
      agreement. See "Risk Factors."





Additionally,
      until the March 2007 Cornell secured convertible is fully repaid or fully
      converted, we are required to obtain Cornell's consent prior to selling or
      issuing (i) any common stock or preferred stock without consideration or
      for a consideration per share less than its lowest bid price determined
      immediately prior to its issuance, (ii) issue or sell any preferred stock,
      warrant, option, right, contract, call, or other security or instrument granting
      the holder thereof the right to acquire common stock without consideration
      or
      for a consideration per share less than such common stock's fair market value
      determined immediately prior to its issuance, each of which will
      restrict our ability to obtain future financing.





We
      hired
      Siemens' former ONT development team effective at the beginning of Q4 2006
      and
      formed our iPhotonics' business unit. As a result, TXP has added 35 full-time
      employees and amended its lease in November of 2006 and expanded the operating
      facility by 16,000 square feet. Incremental personnel cost and lease payments
      are expected to average approximately $290,000 and $7,000, respectively, per
      month. Other research and development and operational costs are expected to
      average between $100,000 and $150,000 per month for the next twelve months.
      Revenues to date related to the iPhotonics’ business unit have been
      insignificant. Accordingly, there is a high probability that we will be required
      to raise additional capital in order to meet our liquidity needs and satisfy
      our
      current business plan prior to the receipt of significant revenues from sales
      of
      our ONT products. At the present time, we have no legally binding commitments
      for any additional financing, and there can be no assurance that additional
      capital will be available to us on commercially acceptable terms or at all.
      Additional equity financings are likely to be dilutive to holders of our common
      stock. Debt financing, if available, may involve significant payment obligations
      and covenants that restrict how we operate our business or contain rights,
      preferences and privileges senior to our common stock. The Company also may
      be
      required to seek additional financing in the future to respond to increased
      expenses or shortfalls in anticipated revenues, accelerate product development
      and deployment, respond to competitive pressures, develop new or enhanced
      products, or take advantage of unanticipated acquisition opportunities. If
      we
      are unable to obtain additional financing when needed, we could be required
      to
      modify our business plan in accordance with the extent of available financing.
      Finally, we may be required to sell the Iphotonics’ business unit assets or
      shut down its operations.




16




Management
      believes that it has sufficient financing arrangements to satisfy TXP's cash
      requirements for the next twelve months. Management is not depending upon the
      Standby Equity Distribution Agreement to meet its cash requirements for the
      next
      twelve months. If TXP is unable to recognize sufficient proceeds from these
      anticipated arrangements, management believes that it can limit its operations,
      defer payments to management and maintain its business at nominal levels until
      it can identify alternative sources of capital or if necessary cease certain
      operations specifically its Iphotonics’ business unit.





**Off-Balance
      Sheet Arrangements**





We
      do not
      have any off balance sheet arrangements that are reasonably likely to have
      a
      current or future effect on our financial condition, revenues, results of
      operations, liquidity or capital expenditures.




**RISK
      FACTORS**





An
      investment in our shares involves a high degree of risk. Before making an
      investment decision, you should carefully consider all of the risks described
      herein. If any of the risks discussed herein actually occur, our business,
      financial condition and results of operations could be materially and adversely
      affected. If this were to happen, the price of our shares could decline
      significantly and you may lose all or a part of your investment. The risk
      factors described below are not the only ones that may affect us. Our
      forward-looking statements in this 10-QSB are subject to the following risks
      and
      uncertainties. Our actual results could differ materially from those anticipated
      by our forward-looking statements as a result of the risk factors below. See
      "Forward-Looking Statements."





**Risks
      Related to Our Business and Financial Condition**




***We
      have a history of losses, which may continue in the future and which may cause
      us to curtail operations.***




For
      the
      year ended December 31, 2006 and 2005, we generated revenues of $8,228,000
      and
      $9,400,000, respectively. Our accumulated deficit was $5,190,000 at December
      31,
      2006 and $598,000 at December 31, 2005. For the quarter ending June 30, 2007,
      we
      generated revenues of $3,296,000. Our accumulated deficit was $7,022,000. While
      we are building our sales and operating infrastructure, future losses are likely
      to occur, as we are dependent on spending money in excess of funds received
      from
      sales to pay for our operations. No assurances can be given that we will be
      successful in reaching or maintaining profitable operations. Accordingly, we
      may
      experience liquidity and cash flow problems. If our losses continue, our ability
      to operate may be severely impacted which may cause us to cease operations
      altogether.





***We
      are an early-stage company with a short operating history, which makes it
      difficult to evaluate our current business and future
      prospects.***





We
      have a
      limited operating history upon which to base an evaluation of our current
      business and future prospects. We were founded in March 2002 and began selling
      our services that same month. Our limited operating history makes evaluating
      our
      business and prospects very difficult. These risks and difficulties include,
      but
      are not limited to, the following:




·
            Our
                new business and technology models;·
            a
                limited number of service offerings and risks associated with developing
                new service offerings;




·
            the
                difficulties we face in managing rapid growth in personnel and
                operations;·
            the
                negative impact on our brand, reputation or trustworthiness caused
                by any
                significant unavailability of our
                service;




·
            the
                failure to perform our service at our customers' expectations including
                quick turnaround and product quality;·
            the
                timing and success of new service introductions and new technologies
                by
                our competitors; and




17




·
            our
                ability to build brand awareness in a highly fragmented
                market.




We
      may
      not be able to successfully address any of these risks or others. Failure to
      adequately do so could seriously harm our business and cause our operating
      results to suffer.





***Because
      a small number of customers account for a substantial portion of our net sales,
      our net sales could decline significantly if we lose a major customer or a
      major
      customer orders fewer of our services or cancels or delays
      orders.***





Historically,
      we have derived a significant portion of our net sales from a limited number
      of
      customers. Our top five customers, which may vary from year to year and quarter
      to quarter, represented 54% of our net sales in fiscal 2006. AMX Corporation,
      Siemens Networks GmbH Co. KG, and Flextronics accounted for 18%, 12%, and 11%
      respectively of net sales in 2006 while no other customer accounted for more
      than 10% of net sales for 2006. Our top 5 customers represented 61% of net
      sales
      for the six months ended June 30, 2007. Tellabs Inc and AMX Corporation
      accounted for 29% and 13% respectively of net sales in 2007 while no other
      customer accounted for more than 10% of net sales for 2007.  We expect to
      continue to depend upon a small number of customers for a significant portion
      of
      our net sales for the foreseeable future. The loss of, or decline in, orders
      from one or more major customers could reduce our net sales.





***Because
      We Generally Do Not Have Long-Term Contracts With  Our Customers, We Are
      Subject To Uncertainties And Variability In Demand By Our Customers, Which
      Could
      Decrease Net Sales And Negatively Affect Our Operating
      Results.***





As
      is
      common in our industry, we generally do not have long-term contracts with our
      customers, and, consequently, our net sales are subject to short-term
      variability in demand by our customers. Customers have no obligation to order
      from us and may cancel, reduce or delay orders for a variety of reasons. The
      level and timing of orders placed by its customers vary due to:




·
                fluctuation
                    in demand for our customers'
                    products;




·
                changes
                    in customers' manufacturing strategies, such as a decision by
                    a customer
                    to either diversify or consolidate the number of prototyping
                    contract
                    manufacturers used;
  ·
                  customers'
                      inventory management; and
  ·
                    changes
                        in new product
                        introductions.





We
      have
      experienced terminations, reductions and delays in its customers' orders.
      Further terminations, reductions or delays in its customers' orders could lower
      our production asset utilization, which would lower our gross margins, decrease
      our net sales and negatively affect our business.




***Because
      we have only one facility, we could be harmed by adverse weather or operating
      conditions.***




Our
      only
      facility is located in Richardson, Texas. Our inability to continue production
      at this facility as a result of weather conditions, or a prolonged power
      shortage, fire or other natural disaster, could prevent us from supplying
      products to our customers, and could harm our business, results of operations
      and financial condition.





***Products
      we assemble may contain defects, which could result in reduced demand for our
      services and liability claims against us.***





Our
      company assembles highly complex products to our customers' specifications.
      These products may contain assembly errors or failures despite our quality
      control and quality assurance efforts. Defects in the products we assemble,
      whether caused by a design, assembly or materials failure or error, may result
      in delayed shipments, customer dissatisfaction, and/or a reduction in or
      cancellation of purchase orders. If these defects occur either in large
      quantities or too frequently, our business reputation may be impaired. Since
      our
      products are used in products that are integral to our customers' businesses,
      errors, defects or other performance problems could result in financial or
      other
      damages to our customers beyond the cost of the printed circuit board, for
      which
      we may be liable. Although sales arrangements generally contain provisions
      designed to limit our exposure to liability and related claims, existing or
      future laws or unfavorable judicial decisions could negate these limitation
      of
      liability provisions. Liability litigation against us, even if it were
      unsuccessful, would be time consuming and costly to defend.





***Our
      company is exposed to the credit risk of some of our customers as a result
      of a
      concentration of our customer base.***





Most
      of
      our sales are on an "open credit" basis, with standard industry payment terms.
      We monitor individual customer payment capability in granting open credit
      arrangements, and seek to limit open credit to amounts our management believes
      the customers can pay. Further, we maintain reserves we believe are adequate
      to
      cover exposure for doubtful accounts. During periods of economic downturn in
      the
      global economy and the electronics industry, our exposure to credit risks from
      our customers increases. Although we have programs in place to monitor and
      mitigate the associated risk, those programs may not be effective in reducing
      our credit risks.





Five
      companies represented approximately 41% of our net trade accounts receivable
      at
      June 30, 2007, with individual percentages for those companies ranging from
      6%
      to 9%. Our OEM customers direct their sales to a relatively limited number
      of
      EMS providers. Our management expects to continue to be subject to the credit
      risk of a limited number of customers. This concentration of customers exposes
      us to increased credit risks. If one or more of our significant customers were
      to become insolvent or were otherwise unable to pay us, our results of
      operations would be harmed.




18




***Our
      Company depends on industries that continually produce technologically advanced
      products with short life cycles.***




Factors
      affecting these industries in general could seriously harm our customers and,
      as
      a result, our company. These factors include:





·
            slower
                changes in technology, which result in longer product life
                cycles;·
            lack
                of competitive pressure on our customers to develop new
                products;




·
            the
                inability of our customers to successfully develop new product
                innovations, and the failure of these innovations to gain widespread
                market acceptance for commercialization; and·
            maturation
                of the technology markets served by our customers or market periods
                characterized by a lack of disruptions in the enabling
                technology.





***If
      our company cannot deliver the customized complex products in the time demanded
      by our customers, we will be unable to attract new
      customers.***





Our
      future success depends upon our ability to respond quickly to the needs of
      our
      customers and to analyze and advise regarding the best design of complex
      products in a quick and cost efficient manner.




***In
      the past, our customers have canceled their orders, changed pre-production
      quantities or locations or delayed pre-production and new product design cycles,
      and may do so again in the future.***





As
      a
      provider of electronic pre-manufacturing services, we must provide increasingly
      rapid product turnaround for our customers. We generally do not obtain firm,
      long-term purchase commitments from our customers, and we often experience
      reduced lead-times in customer orders. Customers cancel their orders, change
      pre-production quantities, and delay pre-production for a number of reasons.
      Uncertain economic and geopolitical conditions have resulted, and may continue
      to result, in some of our customers delaying prototyping of products that they
      are to assemble in a period, causing a delay in repayment of their expenditures
      for inventory in preparation for customer orders and lower asset utilization,
      resulting in lower gross margins.




In
      addition, our management makes significant decisions, including determining
      the
      levels of business that it seeks and accepts, production schedules, component
      procurement commitments, personnel needs and other resource requirements, based
      on its estimates of customer requirements. The short-term nature of our
      customers' commitments and rapid changes in demand for their products reduces
      our ability to estimate accurately future customer requirements. This makes
      it
      difficult to schedule prototyping production and maximize utilization of our
      operating capacity. We may be forced to increase staffing, increase capacity
      and
      incur other expenses to meet the anticipated demand of our customers, which
      may
      cause reductions in our gross margins if customer orders are cancelled.
      Anticipated orders may not materialize and delivery schedules may be deferred
      as
      a result of changes in demand for our customers' products. On occasion,
      customers may require increases in production development services, which strain
      our resources and reduce our margins. Although we have increased our capacity,
      and may plan further increases, we may not have significant capacity at any
      given time to meet our customers' demands. In addition, because many of our
      cost
      and operating expenses are relatively fixed, a reduction in customer demand
      harms may harm our gross profit and operating income.





***Our
      Operating Results May Vary Significantly From Period To
      Period.***





We
      experience significant fluctuations in our results of operations. Some of the
      principal factors that contribute to these fluctuations are:




·
                changes
                    in demand for our services;
  ·
                  our
                      effectiveness in managing manufacturing processes and costs
                      in order to
                      decrease manufacturing
                      expenses;




·
              changes
                  in our low volume, high mix, high complexity manufacturing
                  requirements;




·
                changes
                    in the cost and availability of labor and components, which often
                    occur in
                    the electronics manufacturing industry and which affect our margins
                    and
                    our ability to meet delivery
                    schedules;




·
                the
                    degree to which we are able to utilize our available manufacturing
                    capacity;




·
                our
                    ability to manage the timing of our component purchases so that
                    components
                    are available when needed for production, while avoiding the
                    risks of
                    purchasing inventory in excess of immediate prototyping
                    needs;




19


·
                local
                    conditions and events that may effect our production volumes,
                    such as
                    labor conditions, political instability and local holidays;
                    and


·
                changes
                    in demand in our customers' end
                    markets.




***Intellectual
      property infringement claims against our customers could harm our
      business.***





Customers
      for our services typically require that we indemnify them against the risk
      of
      intellectual property infringement. If any claims are brought against us or
      our
      customers for such infringement, whether or not these have merit, we could
      be
      required to expend significant resources in defense of such claims. In the
      event
      of such an infringement claim, we may be required to spend a significant amount
      of money to develop non-infringing alternatives or obtain licenses. We may
      not
      be successful in developing such alternatives or obtaining such a license on
      reasonable terms or at all.





***We
      depend on the continuing trend of outsourcing by
      OEMs.***





Future
      growth in our revenue depends on new outsourcing opportunities in which we
      assume additional manufacturing and design responsibilities from OEMs. To the
      extent that these opportunities are not available, either because OEMs decide
      to
      perform these functions internally or because they use other providers of these
      services, our future growth would be limited.





***Our
      industry is extremely competitive.***





The
      prototyping and quick turn sector of the electronics manufacturing services
      industry is extremely competitive and highly fragmented. We principally compete
      in the time-critical segment of the industry against small independent private
      companies and integrated subsidiaries of large, broadly based volume producers,
      as well as the internal capacity of OEMs. Our management believes that
      competition in the market segment we serve is less driven by price because
      customers are willing to pay a premium for a responsive, broad-reaching
      capability to design customized complex products in a very short time.
      Accordingly, we compete primarily on the basis of quick turnaround, product
      quality and customer service.




***Our
      customers may be adversely affected by rapid technological change, which may
      decrease our revenues.***





Our
      customers compete in markets that are characterized by rapidly changing
      technology, evolving industry standards and continuous improvement in products
      and services. These conditions frequently result in a disruption in a product's
      development life cycle. Customers may be adversely affected by maturation of
      the
      technology markets they serve. This lack of innovation and competitive pressure
      in technology development could impact the research and development plans of
      some technology companies. Our success will depend largely on the success
      achieved by our customers in continually developing and marketing new products.
      If the technologies or product development activity supported by our customers
      mature, our business could be adversely affected.





***Our
      limited operating history may impede acceptance of our service by medium-sized
      and large customers and reduce our revenues.***




Although
      we compete in a highly fragmented market, our ability to increase revenue and
      achieve profitability depends, in large part, on widespread acceptance of our
      service by medium-sized and large businesses. Our efforts to sell to these
      customers may not be successful. In particular, because we are a relatively
      new
      company with a limited operating history, these target customers may have
      concerns regarding our viability and may prefer to purchase services from one
      of
      our larger, more established competitors. Even if we are able to sell our
      services to these types of customers, they may insist on additional assurances
      from us that we will be able to provide adequate levels of service, which could
      harm our business.





***As
      More Of Our Sales Efforts Are Targeted At Larger Customers, Our Sales Cycle
      May
      Become More Time-Consuming And Expensive, Potentially Diverting Resources And
      Reducing Our Revenues.***





As
      we
      target more of our sales efforts at larger customers, we will face greater
      costs, longer sales cycles and less predictability in completing some of our
      sales. In this market segment, the customer's decision to use our service may
      be
      an enterprise-wide decision and, if so, these types of sales would require
      us to
      provide greater levels of education to prospective customers regarding the
      use
      and benefits of our service. In addition, larger customers may demand more
      customization, services and features. As a result of these factors, these sales
      opportunities may require us to devote greater sales support and professional
      services resources to individual sales, driving up costs and time required
      to
      complete sales and diverting sales and professional services resources to a
      smaller number of larger transactions.





***If
      We Fail To Develop Our Brand Cost-Effectively, Our Revenues May
      Decline.***





Our
      management believes that developing and maintaining awareness of our brand
      in a
      cost-effective manner are critical to achieving widespread acceptance of our
      existing and future services and are important elements in attracting new
      customers. Furthermore, management believes that the importance of brand
      recognition will increase as competition in our market develops. Successful
      promotion of our brand will depend largely on the effectiveness of our marketing
      efforts and on our ability to provide reliable and useful services at
      competitive prices. In the past, our efforts to build our brand have involved
      significant expense. Brand promotion activities may not yield increased revenue,
      and even if they do, any increased revenue may not offset the expenses we incur
      in building our brand. If we fail to successfully promote and maintain our
      brand, or incur substantial expenses in an unsuccessful attempt to promote
      and
      maintain our brand, we may fail to attract enough new customers or retain our
      existing customers to the extent necessary to realize a sufficient return on
      our
      brand-building efforts, and our business could suffer.




20




***We
      Are Subject To Environmental Compliance Risks.***





We
      are
      subject to various federal, state, local and foreign environmental laws and
      regulations, including those governing the use, storage, discharge and disposal
      of hazardous substances in the ordinary course of our manufacturing process.
      Further, environmental matters may arise in the future at sites where no problem
      is currently known or at sites that we may acquire in the future. Currently
      unexpected costs that we may incur with respect to environmental matters may
      result in loss contingencies, the quantification of which cannot be determined
      at this time.





***If
      we lose key employees and consultants or are unable to attract or retain
      qualified personnel, our business could suffer.*** ****





Our
      success is highly dependent on our ability to attract and retain qualified
      scientific and management personnel. We are highly dependent on our management,
      including Mr. Michael C. Shores, our Chief Executive Officer, who has been
      critical to the development of our technologies and business. The loss of the
      services of Mr. Shores could have a material adverse effect on our operations.
      We do not have an employment agreement with Mr. Shores. Accordingly, there
      can
      be no assurance that he will remain associated with us. His efforts will be
      critical to us as we continue to develop our technology and as we attempt to
      transition from a development state company to a company with commercialized
      products and services. If we were to lose Mr. Shores, or any other key
      consultants, we may experience difficulties in competing effectively, developing
      our technology and implementing our business strategies.




**Risks
      Relating to Our Newly Formed Optical Networking Terminal (“ONT”) Business
      Unit.**





***There
      is a High Probability That We Will Need to Raise Additional Funds In Order
      Achieve ONT Business Objectives.***




There
      is
      a high probability that the Company will be required to raise additional capital
      in order to meet our liquidity needs and satisfy our current business plan
      prior
      to the receipt of significant revenues from sales of our ONT products. At the
      present time, we have no legally binding commitments for any additional
      financing, and there can be no assurance that additional capital will be
      available to us on commercially acceptable terms or at all. We may have
      difficulty obtaining additional funds as and when needed, and we may have to
      accept terms that would adversely affect our stockholders. Additional equity
      financings are likely to be dilutive to holders of our Common Stock and debt
      financing, if available, may involve significant payment obligations and
      covenants that restrict how we operate our business or contain rights,
      preferences and privileges senior to our common stock.





We
      also
      may be required to seek additional financing in the future to respond to
      increased expenses or shortfalls in anticipated revenues, accelerate product
      development and deployment, respond to competitive pressures, develop new or
      enhanced products, or take advantage of unanticipated acquisition opportunities.
      We cannot be certain we will be able to find such additional financing on
      commercially reasonable terms, or at all.





If
      we are
      unable to obtain additional financing when needed, we could be required to
      modify our business plan in accordance with the extent of available financing.
      We also may not be able to accelerate the development and deployment of our
      products, respond to competitive pressures, develop new or enhanced products
      or
      take advantage of unanticipated acquisition opportunities. Finally, we may
      be
      required to sell out assets or shut down the iPhotonics business unit and cease
      its operations.





***We
      have a limited operating history, few customers and no contracts and, as a
      result, it is difficult to predict our future results of
      operations.***





We
      have a
      limited operating history upon which to evaluate our ONT offering. We have
      just
      commenced product shipments to date and have few customers and no contracts.
      Due
      to our limited operating history, it is difficult or impossible for us to
      predict future results of operations. Investors in our common stock must
      consider our business and prospects in light of the risks and difficulties
      typically encountered by companies in their early stages of development,
      particularly those in rapidly evolving markets such as this one.





Our
      ability to become operationally profitable will depend on a number of factors,
      many of which are beyond our control. These factors include:




·
              the
                  rate of market acceptance of fiber to premise in general and the
                  demand
                  for our products in particular;
 
 ·
              our
                  ability to acquire customers and contracts for our
                  products.
 
 ·
              our
                  ability to establish a viable contract manufacturing source for
                  production
                  of our products;
 
 ·
              the
                  competitive environment for ONT customer premises equipment and
                  the rate
                  at which the prices that we are able to command for our products
                  may
                  decline; and


21


·
                our
                    ability to achieve manufacturing and operational efficiencies
                    as we
                    implement our operations.


Due
      to
      these factors, we cannot forecast with any degree of accuracy when or if we
      will
      become operationally profitable or, if we achieve such profitability, that
      we
      would be able to sustain it.





***Our
      potential customer base is concentrated, and the lack of acquisition of one
      or
      more of potential customers could harm our
      business.***





A
      substantial majority of potential end users of our ONT Products in the U.S.
      and
      in other countries are a relatively small number of network service providers.
      If we are not successful in establishing relationships with these few network
      service providers or their OEMS that supply them, our business will be
      harmed.




***Competition
      within the Optical Network Terminal market is intense and includes numerous,
      well established competitors. If we are unable to compete effectively, our
      business would be harmed.***





Competition
      in the ONT customer premises equipment market is intense, and we expect
      competition to increase. Many of our competitors and potential competitors
      have
      substantially greater name recognition and technical, financial and marketing
      resources than we have. In addition, many of our competitors are able to offer
      their customers a range of products of which the ONT premises equipment is
      only
      one element. Customers may prefer to purchase from fewer vendors, and may
      therefore favor competitors with broader product offerings. If we are unable
      to
      compete successfully, our business will be harmed and our results of operations
      and financial condition would be adversely affected. We cannot assure you that
      we will have the financial resources, technical expertise or marketing,
      distribution and support capabilities to compete successfully. Competitive
      pressures could adversely affect us in the following ways once sales commence,
      if they commence at all:




·
              reduce
                  demand for our products if customers shift their purchasing to
                  competitors; or
 
 ·
              cause
                  us to reduce prices on our existing or future products and thereby
                  adversely affect our gross
                  margins.




***Our
      failure to enhance our existing products or to develop and introduce new
      products that meet changing customer requirements and emerging industry
      standards would adversely impact our ability to sell our
      products.***




The
      market for ONT's is characterized by rapidly changing customer demands and
      short
      product life cycles. If our product development and enhancements take longer
      than planned, the availability of our products would be delayed. Any such delay
      could adversely impact our ability to sell our products and our results of
      operations and financial condition would be adversely affected. Our future
      success will depend in large part upon our ability to:




·
              identify
                  and respond to emerging technological trends in the
                  market;
  ·
              develop
                  and maintain competitive products that meet changing customer
                  demands;
  ·
              enhance
                  our products by adding innovative features that differentiate our
                  products
                  from those of our competitors;
  ·
              bring
                  products to market on a timely
                  basis;
  ·
              introduce
                  products that have competitive prices;
                  and
  ·
              respond
                  effectively to new technological changes or new product announcements
                  by
                  others.




**Risks
      Relating to Our Current Financing Arrangements**





***There
      are a large number of shares underlying our convertible notes and warrants
      that
      may be registered in the near future and the sale of these shares may depress
      the market price of our common stock.***




As
      of
      August 9, 2007, we had 112,535,647 shares of common stock issued and
      outstanding. In connection with the financing arrangements that we entered
      into
      on March 30, 2007, we also have outstanding secured convertible note and accrued
      interest that may be converted into an estimated 9,905,246 shares of common
      stock at current market prices. In addition, we have outstanding warrants to
      purchase 13,197,500 shares of common stock. The notes issued on March 30, 2007
      are at a conversion price per share equal to $0.41




The
      shares underlying the convertible note and warrants have not been registered
      but
      the Company intends to register those shares under Form SB-2. Upon effectiveness
      of the registration statement, all of the shares, including all of the shares
      issuable upon conversion of the notes and upon exercise of our warrants, may
      be
      sold without restriction. The sale of these shares may adversely affect the
      market price of our common stock.


22




***The
      issuance of our stock upon the conversion of the convertible note could
      encourage short sales by third parties, which could contribute to the future
      decline of our stock price and materially dilute the existing stockholder's
      equity and voting rights.*** .





The
      convertible note has the potential to cause significant downward pressure on
      the
      price of our common stock. This is particularly the case if the shares being
      placed into the market exceed the market's ability to absorb the increased
      number of shares of stock. Such an event could place further downward pressure
      on the price of our common stock, which presents an opportunity to short sellers
      and others to contribute to the future decline of our stock price. If there
      are
      significant short sales of our stock, the price decline that would result from
      this activity will cause the share price to decline more so, which, in turn,
      may
      cause long holders of the stock to sell their shares thereby contributing to
      sales of stock in the market. If there is an imbalance on the sell side of
      the
      market for the stock, our stock price will decline.





***The
      issuance of shares upon conversion of the convertible note and exercise of
      warrants issued to Cornell Capital Partners, L.P. may result in substantial
      dilution to the interests of other stockholders and a change of control of
      our
      company since the selling stockholders may ultimately convert and sell the
      full
      amount issuable on conversion.***




The
      issuance of shares upon conversion of the convertible note and exercise of
      warrants issued to Cornell Capital Partners, L.P., and the other selling
      stockholders with respect to outstanding warrants, may result in substantial
      dilution to the interests of other stockholders and a change in control of
      our
      company since the selling stockholder may ultimately convert and sell the full
      amount issuable on conversion.





***If
      we are required for any reason to repay our outstanding convertible note, we
      would be required to deplete our working capital, if available, or raise
      additional funds. Our failure to repay the convertible note, if required, could
      result in legal action against us, which could require the sale of substantial
      assets*** .




Our
      convertible note matures three years from the date of issuance, unless sooner
      converted into shares of our common stock. Beginning in month twelve, we are
      required to make monthly interest payments and beginning in month eighteen
      we
      are required to make interest and principal payments in the amount of $100,000.
      The principal and interest payments may be deferred but only at the option
      of
      Cornell Capital. Any event of default such as our failure to repay the principal
      or interest when due, our failure to issue shares of common stock upon
      conversion by the holder, or our failure to timely file a registration statement
      or have such registration statement declared effective, could render the entire
      convertible note and accrued interest immediately due and payable. If we were
      required to repay the entire convertible note, we would be required to use
      our
      limited working capital and raise additional funds. However, our ability to
      raise additional funds is hindered by the fact that we are required to obtain
      the consent of the holder in order to engage in any financing for the issuance
      of our securities or to engage in any secured financing. If we were unable
      to
      repay the convertible note when required, the holders could commence legal
      action against us and foreclose on all of our assets to recover the amounts
      due.
      Any such action would require us to curtail or cease operations.





***If
      an Event of Default Occurs under the Securities Purchase Agreement, Secured
      Convertible Note, Warrants, or Security Agreement, Cornell Could Take Possession
      of all Our Goods, Inventory, Contractual Rights and General Intangibles,
      Receivables, Documents, Instruments, and Chattel Paper, and Intellectual
      Property.***





In
      connection with the Securities Purchase Agreements we entered into on March
      30,
      2007, we executed a Security Agreement in favor of the investors granting them
      a
      second priority security interest in all of our goods, inventory, contractual
      rights and general intangibles, receivables, documents, instruments, and chattel
      paper. The Security Agreement states that if an event of default occurs under
      the Securities Purchase Agreements, Convertible Note, Warrants, or Security
      Agreement, Cornell has the right to take possession of the collateral, to
      operate our business using the collateral, and have the right to assign, sell,
      lease or otherwise dispose of and deliver all or any part of the collateral,
      at
      public or private sale or otherwise to satisfy our obligations under these
      agreements.




***Risk
      Related to Our Common Stock*** ****




***There
      is a limited market for our common stock which may make it more difficult for
      you to sell your stock.***





Our
      common stock is quoted on the OTC Bulletin Board under the symbol "TXPO.OB."
      There is a limited trading market for our common stock. Accordingly, there
      can
      be no assurance as to the liquidity of any markets that may develop for our
      common stock, the ability of holders of our common stock to sell our common
      stock, or the prices at which holders may be able to sell our common
      stock.





***Our
      stock price may be volatile.***





The
      market price of our common stock is likely to be highly volatile and could
      fluctuate widely in price in response to various factors, many of which are
      beyond our control, including:




·
              technological
                  innovations or new products and services by us or our
                  competitors;
 
 ·
              additions
                  or departures of key personnel;
 
 ·
              sales
                  of our common stock;




23


·
              our
                  ability to integrate operations, technology, products and
                  services;
 
 ·
              our
                  ability to execute our business
                  plan;
 
 ·
              operating
                  results below expectations;
 
 ·
              loss
                  of any strategic relationship;
 
 ·
              industry
                  developments;
 
 ·
              economic
                  and other external factors; and
 
 ·
              period-to-period
                  fluctuations in our financial
                  results.




Because
      we have a limited operating history, you may consider any one of these factors
      to be material. Our stock price may fluctuate widely as a result of any of
      the
      above listed factors.





In
      addition, the securities markets have from time to time experienced significant
      price and volume fluctuations that are unrelated to the operating performance
      of
      particular companies. These market fluctuations may also materially and
      adversely affect the market price of our common stock.





***We
      have not paid dividends in the past and do not expect to pay dividends in the
      future. Any returns on investment may be limited to the value of our common
      stock.***





We
      have
      never paid cash dividends on our common stock and do not anticipate paying
      cash
      dividends in the foreseeable future. The payment of dividends on our common
      stock will depend on earnings, financial condition and other business and
      economic factors affecting it at such time as the board of directors may
      consider relevant. If we do not pay dividends, our common stock may be less
      valuable because a return on your investment will only occur if its stock price
      appreciates.




***Our
      common stock is deemed to be “penny stock” with a limited trading
      market.*** ****





Our
      common stock is currently listed for trading on the OTC Bulletin Board which
      is
      generally considered to be a less efficient market than markets such as NASDAQ
      or other national exchanges, and which may cause difficulty in conducting trades
      and difficulty in obtaining future financing. Further, our securities are
      subject to the "penny stock rules" adopted pursuant to Section 15 (g) of the
      Securities Exchange Act of 1934, as amended, or Exchange Act. The penny stock
      rules apply to non-NASDAQ companies whose common stock trades at less than
      $5.00
      per share or which have tangible net worth of less than $5,000,000 ($2,000,000
      if we have been operating for three or more years). Such rules require, among
      other things, that brokers who trade "penny stock" to persons other than
      "established customers" complete certain documentation, make suitability
      inquiries of investors and provide investors with certain information concerning
      trading in the security, including a risk disclosure document and quote
      information under certain circumstances. Many brokers have decided not to trade
      "penny stock" because of the requirements of the penny stock rules and, as
      a
      result, the number of broker-dealers willing to act as market makers in such
      securities is limited. In the event that we remain subject to the "penny stock
      rules" for any significant period, there may develop an adverse impact on the
      market, if any, for our securities. Because our securities are subject to the
      "penny stock rules," investors will find it more difficult to dispose of our
      securities. Further, for companies whose securities are traded in the OTC
      Bulletin Board, it is more difficult: (i) to obtain accurate quotations, (ii)
      to
      obtain coverage for significant news events because major wire services, such
      as
      the Dow Jones News Service, generally do not publish press releases about such
      companies, and (iii) to obtain needed capital.




**Item
      3. Controls and Procedures.**





(a) ***Evaluation of Disclosure Controls and Procedures*** . Based
      on
      an evaluation of our disclosure controls and procedures (as defined in
      Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
      1934, as amended) required by paragraph (b) of Rule 13a-15 or
      Rule 15d-15, as of June 30, 2007, our Chief Executive Officer and Chief
      Financial Officer have concluded that our disclosure controls and procedures
      were effective in ensuring that information required to be disclosed by us
      in
      the reports that we file or submit under the Exchange Act is recorded,
      processed, summarized and reported within the time periods specified in the
      Commission’s rules and forms. Our Chief Executive Officer and Chief
      Financial Officer also concluded that, as of June 30, 2007, our disclosure
      controls and procedures were effective in ensuring that information required
      to
      be disclosed by us in the reports that we file or submit under the Exchange
      Act
      is accumulated and communicated to our management, including our Chief Executive
      Officer and Chief Financial Officer, to allow timely decisions regarding
      required disclosure.





(b) ***Changes in internal controls*** . During
      the quarter ended June 30, 2007, there were no changes in our internal control
      over financial reporting identified in connection with the evaluation required
      by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially affected,
      or
      is reasonably likely to materially affect, our internal control over financial
      reporting.




24





**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings.**




None.




**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.**




On
      May 8,
      2007, the Company issued 125,000 shares of common stock to the accredited
      investor who executed an Agreement (the "Agreement") with the Company on October
      12, 2006 as a commitment fee called for by the Agreement representing additional
      consideration of the investor's agreement to pledge an aggregate of $2,000,000
      in free-trading shares of common stock of Adobe Systems Incorporated
      (NASDAQ:ADBE), Fossil Incorporated (NASDAQ:FOSL) or such other shares of
      free-trading common stock having a value of $2,000,000 in the aggregate
      beneficially owned by the investor to a lender of the
      Company.





*
      All of
      the above offerings and sales were deemed to be exempt under rule 506 of
      Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No
      advertising or general solicitation was employed in offering the securities.
      The
      offerings and sales were made to a limited number of persons, all of whom were
      accredited investors, business associates of TXP Corporation or executive
      officers of TXP Corporation, and transfer was restricted by TXP Corporation
      in
      accordance with the requirements of the Securities Act of 1933. In addition
      to
      representations by the above-referenced persons, we have made independent
      determinations that all of the above-referenced persons were accredited or
      sophisticated investors, and that they were capable of analyzing the merits
      and
      risks of their investment, and that they understood the speculative nature
      of
      their investment. Furthermore, all of the above-referenced persons were provided
      with access to our Securities and Exchange Commission filings.




**Item
      3. Defaults Upon Senior Securities.**




None.




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





None.




**ITEM
      5. Other Information.**





None.





25





**Item
      6. Exhibits.**





**Exhibit
                No.**
            
            **Description**31.1
            
            Certification
                by Chief Executive Officer pursuant to Sarbanes Oxley Section
                302.31.2
            
            Certification
                by Chief Financial Officer pursuant to Sarbanes Oxley Section
                302.32.1
            
            Certification
                by Chief Executive Officer pursuant to 18 U.S.C. Section
                1350.32.2
            
            Certification
                by Chief Financial Officer pursuant to 18 U.S.C. Section
                1350.




26





**Signatures**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934,****the Registrant has duly caused this report to
      be signed on its behalf by the undersigned, therunto duly authorized, on
      this 9th day of August 2007.




**TXP
                CORPORATION***/s/ Michael
                C. Shores*Michael
                C. ShoresChief
                Executive*Officer (Principal Executive
                Officer)*






*/s/ Robert
                Bruce*Robert
                Bruce*Chief
                Financial Officer (Principal Accounting and Financial
                Officer)*




27