**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-QSB**





(Mark
        One)
 **QUARTERLY
        REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES**
 **EXCHANGE
          ACT OF 1934**
  **For
            the quarterly period ended March 31, 2007**
  **Or**
  **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES**
 **EXCHANGE
                  ACT OF 1934**
  **For
                    the transition period from  _______ to
                    ________**




**TXP
      CORPORATION**


**(F/K/A
      YTXP 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**(Address
                of principal
              executive
                offices)
            
            (Zip
                Code)





Check
      whether the issuer 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**




The
      number of shares issued and outstanding of the registrant's common stock, par
      value $.001 per share, as of May 21, 2007 was 112,410,647 shares.




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












**TXP
      CORPORATION**




**March
      31, 2007 FORM 10-QSB QUARTERLY REPORT**




**INDEX**




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









**PART
      I**




**Item
      1.**  **Financial Information**




TXP
      CORPORATION


CONSOLIDATED
      BALANCE SHEETS


March
      31,
      2007 and December 31, 2006





**2007**
            
            **2006**(unaudited)
            
            (audited)ASSETSCurrent
                assetsCash
            
            $
            3,621,000
            
            $
            228,000Accounts
                receivable, net of allowance of $0 and $0 as ofMarch 31,
                2007 and December 31, 2006, respectively.
            
            
            920,000
            
            
            976,000Inventory
            
            
            1,203,000
            
            
            673,000Other
                assets
            
            
            360,000
            
            
            346,000Total
                current assets
            
            
            6,104,000
            
            
            2,223,000Property
                and equipment, net
            
            
            2,686,000
            
            
            2,667,000Other
                assets
            
            
            13,000
            
            
            13,000TOTAL
                ASSETS
            
            $
            8,803,000
            
            $
            4,903,000LIABILITIES
                AND STOCKHOLDERS' EQUITY (DEFICIT)Current
                liabilitiesCurrent
                maturities of notes payable
            
            $
            260,000
            
            $
            272,000Current
                capital lease obligations
            
            
            75,000
            
            
            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
            
            
            1,139,000
            
            
            913,000Deferred
                revenue
            
            
            —
            
            
            332,000Accrued
                expenses
            
            
            240,000
            
            
            412,000Total
                current liabilities
            
            
            2,114,000
            
            
            4,130,000Notes
                payable, net of current maturities
            
            
            107,000
            
            
            144,000Capital
                lease obligations, net of current obligations
            
            
            94,000
            
            
            32,000Line
                of credit
            
            
            2,400,000
            
            
            1,000,000Convertible
                debentures, net of unamortized discount of $3,826,000 as of
                March 31, 2007
            
            
            174,000
            
            
            —Derivative
                financial instruments, net of current obligation
            
            
            2,603,000
            
            
            2,507,000Deferred
                tax liability
            
            
            48,000
            
            
            48,000TOTAL
                LIABILITIES
            
            
            7,540,000
            
            
            7,861,000STOCKHOLDERS'
                EQUITY (DEFICIT):Common
                stock, $.001 par value, 300,000,000 shares authorized, 111,005,777
                and104,080,623
                shares issued and outstanding as of March 31, 2007 andDecember
                31, 2006, respectively.
            
            
            111,000
            
            
            104,000Additional
                paid in capital
            
            
            6,713,000
            
            
            2,121,000Accumulated
                deficit
            
            
            (5,568,000
            )
            
            (5,190,000
            )Accumulated
                other comprehensive income
            
            
            7,000
            
            
            7,000TOTAL
                STOCKHOLDERS' EQUITY (DEFICIT)
            
            
            1,263,000
            
            
            (2,958,000
            )TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
            
            $
            8,803,000
            
            $
            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 ended March 31, 2007 and 2006 (unaudited)




**2007**
            
            **2006**RevenuesPrototyping
                and assembly
            
            $
            1,268,000
            
            $
            873,000Material
                management services
            
            
            565,000
            
            
            630,000Product
                and accessory sales
            
            
            19,000
            
            
            —Design
                and development services
            
            
            332,000
            
            
            —Total
                Revenues
            
            
            2,184,000
            
            
            1,503,000Cost
                of sales
            
            
            1,449,000
            
            
            1,043,000Gross
                profit
            
            
            735,000
            
            
            460,000Costs
                and expensesSelling,
                general administrative
            
            
            1,197,000
            
            
            592,000Research
                and development
            
            
            746,000
            
            
            —Depreciation
            
            
            33,000
            
            
            20,000Total
                costs and expenses
            
            
            1,976,000
            
            
            612,000Operating
                loss
            
            
            (1,241,000
            )
            
            (152,000
            )Other
                income and expenseInterest
                expense, net
            
            
            (248,000
            )
            
            (56,000
            )Change
                  in fair value of derivativefinancial
                  instruments
            
            
            1,111,000
            
            
            —Gain on
                sale of fixed assets
            
            
            —
            
            
            18,000Total
                other income and expense
            
            
            863,000
            
            
            (38,000
            )Loss
                before income taxes
            
            
            (378,000
            )
            
            (190,000
            )Income tax
                expense
            
            
            —
            
            
            —Net
                loss
            
            
            (378,000
            )
            
            (190,000
            )Foreign
                currency translationadjustment
            
            
            —
            
            
            —Comprehensive
                loss
            
            $
            (378,000
            )
            $
            (190,000
            )Basic
                earnings per share
            
            $
            —
            
            $
            —Diluted
                earnings per share
            
            $
            —
            
            $
            —Basic
                weighted average shares outstanding:
            
            
            104,234,515
            
            
            89,298,042Diluted
                weighted average shares outstanding:
            
            
            104,234,515
            
            
            89,298,042




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





F-2




TXP
      CORPORATION


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


Three
      Months Ended March 31, 2007 and 2006 (unaudited)





2007
            
            2006CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                loss
            
            $
            (378,000
            )
            $
            (190,000
            )Adjustments
                to reconcile net loss to cash used in operating
                activities:Depreciation
            
            
            120,000
            
            
            60,000Gain
                on sale of fixed assets
            
            
            —
            
            
            (18,000
            )Deferred
                revenue
            
            
            (332,000
            )
            
            —Amortization
                of discount on convertible notes
            
            
            159,000
            
            
            22,000Stock
                compensation
            
            
            285,000
            
            
            —Change
                in fair value of derivative financial instruments
            
            
            (1,111,000
            )
            
            —Changes
                in assets and liabilities:Accounts
                receivable
            
            
            56,000
            
            
            (314,000
            )Inventory
            
            
            (530,000
            )
            
            (72,000
            )Other
                current assets
            
            
            (14,000
            )
            
            (14,000
            )Other
                assets
            
            
            —
            
            
            12,000Accounts
                payable
            
            
            226,000
            
            
            248,000Accrued
                expenses
            
            
            (6,000
            )
            
            119,000CASH
                FLOWS USED IN OPERATING ACTIVITIES
            
            
            (1,525,000
            )
            
            (147,000
            )CASH
                  FLOWS FROM INVESTING ACTIVITIESCapital
                expenditures
            
            
            (35,000
            )
            
            (53,000
            )Proceeds
                from sale of fixed assets
            
            
            —
            
            
            60,000CASH
                FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES
            
            
            (35,000
            )
            
            7,000CASH
                  FLOWS FROM FINANCING ACTIVITIESDeferred
                offering costs
            
            
            —
            
            
            (25,000
            )Proceeds
                from convertible debenture
            
            
            3,615,000
            
            
            —Line
                of credit, net
            
            
            1,400,000
            
            
            —Repayment
                of notes payable and capital lease obligation
            
            
            (62,000
            )
            
            (41,000
            )CASH
                FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
            
            
            4,953,000
            
            
            (66,000
            )Effect
                of currency translation on cash balances
            
            
            —
            
            
            —NET
                INCREASE/(DECREASE) IN CASH
            
            
            3,393,000
            
            
            (206,000
            )Cash,
                beginning of period
            
            
            228,000
            
            
            342,000Cash,
                end of period
            
            $
            3,621,000
            
            $
            136,000




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




F-3




TXP
      CORPORATION


CONSOLIDATED
      STATEMENTS OF CASH FLOWS -continued


Three
      Months Ended March 31, 2007 and 2006 (unaudited)




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





**2007**
            
            **2006****Cash**Interest
                paid
            
            $
            44,000
            
            $
            11,000Taxes
                paid
            
            $
            —
            
            $
            —**NONCASH
                INVESTING AND FINANCING ACTIVITIES**6,730,032
                shares issued on conversion of debt and accrued interest
            
            $
            792,000
            
            $
            —Property
                acquired under capital lease obligations and notes payable
            
            $
            104,000
            
            $
            62,000Reclassification
                of Warrants to Additional Paid in Capital (See 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)


Three
      Months Ending March 31, 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
            
            
            —
            
            
            —
            
            
            —
            
            
            (378,000
            )
            
            —
            
            
            (378,000
            )Stock
                compensation: options awarded to employees (Note 4)
            
            
            —
            
            
            —
            
            
            50,000
            
            
            —
            
            
            —
            
            
            50,000Stock
                compensation: shares awarded to employees (Note 4)
            
            
            —
            
            
            —
            
            
            235,000
            
            
            —
            
            
            —
            
            
            235,000Compensation
                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,
                March 31, 2007**
            
            
            **111,005,777**
            
            **$**
            **111,000**
            
            **$**
            **6,713,000**
            
            **$**
            **(5,568,000**
            **)**
            **$**
            **7,000**
            
            **$**
            **1,263,000**




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 will focus
      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 merger between
      YTXP and its wholly owned subsidiary 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).





The
      company is located in a 47,500 square-foot high-tech facility, located in
      Richardson, Texas.





**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
      March 31, 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 March 31, 2007 and December 31, 2006, the cash balance at our
      financial institution exceeded the insured limits by $3,613,000 and $162,000,
      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 overheads 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 3) 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.”




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 share 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, 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 ( “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 March 31, 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.





***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




·
            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.





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 will focus 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.





***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 March 31, 2007, 2,691,329 stock options
      and 149,000 shares of common stock have been issued to employees, directors
      or
      consultants under this plan of which the company recognized $50,000 of stock
      compensation expense in SGA in the statement of operations for quarter ended
      March 31, 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 at which time the common stock will be issued to the
      employees. In our statement of operations for the quarter ended March 31, 2007,
      we recorded $235,000 of compensation cost for the expected issuance of these
      shares based on the closing price of our stock on the award date of October
      2,
      2006.





***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 balance on
      the
      note at March 31, 2007 and December 31, 2006 was $112,500 and $112,500,
      respectively.





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, we entered into an Asset Purchase Agreement with Mr. Richard Smitten,
      the
      former Chief Executive Officer and sole director of our predecessor corporation,
      Stock Market Solutions, Inc., pursuant to which we sold the assets of our
      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 we 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, we entered into an Asset Purchase Agreement with G3 Global
      Investments, Inc., a Texas corporation, pursuant to which we purchased all
      of
      the SMT line production assets of G3. G3 is 100% owned and controlled by Mr.
      Michael C. Shores, our Chief Executive Officer. Prior to entering into the
      Agreement, we 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 our company. The Lease
      terminates on April 30, 2007. We assumed the Lease from its wholly owned
      subsidiary in April 2006. In consideration for the sale of the assets, we 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 our
      statement of operations for the year ended December 31, 2006, we recorded
      $61,000 of compensation cost for the issuance of these shares based on the
      closing price of our 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 at which time the common stock will be issued to the employees. In our
      statement of operations for the quarter ended March 31, 2007, we recorded
      $235,000 of compensation cost for the expected issuance of these shares based
      on
      the closing price of our stock on the award date of October 2,
      2006.





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 Quarter ended March 31, 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
            
            
            284,000
            
            $
            0.30Exercised
            
            
            --
            
            
            --Forfeited
            
            
            --
            
            
            --Expired
            
            
            --
            
            
            --**Outstanding
                at March  31, 2007**
            
            
            **2,691,329**
            ****
            **$**
            **0.31**
            ****
            **$**
            **207,660,**
            ****
            ****
            **9.70****Exercisable
                at March  31, 2007**
            
            
            **--**
            ****
            **$**
            **--**
            ****
            **$**
            **--**
            ****
            ****
            **--**




We
      adopted SFAS No. 123R effective January 1, 2006. In our statement of
      operations for the quarter ended March 31, 2007, we recorded $50,000 of
      compensation cost for stock option share-based payment arrangements, and
      $235,000 of compensation costs for the expected issuance of common stock to
      employees on April 2, 2007. No stock options were exercised during the quarter
      ended March 31, 2007.




The
      fair
      value of stock options is determined using the Black-Scholes valuation model.
      During quarter ended March 31, 2007 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 assumptions:





Expected
                volatility
            
            
            112
            %Expected
                term (years)
            
            
            6.0Risk-free
                interest rate
            
            
            4.8
            %Expected
                dividend yield
            
            
            0
            %Forfeiture
                rate
            
            
            10
            %





Expected
      volatility is based solely on historical volatility of our common stock over
      the
      period commensurate with the expected term of the stock options. We rely solely
      on historical volatility because our traded options do not have sufficient
      trading activity to allow us to incorporate the mean historical implied
      volatility from traded options into our 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 we have never paid cash dividends on our common stock, and we have
      no
      present intention to pay cash dividends.




As
      of
      March 31, 2007, there was $519,000 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 2.9 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 March 31,****2007**
            
            **2006**Numerator:Net
                loss available to common stockholders
            
            $
            (378,000
            )
            $
            (190,000
            )Denominator:Denominator
                for basic net income per share--weightedaverage
                shares
            
            
            104,234,515
            
            
            89,298,042Dilutive
                potential securities
            
            
            --
            
            
            --Denominator
                for diluted net income per share--adjusted
                weighted average shares
            
            
            104,234,515
            
            
            89,298,042Basic
                net income per share
            
            $
            (.00
            )
            $
            (.00
            )Diluted
                net income per share
            
            $
            (.00
            )
            $
            (.00
            )




For
      the
      quarters ended March 31, 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 our 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 March 31,****2007**
            
            **2006**Warrants
                to purchase common shares
            
            
            13,198,000
            
            
            --Stock
                options issued under the 2006 Incentive Stock Plan
            
            
            2,691,329
            
            
            --Convertible
                note
            
            
            9,756,098
            
            
            --25,645,427
            
            
            --





F-13




**NOTE
      6 - LINES OF CREDIT**





***Line
      of Credit April 1, 2006***





On
      April
      1, 2006 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 April 1, 2006 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 March 31, 2007 and
      December 31, 2006. The revolving line 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
      March
      31, 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 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 March 31, 2007, the Debt-to-net-worth and Current Ratio were in
      compliance with the loan agreement. The balance outstanding on the note at
      March
      31, 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 the
      Investor (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 March 31, 2007 and December 31, 2006, the balance
      outstanding on the line of credit was $2,400,000 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
      balance outstanding on the note at March 31, 2007 and December 31, 2006 was
      $1,000 and $5,000, respectively.





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 balance outstanding on this note at March
      31,
      2007 and December 31, 2006 was $112,500 and $112,500, respectively.





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 we purchased all of the SMT line production assets of G3.
      G3
      is 100% owned and controlled by Mr. Michael C. Shores, our 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 March 31, 2007 and December 31, 2006 was $254,000 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 March 31, 2007 and December 31, 2006 was
      $27,000 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 March 31, 2007 and December 31, 2006 was
      $18,000 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 March 31, 2007 and December 31, 2006 was $22,000 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-month term and is secured by the
      software. Monthly lease payments are $2,000 and began in March of 2007. The
      balance outstanding at March 31, 2007 was $51,000. 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-month term and is secured by the
      equipment. Monthly lease payments are $2,000 and began in March of 2007. The
      balance outstanding at March 31, 2007 was $51,000. 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 March 31, 2007:




Year
            
            Amount04/01/07
                - 12/31/07
            
            $
            75,00001/01/08
                - 12/31/08
            
            
            80,00001/01/09
                - 12/31/09
            
            
            48,00001/01/10
                - 12/31/10
            
            
            10,000Total
                Minimum Lease Payments
            
            
            213,00Less
                Amounts Representing Interest
            
            
            44,000Present
                Value of Minimum Lease Payments
            
            $
            169,000




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 the sale of Common Stock under the Standby
      Equity Distribution Agreement is registered with the SEC and the authorization
      for quotation on the National Association of Securities Dealers OTC Bulletin
      Board is obtained and TXP is within the commitment period as defined under
      the
      terms of the agreement. The commitment period shall mean the period commencing
      on the earlier to occur of the effective date (which shall mean 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 Investor shall have made
      payment of advances pursuant to this agreement in the aggregate amount of
      Fifteen Million Dollars ($15,000,000), or the date occurring twenty-four (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 five percent (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.





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.





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
      five
      percent (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 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 . 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 one hundred twenty percent (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 one hundred ten (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 the TXP's Common Stock
      is
      first quoted on the Principal Market). Second, the debentures are convertible
      at
      an amount equal to eighty percent (80%) of the volume weighted average price
      of
      TXP' 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 eighty percent (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. We 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.





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 eighteen (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.  The Holder shall have ten (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 we will not receive any proceeds. In addition, the exercise
      price of the warrants will be adjusted in the event we issue 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 the 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 we 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.





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. We 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,
      2007, 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 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 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 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 we will not receive any proceeds. The exercise price of
      the
      warrants may be adjusted in certain circumstances such as if we 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 forty-five (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 one hundred twenty
      (120) days after the initial filing. There are no liquidating damages clauses
      related to the warrant or agreement with the investor.





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 7).





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. Since 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. We 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.





***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 we will not receive any proceeds. The exercise price of
      the
      warrants may be adjusted in certain circumstances such as if we 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.





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. Since 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. We 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.





***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 share 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. Since 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.
      We
      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.





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 this Note is outstanding, if any Event of Default
      has occurred and shall continue for a period of ten (10) days after a notice
      of
      such default has been delivered by the Holder to the Obligor (the “Notice
      Period ”),
      the
      full principal amount of this 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 twenty percent (20%) of the lowest Volume
      Weighted Average Price, as quoted by Bloomberg, LP, of the Common Stock during
      the thirty (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 ten (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 rights agreements (the “Registration Rights Agreements”) 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 (
“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 March 31, 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.





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 i f
      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, we do believe 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. We 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 March 31, 2007 the convertible debenture had balance of $174,000 net
      $3,826,000 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 March 31, 2007:
 
 Description
              
              Principal
                  balance
              
              Unamortized
                  discount
              
              Fair
                  value of derivative instrument
              
              Accrued
                  interestMarch
                  2007 secured convertible note
              
              $
              4,000,000
              
              $
              3,826,000
              
              $
              2,603,000
              
              $
              —**Total**
              ****
              **$**
              **4,000,000**
              ****
              **$**
              **3,826,000**
              ****
              **$**
              **2,603,000**
              ****
              **$**
              **—**
  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, 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.
  The
        fair
        value of derivatives was determined using the Black-Scholes option-pricing
        model
        with the following assumptions:
 
 Expected
                  volatility
              
              
              112
              %Expected
                  term (years)
              
              
              3Risk-free
                  interest rate
              
              
              5.1
              %Expected
                  dividend yield
              
              
              0
              %
 
 Expected
        volatility is based solely on historical volatility of our common stock over
        the
        period commensurate with the expected term of the stock options. We rely
        solely
        on historical volatility because our traded options do not have sufficient
        trading activity to allow us to incorporate the mean historical implied
        volatility from traded options into our 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 we have never paid cash dividends on our common stock, and we have
        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. We 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 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.
 
 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 of 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).
 
 
 **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. Our 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
              
              Amount04/01/07
                  - 12/31/07
              
              $
              232,00001/01/08
                  - 12/31/08
              
              
              315,00001/01/09
                  - 12/31/09
              
              
              321,00001/01/10
                  - 12/31/10
              
              
              81,000Total
              
              $
              949,000
 
 Rent
        expense for the quarters ended March 31, 2007 and 2006 amounted to $76,000
        and
        $49,000, respectively.
  F-27
  **NOTE
        13- MAJOR CUSTOMERS**
 
 During
        the three months ending March 31, 2007 and March 31, 2006, TXP had sales
        to five
        customers which amounted to 66% and 63% of net sales, respectively. Tellabs
        Inc., Siemens Networks GmbH Co. KG, and AMX Corporation accounted for 25%,
        15%
        and 14% respectively of net sales in 2007 while no other customer accounted
        for
        more than 10% of net sales for 2007. AMX Corporation and Essex Corporation
        accounted for 26% and 15% 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 March 31, 2007, 2,691,329 stock options
        and 149,000 shares of common stock have been issued to employees, directors
        or
        consultants under this plan of which the company recognized $50,000 of stock
        compensation expense in SGA in the statement of operations for quarter ended
        March 31, 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 at which time the common stock will be issued to the
        employees. In our statement of operations for the quarter ended March 31,
        2007,
        we recorded $235,000 of compensation cost for the expected issuance of these
        shares based on the closing price of our stock on the award date of October
        2,
        2006.
  **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
        our
        design services costs consist of engineering labor costs.
  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 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 will
        focus
        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 March 31, 2007 and 2006, we generated
        revenues of $2,184,000 and $1,503,000, respectively, and incurred a net loss
        of
        $378,000 and $190,000, 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 share 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 (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 (
        “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 March 31, 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 Warrrants 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
 
 ·
                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 will focus 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 MARCH 31, 2007 ("2007") TO THE QUARTER ENDED MARCH 31, 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 45% from $1,503,000 in 2006 to $2,184,000 in 2007 or by $681,000.
          Material supply chain management services decreased 10% from $630,000 in
          2006 to
          $565,000 in 2007. Prototyping and assembly services increased 45% from
          873,000
          in 2006 to $1,268,000 in 2007 or $395,000. Included in this increase were
          sales
          of $184,000 in 2007 to customers related to build-to-order tele-communications
          product assemblies compared to sales of $152,000 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 $19,000 related
          to
          GPON and BPON ONT product and accessory sales in 2007 in its first quarter
          of
          operations. 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 89 in 2006 to 117 in 2007. Total
          active customers for the quarters ending March 31, 2007 and 2006 were 40
          and 32,
          respectively. TXP's top five customers accounted for 66% of revenue in
          2007and
          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 $1,043,000 in 2006 to $1,449,000 in 2007 or $406,000. Other direct
          material
          costs and production supplies increased from $641,000 in 2006 to $665,000
          in
          2007 or $24,000. Manufacturing overhead and labor cost increased from $315,000
          in 2006 to $393,000 in 2007 or $78,000 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. 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 $460,000 in 2006 to $735,000 in 2007 or $275,000.
          Revenues
          increased for the same period by $681,000. During the same period the gross
          margin increased from 31% in 2006 to 34% in 2007 due to a positive change
          in
          revenue mix compared to 2006. Additionally, overall margins were negatively
          impacted by 6 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 increased by $605,000 from $592,000 in 2006 to $1,197,000
          in 2007. Personnel costs increased as costs increased from $466,000 in
          2006 to
          $846,000 in 2007 or by $380,000. Included in this personnel increase was
          a net
          increase of approximately $288,000 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 and increases in company paid benefits including medical and
          dental
          insurance from 2006 to 2007. Contract labor increased $59,000 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 $22,000 due to expanded efforts to
          promote
          the company since becoming public in April of 2006. Professional fees increased
          by $81,000 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 $21,000 in 2006 to $53,000 in 2007 because
          of
          increased international and domestic travel related to establishing and
          developing our iPhotonics business unit.
  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 $746,000 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
        $20,000 in 2006 to $33,000 in 2007. The increase was in-line with capital
        expenditures and depreciable asset base.
  ***Net
        Interest Expense***
 
 Net
        interest expense increased from $56,000 in 2006 to $248,000 in 2007 or by
        $192,000. Approximately $137,000 of the increase relates to additional
        amortization of note discounts 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 Q1 2006. The remaining increase in interest expense relates to increases
        on
        the outstanding balances of our lines credit, 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
        $1,111,000 in 2007 compared to $0 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. We had no derivative instrument liabilities as of and
        March 31, 2006. 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 March
        31,
        2007, TXP had cash and cash equivalents of $3,621,000.
 
 During
        2007, TXP used $1,525,000 in operating activities compared to using $147,000
        during 2006. Cash used in operating activities during 2007 reflects $378,000
        in
        net loss, $120,000 in depreciation, $159,000 in debt discount amortization,
        $285,000 in stock compensation, $1,111,000 in change (credit) in fair value
        of
        derivative financial instruments and $332,000 in deferred revenue. Inventory
        and
        other currents assets increased by $530,000 and $14,000, respectively, and
        accrued expenses decreased by $6,000 combining to decrease working capital
        by
        $550,000. TXP obtained cash from working capital changes of $282,000 consisting
        of increases in accounts payable of $226,000 and decreases in accounts
        receivable of $56,000.
 
 Cash
        used
        in operating activities during 2006 reflects $190,000 in net loss, $60,000
        in
        depreciation, $22,000 in debt discount amortization, and $18,000 in gain
        on sale
        of fixed assets. Accounts receivable, inventory, and other current assets
        increased by $314,000, $72,000, and $14,000 respectively decreasing working
        capital. TXP obtained cash for working capital changes consisting of increases
        in accounts payable and accrued expenses of $248,000 and $119,000 as well
        as a
        decrease in other assets of $12,000.
 
 During
        2007, TXP used $35,000 in investing activities reflecting capital expenditures
        for plant, property and equipment and software.
 
 During
        2006, TXP obtained $7,000 in investing activities reflecting capital
        expenditures for plant, property and equipment and software of $53,000 net
        of
        $60,000 in proceeds received from the sale of fixed assets.
 
 During
        2007, financing activities provided net cash of $4,953,000 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 proceeds from draw downs on our lines of credit
        of
        $1,400,000. Total repayments on loans and capital lease obligations amounted
        to
        $62,000.
 
 6
  During
        2006, financing activities used net cash of $66,000 as the result of increases
        of deferred offering costs of $25,000 and repayments on loans and capital
        leases
        of $41,000.
  **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 the sale of Common Stock under the Standby
        Equity Distribution Agreement is registered with the SEC and the authorization
        for quotation on the National Association of Securities Dealers OTC Bulletin
        Board is obtained and TXP is within the commitment period as defined under
        the
        terms of the agreement. The commitment period shall mean the period commencing
        on the earlier to occur of the effective date (which shall mean 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 Investor shall have made
        payment of advances pursuant to this agreement in the aggregate amount of
        Fifteen Million Dollars ($15,000,000), or the date occurring twenty-four
        (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 five percent
        (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.
 
 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.
 
 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 eighteen (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.  The Holder shall have ten (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
  7
 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 we will not receive any proceeds. In addition, the exercise
        price of the warrants will be adjusted in the event we issue 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 the 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 we 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.
 
 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.
 8
  ·
              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. We 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,
        2007, 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 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 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 we will not receive any proceeds. The exercise price
        of the
        warrants may be adjusted in certain circumstances such as if we 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 forty-five (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 one hundred twenty
        (120) days after the initial filing. There are no liquidating damages clauses
        related to the warrant or agreement with the investor.
 
 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 7).
 
 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. Since 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. We 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.
 
 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 we will not receive any proceeds. The exercise price
        of the
        warrants may be adjusted in certain circumstances such as if we 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.
 
 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 7).
 
 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. Since 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. We 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.
 
 ***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.
 
 11
  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 share 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. Since 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.
        We
        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.
 
 ***Line
        of Credit April 1, 2006***
 
 On
        April
        1, 2006 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 April 1, 2006 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  March 31, 2007 and
        December 31, 2006. The revolving line 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
        March
        31, 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 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 March 31, 2007, the Debt-to-net-worth and Current Ratio were in
        compliance with the loan agreement. The balance outstanding on the note at
        March
        31, 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
        the
        Investor (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 March 31, 2007 and December 31, 2006, the balance
        outstanding on the line of credit was $2,400,000 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; however, we expect full year 2007 BPON and GPON sales
        to
        have a material impact to the financial statements.
  ***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
 ·
                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;
 
 ·
              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 this Note is outstanding, if any Event of Default
        has occurred and shall continue for a period of ten (10) days after a notice
        of
        such default has been delivered by the Holder to the Obligor (the “Notice
        Period ”),
        the
        full principal amount of this 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 twenty percent (20%) of the lowest Volume
        Weighted Average Price, as quoted by Bloomberg, LP, of the Common Stock during
        the thirty (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 does 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 ten (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 rights agreements (the “Registration Rights Agreements”) 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 (
        “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 March 31, 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 Warrrants 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 i f
        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, we do believe 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. We 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.
 
 **Cash
        Requirements**
 
 Except
        for the financing agreements with Cornell Capital and other investors discussed
        above, existing financing arrangements, borrowing capacity created by the
        investor agreeing to pledge collateral, 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, or (iii) file any registration
        statement on Form S-8 for more than 10,000,000 shares of common stock 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.
        We
        may be required to raise additional capital in order to meet our liquidity
        needs
        if we do not successfully execute our current iPhotonics’ business plan;
        including but not limited to the receipt of significant revenues from sales
        of
        our ONT products in the time-frame forecasted. 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.
 
 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.
 
 **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 March 31,
        2007,
        we generated revenues of $2,184,000. Our accumulated deficit was $5,568,000.
        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 66 % of net
        sales in the quarter ended March 31, 2007 Tellabs, Siemens Networks GmbH
        Co. KG,
        and AMX Corporation accounted for 25%, 15%, and 14% respectively of net sales
        in
        for the quarter ended March 31, 2007 while no other customer accounted for
        more
        than 10% of net sales for the same period. 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 67% of our net trade accounts receivable
        at
        March 31, 2007, with individual percentages for those companies ranging from
        4%
        to 36%. 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 consultant 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.**
 
 ***We
        May Need to Raise Additional Funds In Order Achieve ONT Business
        Objectives.***
  We
        may 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 company and cease
        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 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 May
        21, 2007, we had 112,410,647 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 9,756,098 shares of common stock at
        current market prices. In addition, we have outstanding warrants to purchase
        13,197,500 shares of common stock. The debentures 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 principal and interest 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*** .
        As of
        the end of the period covered by this report, we conducted an evaluation,
        under
        the supervision and with the participation of our chief executive officer
        and
        chief financial officer of our disclosure controls and procedures (as defined
        in
        Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this
        evaluation, our chief executive officer and chief financial officer concluded
        that our disclosure controls and procedures are effective to ensure 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.
 
 b) ***Changes in internal controls*** .
        There
        was no change in our internal controls or in other factors that could affect
        these controls during our last fiscal quarter that has materially affected,
        or
        is reasonably likely to materially affect, our internal control over financial
        reporting.
  24
 
 **PART
        II**
  **Item
        1. Legal Proceedings.**
  None.
 
 **Item
        2. Unregistered Sales of Equity Securities and Use of
        Proceeds.**
 
 On
        March
        30, 2007, TXP Corporation (the "Company") consummated a Securities Purchase
        Agreement (the "Purchase Agreement") with Cornell Capital Partners L.P.
        ("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 (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 600,000 shares of common stock at a price equal to $1.00 per share
        (collectively, the "Warrants").
 
 The
        Notes
        mature on the third anniversary of the date of issuance (the "Maturity Date")
        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 (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. 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.
 
 In
        connection with the Purchase Agreement, the Company also entered into
        registration rights agreements (the “Registration Rights Agreements”) 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 (
        “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.
 
 *
        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. Default 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,as amended, the Registrant has duly caused this report to be signed
        on its
        behalf by the undersigned, thereunto duly authorized, on this
        21st day
        of May 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