**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-Q**





(Mark
      One)


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


**EXCHANGE
      ACT OF 1934**




**For
      the quarterly period ended September 30, 2008**




**OR**




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


**EXCHANGE
      ACT OF 1934**




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





**Commission
      file number: 000-49743**




**TXP
      CORPORATION**


(Exact
      name of registrant 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)





**(214)
      575-9300**


(Registrant’s
      telephone number, including area code)





Indicate
      by check mark whether the registrant (1) filed all reports required to be filed
      by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
      preceding 12 months (or for such shorter period that the registrant 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 large accelerated filer, an
      accelerated filer, a non-accelerated filer or a smaller reporting company.
      See
      the definitions of “large accelerated filer,” “accelerated filer”
and  “smaller reporting company” in Rule 12b-2 of the Exchange
      Act.




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





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**




Indicate
      the number of shares outstanding of each of the issuer's classes of common
      stock, as of the latest practicable date: As of November 14, 2008, the number
      of
      issued and outstanding shares of the issuer's common stock, par value $.001
      per
      share, was 116,966,428 shares.










**TXP
      CORPORATION**




**SEPTEMBER
      30, 2008 FORM 10-Q QUARTERLY REPORT**




**INDEX**




Page**PART
                I - FINANCIAL INFORMATION**
            
            
            F-1Item
                1.****Financial
                Statements.
            
            
            F-1Item
                2. Management's Discussion and Analysis of Financial Condition and
                Results
                of Operations.
            
            
            1Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk.
            
            
            24****Item
                4. Controls and Procedures.
            
            
            24**PART
                II - OTHER INFORMATION**
            
            
            25Item
                1. Legal Proceedings.
            
            
            25Item
                1A. Risk Factors.
            
            
            25Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds.
            
            
            33Item
                3. Defaults Upon Senior Securities.
            
            
            34Item
                4. Submission of Matters to a Vote of Security Holders.
            
            
            34Item
                5. Other Information.
            
            
            34Item
                6. Exhibits.
            
            
            34**SIGNATURES**
            
            
            35










**PART
      I - FINANCIAL INFORMATION**





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





**TXP
      CORPORATION AND SUBSIDIARY**


CONSOLIDATED
      BALANCE SHEETS





**September 30**
            
            **December 31****2008**
            
            **2007**(unaudited)**ASSETS****Current
                assets**Cash
            
            $
            416,000
            
            $
            210,000Accounts
                receivable, net of allowance of $19,000 and $23,000 as of September
                30,
                2008 and December 31, 2007.
            
            
            1,253,000
            
            
            1,708,000Inventory
            
            
            2,059,000
            
            
            1,772,000Other
                current assets
            
            
            327,000
            
            
            212,000Total
                current assets
            
            
            4,055,000
            
            
            3,902,000**Property
                and equipment, net**
            
            
            2,489,000
            
            
            2,641,000**Other
                assets**
            
            
            77,000
            
            
            140,000**TOTAL
                ASSETS**
            
            $
            6,621,000
            
            $
            6,683,000**LIABILITIES
                AND STOCKHOLDERS' DEFICIT****Current
                liabilities**Current
                maturities of notes payable
            
            $
            57,000
            
            $
            144,000Current
                capital lease obligations
            
            
            71,000
            
            
            120,000Lines
                of credit
            
            
            5,084,000
            
            
            3,300,000Accounts
                payable
            
            
            1,638,000
            
            
            1,239,000Deferred
                revenue
            
            
            -
            
            
            17,000Accrued
                expenses
            
            
            1,473,000
            
            
            704,000Total
                current liabilities
            
            
            8,323,000
            
            
            5,524,000**Notes
                payable, net of current maturities**
            
            
            74,000
            
            
            -**Capital
                lease obligations, net of current obligations**
            
            
            120,000
            
            
            165,000**Convertible
                  debentures,** net of unamortized discount of $6,846,000 and
                  $3,370,000 as of September 30, 2008 and December 31, 2007
                  respectively.
            
            
            2,654,000
            
            
            1,630,000**Derivative
                financial instruments**
            
            
            9,743,000
            
            
            5,178,000**Deferred
                tax liability**
            
            
            48,000
            
            
            48,000**TOTAL
                LIABILITIES**
            
            
            20,962,000
            
            
            12,545,000**STOCKHOLDERS'
                DEFICIT**Common
                Stock, $.001 par value, 300,000,000 authorized 116,966,428 and 116,584,428
                shares issued and outstanding as of September 30, 2008 and December
                31,
                2007 respectively.
            
            
            117,000
            
            
            117,000Additional
                paid in capital
            
            
            6,708,000
            
            
            8,133,000Accumulated
                deficit
            
            
            (21,171,000
            )
            
            (14,117,000
            )Accumulated
                other comprehensive income
            
            
            5,000
            
            
            5,000**TOTAL
                STOCKHOLDERS' DEFICIT**
            
            
            (14,341,000
            )
            
            (5,862,000
            )**TOTAL
                LIABILITIES AND STOCKHOLDERS' DEFICIT**
            
            $
            6,621,000
            
            $
            6,683,000





See
      Accompanying Notes to Consolidated Financial Statements


F-1





**TXP
      CORPORATION AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENT OF OPERATIONS**


(Unaudited)





**Three Months Ended**
              **September 30**
            
            **Nine Months Ended**
              **September 30****2008**
            
            **2007**
            
            **2008**
            
            **2007****Revenues**Prototyping
                and assembly
            
            $
            866,000
            
            $
            1,016,000
            
            $
            3,211,000
            
            $
            3,644,000Material
                management services
            
            
            845,000
            
            
            896,000
            
            
            3,210,000
            
            
            2,870,000Retrofit
                solutions
            
            
            603,000
            
            
            331,000
            
            
            1,268,000
            
            
            809,000Product
                and accessory
            
            
            363,000
            
            
            95,000
            
            
            796,000
            
            
            123,000Design
                and development
            
            
            -
            
            
            327,000
            
            
            -
            
            
            699,000Total
                revenues
            
            
            2,677,000
            
            
            2,665,000
            
            
            8,485,000
            
            
            8,145,000**Cost
                of sales**
            
            
            2,210,000
            
            
            1,810,000
            
            
            6,290,000
            
            
            5,267,000**Gross
                profit**
            
            
            467,000
            
            
            855,000
            
            
            2,195,000
            
            
            2,878,000**Costs
                and expenses**Selling,
                general and administrative
            
            
            1,303,000
            
            
            1,243,000
            
            
            4,470,000
            
            
            3,493,000Research
                and development
            
            
            1,053,000
            
            
            1,271,000
            
            
            3,764,000
            
            
            3,278,000Depreciation
            
            
            48,000
            
            
            44,000
            
            
            165,000
            
            
            113,000Total
                costs and expenses
            
            
            2,404,000
            
            
            2,558,000
            
            
            8,399,000
            
            
            6,884,000**Operating
                loss**
            
            
            (1,937,000
            )
            
            (1,703,000
            )
            
            (6,204,000
            )
            
            (4,006,000
            )**Other
                income (expense)**Interest
                expense, net
            
            
            (1,335,000
            )
            
            (488,000
            )
            
            (2,825,000
            )
            
            (1,189,000
            )Change
                in fair value of derivative financial instruments
            
            
            6,305,000
            
            
            869,000
            
            
            3,424,000
            
            
            2,041,000Loss
                on impairment of fixed assets
            
            
            -
            
            
            -
            
            
            (196,000
            )
            
            -Gain (loss)on
                the early extinguishment of debt
            
            
            -
            
            
            3,000
            
            
            (1,253,000
            )
            
            3,000Total
                other income (expense)
            
            
            4,970,000
            
            
            384,000
            
            
            (850,000
            )
            
            855,000**Income
                (loss) before income taxes**
            
            
            3,033,000
            
            
            (1,319,000
            )
            
            (7,054,000
            )
            
            (3,151,000
            )**Income
                tax expense**
            
            
            -
            
            
            -
            
            
            -
            
            
            -**Net
                income (loss)**
            
            $
            3,033,000
            
            $
            (1,319,000
            )
            $
            (7,054,000
            )
            $
            (3,151,000
            )**Comprehensive
                income (loss)**
            
            $
            3,033,000
            
            $
            (1,319,000
            )
            $
            (7,054,000
            )
            $
            (3,151,000
            )**Net
                income (loss) per share – Basic & Diluted**
            
            $
            0.03
            
            $
            (0.01
            )
            $
            (0.06
            )
            $
            (0.03
            )**Weighted
                average shares outstanding - Basic & Diluted**
            
            
            116,864,230
            
            
            113,013,908
            
            
            116,786,584
            
            
            108,374,698




See
      Accompanying Notes to Consolidated Financial Statements




F-2





**TXP
      CORPORATION AND SUBSIDIARY**


**STATEMENT
      OF CHANGES IN STOCKHOLDERS’ DEFICIT**


**Nine
      Months Ended September 30, 2008 (unaudited)**





**COMMON
                STOCK**
            
            
            
            **Accumulated****Additional**
            
            
            
            **other****paid
                in**
            
            **Accumulated**
            
            **comprehensive****Shares**
            
            **Amount**
            
            **capital**
            
            **deficit**
            
            **income**
            
            **Total****Balance,
                December 31, 2007**
            
            
            **116,584,428**
            
            **$**
            **117,000**
            
            **$**
            **8,133,000**
            
            **$**
            **(14,117,000**
            **)**
            **$**
            **5,000**
            
            $
            **(5,862,000**
            **)**Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (7,054,000
            )
            
            -
            
            
            (7,054,000
            )Reclassification
                of Warrants to Derivative Financial Instruments
            
            
            -
            
            
            -
            
            
            (1,904,000
            )
            
            -
            
            
            -
            
            
            (1,904,000
            )Stocks
                issued or awarded to employees and consultants
            
            
            382,000
            
            
            -
            
            
            51,000
            
            
            -
            
            
            -
            
            
            51,000Stock
                compensation: options awarded to employees (Note 5)
            
            
            -
            
            
            -
            
            
            428,000
            
            
            -
            
            
            -
            
            
            428,000**Balance,
                September 30, 2008**
            
            
            **116,966,428**
            
            **$**
            **117,000**
            
            **$**
            **6,708,000**
            
            **$**
            **(21,171,000**
            **)**
            **$**
            **5,000**
            
            **$**
            **(14,341,000**
            **)**





See
      Accompanying Notes to Consolidated Financial Statements


F-3





**TXP
      CORPORATION AND SUBSIDIARY**


CONSOLIDATED
      STATEMENT OF CASH FLOWS


(Unaudited)





**Nine Months Ended September 30****2008**
            
            **2007****CASH
                FLOWS USED IN OPERATING ACTIVITIES:**Net
                loss
            
            $
            (7,054,000
            )
            $
            (3,151,000
            )**Adjustments
                to reconcile net loss to cash used in operating
                activities:**Depreciation
            
            
            400,000
            
            
            378,000Provision
                for Bad Debt
            
            
            -
            
            
            10,000Gain
                on sale of fixed assets
            
            
            -
            
            
            (3,000
            )Loss
                on Impairment of Fixed Assets
            
            
            196,000
            
            
            -Deferred
                revenue
            
            
            (17,000
            )
            
            (245,000
            )Amortization
                of discount on convertible notes
            
            
            1,576,000
            
            
            797,000Gain
                on early extinguishment of debt
            
            
            1,253,000
            
            
            -Stock
                compensation
            
            
            479,000
            
            
            429,000Change
                in value of derivative financial instruments
            
            
            (3,424,000
            )
            
            (2,041,000
            )Changes
                in assets and liabilities:Accounts
                receivable
            
            
            455,000
            
            
            (569,000
            )Inventory
            
            
            (287,000
            )
            
            (1,286,000
            )Other
                current assets
            
            
            351,000
            
            
            (46,000
            )Other
                assets
            
            
            63,000
            
            
            -Accounts
                payable
            
            
            398,000
            
            
            241,000Accrued
                expenses
            
            
            771,000
            
            
            307,000**CASH
                FLOWS USED IN OPERATING ACTIVITIES**
            
            
            (4,840,000
            )
            
            (5,179,000
            )**CASH
                FLOWS USED IN INVESTING ACTIVITIES:**Proceeds
                from sale of fixed assets
            
            
            -
            
            
            20,000Capital
                expenditures
            
            
            (275,000
            )
            
            (181,000
            )**CASH
                FLOWS USED IN INVESTING ACTIVITIES**
            
            
            (275,000
            )
            
            (161,000
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Proceeds
                from sale of common stock and warrants
            
            
            -
            
            
            1,000,000Proceeds
                from convertible debenture
            
            
            3,814,000
            
            
            3,615,000Line
                of credit, net
            
            
            1,784,000
            
            
            850,000Repayment
                of notes payable and capital lease obligations
            
            
            (277,000
            )
            
            (294,000
            )**CASH
                FLOWS PROVIDED BY FINANCING ACTIVITIES**
            
            
            5,321,000
            
            
            5,171,000NET
                INCREASE / (DECREASE) IN CASH
            
            
            206,000
            
            
            (169,000
            )Cash,
                beginning of period
            
            
            210,000
            
            
            228,000Cash,
                end of period
            
            $
            416,000
            
            $
            59,000





See
      Accompanying Notes to Consolidated Financial Statements





F-4





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





**2008**
            
            **2007****CASH**Interest
                paid
            
            $
            373,000
            
            $
            149,000Taxes
                paid
            
            $
            -
            
            $
            -**NONCASH
                INVESTING AND FINANCING ACTIVITIES**125,000
                shares issued to investor to settle commitment fee liability
            
            $
            -
            
            $
            60,0006,730,032
                shares issued on conversion of debt and accrued interest
            
            $
            -
            
            $
            792,000Property
                acquired under capital lease obligations and notes payable
            
            $
            174,000
            
            $
            289,000Reclassification
                of warrants to additional paid in capital (Note 12)
            
            $
            -
            
            $
            2,684,000Fees
                paid to holder in conjunction with the issuance of convertible
                note
            
            $
            -
            
            $
            350,000Offering
                costs charged to additional paid in capital
            
            $
            -
            
            $
            35,000Fair
                value of embedded conversion option bifurcated from $4M convertible
                note
            
            $
            -
            
            $
            2,603,000Warrants
                issued to investor
            
            $
            -
            
            $
            797,000Fees
                to holder settled in common stock in conjunction with issuance of
                $4M
                convertible note
            
            $
            -
            
            $
            76,000Fair
                value of re-issued embedded conversion option bifurcated from $4M
                and
                $1Mconvertible note (Note 12) net of value at
                extinguishment.
            
            $
            1,806,000
            
            $
            -Reclassification
                of warrants to derivative financial instrument from additional paid
                in
                capital (Note 12)
            
            $
            2,370,000
            
            $
            -Fair
                value of embedded conversion option bifurcated from $3M convertible
                note
                net of excess fees, options and warrants over the value of the convertible
                debenture (Note 12)
            
            $
            553,000
            
            $
            -Fair
                value of warrants issued to investor in conjunction with the $3M
                convertible debenture (Note 12)
            
            $
            1,777,000
            
            $
            -Fair
                value of embedded conversion option bifurcated from $1.5M convertible
                note
                net of excess fees, options and warrants over the value of the convertible
                debenture (Note 12)
            
            $
            521,000
            
            $
            -Fair
                value of warrants issued to investor in conjunction with the $1.5M
                convertible debenture (Note 12)
            
            $
            962,000
            
            $
            -Debt
                issue costs recorded on issuance of 1,280,000 warrants
            
            $
            431,000
            
            $
            -Debt
                issue costs recorded on issuance of 100,000 shares
            
            $
            35,000
            
            $
            -





See
      Accompanying Notes to 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 October 14, 2008. 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
      2007 as reported in the 10-KSB/A filed October 14, 2008, 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 (OEMs)
      and contract manufacturers (CMs) in the United States of America.




TXP’s
      retrofit solutions business offers custom engineering kits to enable incumbent
      local exchange carriers (ILECs) to upgrade their local access service delivery
      infrastructure. These retrofit kits enable a wide range of next generation
      telecom platforms to fit into various remote cabinets that have been deployed
      by
      ILECs. The Company’s kits cover a diverse range of cabinets of differing sizes
      and line counts from a majority of the industry’s access vendors. TXP believes
      that its retrofit kits offer carriers the ability to upgrade their network
      infrastructure for substantially less cost than using new cabinets. Retrofits
      are generally deployed due to a generational change of access equipment
      supporting the latest telecom services which require power and/or cooling
      upgrades.




In
      December of 2006, TXP created a new business unit, iPhotonics, which focuses
      primarily on the development and sale of Optical Network Terminals (“ONTs”) 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
      Company’s corporate name has changed several times to date including in November
      1999 to “Jesse Livemore.com” and in December 2001 to “Stock Market Solutions,
      Inc.” and in April of 2006 to “YTXP Corporation”. On April 28, 2006, the reverse
      merger between the wholly owned subsidiary of Stock Market Solutions, Inc.
      was
      consummated with Texas Prototypes, Inc., a private company. The transaction
      was
      treated as a recapitalization of Texas Prototypes, Inc., with Texas Prototypes,
      Inc. treated as the accounting acquirer and continuing reporting entity. A
      change of control was deemed to have occurred as a result of the transaction.
      In
      June of 2006, the articles of incorporation were amended and the Company's
      name
      was changed to TXP Corporation (See Note 2, Merger and
      Recapitalization).





**NOTE
      2 - ACCOUNTING POLICIES**





***Merger
      and Recapitalization***





On
      June
      14, 2005 Stock Market Solutions, Inc. and its wholly owned subsidiary entered
      into a definitive Agreement and Plan of Merger (“the 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 by 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.




F-6




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.





On
      June
      29, 2008, we entered into a non-binding letter of intent with Cambridge
      Industries Group (“ CIG ”)
      which
      set forth preliminary terms for a proposed merger of the two companies (the
      “ Proposed
      Merger ”).
      On
      August 18, 2008, the parties entered into a non-binding memorandum of
      understanding for the Proposed Merger. The Proposed Merger is expected to close
      before year-end. However, there can be no assurance that satisfactory due
      diligence will be completed, that a definitive merger agreement will be entered
      into, that all closing conditions will be satisfied, or that the Proposed Merger
      will be consummated.




***Consolidation***





As
      of
      September 30, 2008, TXP had one wholly owned subsidiary, TXP-Asia. All material
      inter-company balances and inter-company transactions have been
      eliminated.





***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 recorded in “Accumulated other comprehensive
      income.”




***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 September 30, 2008 and December 31, 2007, the cash balance
      at
      our financial institution exceeded the insured limits by $513,000 and $215,000,
      respectively.





***Allowance
      for Doubtful Accounts***





Earnings
      are charged with a provision for doubtful accounts based on a current review
      of
      collectability of accounts receivable. Accounts deemed uncollectible are charged
      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, retrofit services raw
      materials, and ONT related raw materials. In November 2004 the Financial
      Accounting Standards Board ("FASB") issued Statement of Financial Accounting
      Standards No. 151, "Inventory Costs-an amendment of ARB No. 43, Chapter 4"
      ("SFAS 151"). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory
      Pricing," to clarify the accounting for abnormal amounts of idle facility
      expense, freight, handling costs and wasted material (spoilage). Among other
      provisions, the new rule requires that items such as idle facility expense,
      excessive spoilage, double freight and rehandling costs be recognized as
      current-period charges regardless of whether they meet the criterion of "so
      abnormal" as stated in ARB No. 43. Additionally, SFAS 151 requires that the
      allocation of fixed production overhead to the costs of conversion be based
      on
      the normal capacity of the production facilities. SFAS 151 is effective for
      fiscal years beginning after June 15, 2005. As of January 1, 2006, the Company
      adopted SFAS 151. The adoption did not have a material impact on the Company's
      consolidated financial condition and results of operations.





F-7





***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.





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




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





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





TXP
      has
      penalty provisions in the registration rights agreement executed prior to the
      year 2007 of its YA Global Investments, L.P. (f/k/a Cornell Capital Partners,
      L.P.) debentures and warrants **(See NOTE 12 - CONVERTIBLE DEBENTURES, WARRANTS, AND
      SECURITIES)** that
      require TXP to file the registration statement which registers the shares
      underlying the YA Global debentures and warrants no later than 45 days from
      the
      date of closing and to use its best efforts to cause the registration statement
      to be declared effective no later than 120 days after filing and to insure
      that
      the registration statement remains in effect until all of the shares of common
      stock issuable upon conversion of the debentures and exercise of the warrants
      have been sold. In the event of a default of the Company's obligations under
      the
      registration rights agreement, including its agreement to file the registration
      statement for the shares of common stock issuable upon conversion of the
      debentures and exercise of the warrants with the Securities and Exchange
      Commission no later than 45 days from the date of closing, or if the
      registration statement is not declared effective within 120 days of filing,
      TXP
      is required to pay to YA Global, 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 YA Global'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 YA Global elect to be paid
      liquidated damages in common stock. The Company obtained a waiver from YA Global
      waiving any claim or payment of liquidated damages up through and including
      May
      15, 2007. On May 14, 2007, the SEC declared TXP's registration statement
      effective for the aforementioned shares of common stock issuable upon conversion
      of the debentures and exercise of the warrants.





On
      October 11, 2006, TXP entered into a securities purchase agreement which
      provided for the filing of a registration statement by the Company with the
      Securities and Exchange Commission registering the shares and the shares of
      common stock issuable upon exercise of the warrants. **(See NOTE 12 - 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 June 17,
      2008,
      the investor agreed to waive its registration rights, as well as its
“piggy-back” registration rights, with respect to the shares and the shares
      underlying the warrants issued pursuant to the October 2006 securities purchase
      agreement. In exchange, the Company agreed to adjust the exercise prices of
      the
      warrants to $0.20 per share.




F-8




On
      March
      30, 2007, TXP entered into a securities purchase agreement with YA Global 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 **(See NOTE 12-CONVERTIBLE DEBENTURES, WARRANTS, AND
      SECURITIES)** within
      30 days of receipt of written demand of YA Global. The Company is obligated
      to
      use its best efforts to cause the registration statement to be declared
      effective no later than 90 days after filing and to ensure that the registration
      statement remains in effect until all of the shares of common stock issuable
      upon conversion of the notes and exercise of the warrants have been sold. In
      the
      event of a default of TXP's obligations under the registration rights agreement,
      including its agreement to file the registration statement with the Securities
      and Exchange Commission no later than 30 days from receipt of a written demand
      from YA Global, or if the registration statement is not declared effective
      within 90 days of filing, the Company is required pay to YA Global, as
      liquidated damages for each month that the registration statement has not been
      filed or declared effective, as the case may be, a cash amount equal to 2%
      of
      the liquidated value of the notes. Notwithstanding the foregoing, the Company
      shall not be liable for liquidated damages with respect to any warrants or
      warrant shares and the maximum aggregate liquidated damages payable to YA Global
      by the Company, if any, shall be 15% of the aggregate purchase price paid by
      YA
      Global pursuant to the purchase agreement.





On
      September 6, 2007, TXP entered into a securities purchase agreement with a
      strategic investor/qualified institutional buyer pursuant to which provides
      for
      the filing of a registration statement by the Company with the Securities and
      Exchange Commission registering the shares issued to the investor and the shares
      of common stock issuable upon exercise of the warrants **(See NOTE 12 - CONVERTIBLE DEBENTURES, WARRANTS, AND
      SECURITIES)** .
      The
      Company is obligated to file the registration statement no later than December
      15, 2007 and to use its best efforts to cause the registration statement to
      be
      declared effective by the Securities and Exchange Commission 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 of the shares and the warrants, in cash or at the investor's
      election in shares of common stock, for each 30 days or part thereof for the
      first 60 days after the occurrence of a non-registration event and 2% for each
      30 days or part thereof thereafter; provided, however, that the aforementioned
      liquidated damages shall only accrue, if at all, for 12 months after the closing
      date. As of September 30, 2008, an aggregate of $173,000 in liquidated damages
      has accrued and been recorded as an expense.





On
      December 13, 2007, the Company and YA Global entered into Amendment No. 1 to
      the
      Purchase Agreement pursuant to which the second closing of $1,000,000 was
      revised from the date on which the Company files the Registration Statement
      to
      December 13, 2007. Accordingly, on December 13, 2007 the Company and YA Global
      completed the second closing in which the Company received gross proceeds in
      the
      amount of $1,000,000 and the Company issued to YA Global a Note in the principal
      amount of $1,000,000. In addition, the Company issued 48,781 shares of common
      stock to YA Global as an original issue discount which represents a number
      of
      shares equal to 2% of the second closing proceeds of $1,000,000 at a per share
      price equal to $0.41, which represents the fixed conversion price of the Notes.
      Moreover, on December 13, 2007 the Company and YA Global entered into Amendment
      No. 1 to the Registration Rights Agreement pursuant to which the Scheduled
      Filing Date was revised to 180 calendar days from the second closing date of
      December 13, 2007.





On
      December 28, 2007, TXP entered into an Agreement with James Von Ehr, II an
      accredited investor pursuant to which we will, within 90 days from the date
      the
      Collateral (as defined below) is deposited into the account of a Lender (the
      “Closing Date”), issue to the investor seven-year warrants to purchase an
      aggregate of 1,280,000 shares of common stock as consideration for the investor
      agreeing to pledge an aggregate of $2,000,000 in free-trading shares of common
      stock of 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 our behalf in favor of First Community Bank
      (f/k/a 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 us from a Lender in an amount up to
      $2,000,000 with a term of January 16, 2009 (the “Term”), which will be further
      guaranteed personally and through the pledge of common stock beneficially owned
      by Michael Shores, our Chief Executive Officer, in an amount equal to the
      initial amount pledged by the investor at a per share price equal to $0.50.
      The
      warrants are exercisable into shares of our common stock at a price equal to
      $0.40 per share.




As
      additional consideration of the investor’s agreement to pledge the Collateral to
      a Lender, on or prior to the Closing Date TXP will pay to the investor a
      one-time commitment fee through the issuance of 100,000 restricted shares of
      our
      common stock. In addition, TXP and the investor agreed to extend the permitted
      maturity dates of the Loans previously received by us from the Lender as set
      forth in the agreements entered into between TXP and the Investor on July 28,
      2006 and October 12, 2006, from July 28, 2008 and October 12, 2007,
      respectively, to January 16, 2009.




F-9




On
      May
      29, 2008, TXP entered into a registration rights agreement with YA Global
      providing 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 debentures and exercise of the warrants **(See
      NOTE 12-CONVERTIBLE DEBENTURES, WARRANTS, AND SECURITIES)** within
      30
      days of receipt of written demand of YA Global. TXP is obligated to use its
      best
      efforts to cause the registration statement to be declared effective no later
      than 120 days after filing and to ensure that the registration statement remains
      in effect until all of the shares of common stock issuable upon conversion
      of
      the debentures and exercise of the warrants have been sold or may
      permanently be sold. In the event of a default of its obligations under the
      registration rights agreement, including TXP’s agreement to file the
      registration statement with the Securities and Exchange Commission no later
      than
      30 days from receipt of a written demand from YA Global, or if the registration
      statement is not declared effective within 120 days of filing, TXP will be
      required pay to YA Global, as liquidated damages, for each month that the
      registration statement has not been filed or declared effective, as the case
      may
      be, a cash amount equal to 2% of the liquidated value of the debentures.
      Notwithstanding the foregoing, TXP shall not be liable for liquidated damages
      with respect to any warrants or warrant shares and the maximum aggregate
      liquidated damages payable to YA Global by TXP, if any, shall be 24% of the
      aggregate purchase price paid by YA Global pursuant to the May 2008 purchase
      agreement.





On
      June
      5, 2008,  we and YA Global entered into Amendment No. 2 to the Registration
      Rights Agreement dated as of March 30, 2007 pursuant to which the scheduled
      filing date of the registration statement required to be filed by us was revised
      from 180 days from the second closing date of December 13, 2007 to no later
      than
      30 days after receipt of written demand from YA Global; *provided
      that* ,
      YA
      Global may only deliver such written demand on or after July 7,
      2008.





On
      August
      20, 2008,  the Company entered into a letter agreement (the “Agreement”)
      with Yorkville Advisors, LLC, on its behalf and as Investment Manager to YA
      Global Investments, L.P. (collectively, “Yorkville”), pursuant to which the
      Company agreed, among other things, to relinquish all of its registration rights
      and rights to liquidated damages previously granted to Yorkville pursuant to
      all
      prior financing agreements entered into with the Company. The consummation
      of
      all of the transactions contemplated by the Agreement are subject to the
      consummation of the Financing by the Company. There can be no assurance that
      the
      Financing or the transactions contemplated by the Agreement will be completed **(See
      NOTE 12 - CONVERTIBLE DEBENTURES, WARRANTS, AND SECURITIES)** .





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





***Revenue
      Recognition***





Revenues
      are derived from the following sources:





·
            Prototyping
                and assembly services;


·
            Prototyping
                -Photonics/Optoelectronics
                services;


·
            Material
                supply chain management services;


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


·
            Telecom
                cabinet retrofit kits and design
                solutions;


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


·
            ONT
                design and development services.




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





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




F-10




Material
      supply chain management services consist 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 on a cost of
      material plus basis. The pricing is solely dependent on the complexity and
      volume of the services performed. TXP recognizes revenue when persuasive
      evidence of an arrangement exists, delivery has occurred, services have been
      performed, the sales price is fixed or determinable and collectability 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.





Telecom
      cabinet retrofit revenue kits and design solutions typically consist of
      designing and assembling retrofit kits to enable ILEC’s (Incumbent Local
      Exchange Carriers) to upgrade their local access service delivery
      infrastructure. TXP recognizes revenue when persuasive evidence of an
      arrangement exists, delivery has occurred, services have been performed, the
      sales price is fixed or determinable and collectability is probable. These
      criteria are generally met after an internal quality control review of the
      product and at the time product is shipped.





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





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 AICPA
      Statement of Position 81-1, “Accounting for Performance of Construction-Type and
      Certain Production-Type Contracts.” Revenues are recognized primarily based on
      costs incurred to date compared with total estimated contract costs. Generally
      TXP's design and development service costs consist of engineering labor costs
      and third party services.





***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. On March 26, 2008, an amendment to the 2006
      Stock Incentive Plan was adopted by the TXP board of directors for the sole
      purpose of increasing the number of authorized shares of common stock underlying
      awards available for issuance from 10,000,000 to 15,000,000 shares. As of
      September 30, 2008, 5,181,976 stock options and 1,935,870 shares of common
      stock
      have been awarded to employees, directors or consultants under this plan of
      which the Company recognized $(24,000) of stock compensation expense in selling,
      general and administrative expense in the statement of operations for quarter
      ended September 30, 2008. This decrease in expense is due primarily to the
      departure and resulting forfeiture of 2,714,400 options by the former Chief
      Operating Officer during the quarter.




F-11




***Net
      Income (Loss) Per Share***





Basic
      net
      income (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.





***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' deficit.





***Fair
      Value Measurements***





On
      January 1, 2008, the Company adopted SFAS No. 157, *Fair
      Value Measurements* (“SFAS
      157”). SFAS 157 revises the definition of fair value, provides guidance on the
      methods used to measure fair value and expands disclosure concerning fair value
      measurements. SFAS 157 establishes a fair value hierarchy that distinguishes
      between assumptions based on market data obtained from independent sources
      (“observable inputs”) and a reporting entity’s internally developed assumptions
      based on the best information available when there is little or no market
      activity for the asset or liability at the measurement date
      (“unobservable inputs ”).
      The
      fair value hierarchy in SFAS 157 assigns highest priority to quoted prices
      in
      active markets (level 1) followed by observable inputs other than quoted prices
      (level 2) and unobservable inputs have the lowest priority (level 3).
      Implementation of the standard did not have a material effect on the Company’s
      results from operations or financial position. The Company did not elect to
      early adopt FAS 157 for nonrecurring measurements of nonfinancial assets or
      liabilities as allowed under FSP FAS 157-2. **(See
      NOTE 11 – FAIR VALUE INSTRUMENTS)** .





***Recently
      Issued Accounting Standards***





In
      December 2007, the FASB issued SFAS No. 141(R), *Business Combinations* ,
      which
      changes the accounting for business combinations including the measurement
      of
      acquirer shares issued in consideration for a business combination, the
      recognition of contingent consideration, the accounting for pre-acquisition
      gain
      and loss contingencies, the accounting for acquisition-related restructuring
      cost accruals, the treatment of acquisition-related transaction costs and the
      recognition of changes in the acquirer’s income tax valuation allowance. This
      Statement is effective for financial statements issued for fiscal years
      beginning after December 15, 2008. The Company is in the process of
      evaluating the impact that the adoption of SFAS No. 141(R) will have
      on its financial position, results of operations and cash flows.




In
      March
      2008, the FASB issued SFAS No. 161, *Disclosures about Derivative Instruments and Hedging Activities — An
      Amendment of FASB Statement No. 133,* which
      requires entities to provide enhanced disclosures about (a) how and why an
      entity uses derivative instruments, (b) how derivative instruments and
      related hedged items are accounted for under Statement No. 133 and its
      related interpretations, and (c) how derivative instruments and related
      hedged items affect an entity’s financial position, financial performance and
      cash flows. SFAS No. 161 is effective for financial statements issued
      for fiscal years beginning after November 15, 2008. The Company is in the
      process of evaluating the impact of the adoption of
      SFAS No. 161.





In
      May 2008, FASB issued SFAS No. 162, *The
      Hierarchy of Generally Accepted Accounting Principles* (“FAS
      162”). FAS 162 identifies the sources of accounting principles and the framework
      for selecting the principles to be used in the preparation of financial
      statements of nongovernmental entities that are presented in conformity with
      GAAP (the “GAAP hierarchy”). This statement is effective 60 days after
      September 16, 2008 which was the date of the SEC’s approval of the Public
      Company Accounting Oversight Board amendments to AU
      Section 411, *The
      Meaning of Present Fairly in Conformity With Generally Accepted Accounting
      Principles* .
      We have
      not yet determined the impact that this requirement may have on our consolidated
      financial position, results of operations, cash flows or financial statement
      disclosures.




F-12




**NOTE
      3 - LIQUIDITY AND GOING CONCERN**




The
      accompanying consolidated financial statements have been prepared in conformity
      with generally accepted accounting principles, which contemplate continuation
      of
      the company as a going concern. As shown in the accompanying consolidated
      financial statements, the Company generated net income of $3,033,000 for the
      quarter ended September 30, 2008. Additionally, as previously filed in form
      10KSB/A on October 14, 2008 for the year ended December 31, 2007 the Company
      incurred a net loss of $8,927,000. As of those dates, the Company’s current
      liabilities exceeded current assets by $4,268,000 and $1,622,000 respectively
      and total liabilities exceed total assets by $14,341,000 and $5,862,000,
      respectively. Further, during 2008 and 2007 the Company violated certain
      provisions of a loan agreement. Any default under the loan agreement permits
      the
      bank to demand immediate payment of the debt including principal and accrued
      interest. During 2008 and 2007, the Company was in default due to failure to
      maintain debt coverage, debt-to-net-worth and current ratios as provided for
      in
      the loan agreement. The Company has entered into forbearance agreements with
      the
      lending institution which waived non-compliance of the covenants as explained
      in
      Note 8.





On
      May
      29, 2008,  we consummated a Securities Purchase Agreement (the “Purchase
      Agreement”) with YA Global Investments, L.P. (“YA Global”) providing for the
      sale by us to YA Global of our 12% secured convertible debentures in the
      aggregate principal amount of $5,750,000 (the “Debentures”), of which a
      $3,000,000 Debenture was issued on May 29, 2008 and a $1,500,000 Debenture
      was
      issued on August 14, 2008. On October 15, 2008,  we and YA Global entered
      into Amendment No. 1 to the Purchase Agreement pursuant to which the date on
      which the third closing of the private placement is scheduled to occur was
      revised from October 15, 2008 to November 15, 2008 **(See
      NOTE 18 – SUBSEQUENT EVENTS)** .
      However, the third closing contains conditions to closing and may not
      occur.  Under the **** Purchase
      Agreement, we must (i) enter into a contract (or series of contracts) for the
      development and sale of optical network terminals on terms that are satisfactory
      to YA Global in total value of contracts, counterparty, and gross product
      margins to the Company, and (ii) complete an equity raise resulting in proceeds
      to us of at least $5,000,000 (collectively, the “Milestones”). If we fail to
      achieve at least one of the Milestones on or before November 15, 2008, then
      the
      third closing will not occur.





In
      addition, beginning on October 31, 2008 and each monthly anniversary thereafter
      until paid in full, we are required to redeem the outstanding principal amount
      of the Debentures in installments equal to $167,777 per month, in cash or in
      common stock (the “Redemption Shares”) at our option and if certain additional
      conditions are met, at a per share price equal to the lesser of (i) the
      conversion price, or (ii) a 25% discount to the lowest daily volume weighted
      average price for the common stock for the 20 trading days prior to the
      redemption payment date; provided that *,* the
      Redemption Share component of each redemption payment will be limited to 15%
      of
      the dollar value of the common stock traded over the previous 30 trading days.
      On November 13, 2008, the Company entered into a Deferral Agreement with YA
      Global deferring the mandatory redemption payments which were scheduled to
      be
      made on October 31, 2008 and November 30, 2008 to December 15, 2008.





On
      August
      13, 2008,  the Company entered into a Factoring and Security Agreement (the
“Factoring Agreement”) with Landry Marks Partners, L.P. (“Landry”) pursuant to
      which Landry shall have to option to purchase certain account receivables (the
      “Purchased Accounts”) from the Company, from time to time on a revolving basis,
      up to a maximum amount of $1,500,000 at any one time (the “Purchase Price”), of
      which, in the initial purchase(s) from Landry (i) $500,000 was used by the
      Company to repay, in full, that certain revolving line of credit with First
      Community Bank (f/k/a First Bank of Canyon Creek); and (ii) $750,000 will be
      used by the Company to redeem certain outstanding convertible notes previously
      issued to YA Global. The Company granted a first priority security interest
      to
      Landry in all of the Purchased Accounts, future acquired accounts, and all
      other
      rights of payment owed to the Company, which will become effective when the
      revolving line of credit with First Community Bank (f/k/a First Bank of Canyon
      Creek) is repaid. The revolving line of credit with First Community Bank was
      repaid on September 18, 2008.





Additionally,
      the cash required to operate the iPhotonics business unit, which was formed
      in
      the fourth quarter of 2006, continues to be significant. The formation of the
      iPhotonics business unit resulted in TXP adding 35 full-time employees and
      amending its lease in November of 2006 to expand the operating facility by
      16,000 square feet. In April of 2008 we reduced headcount and made other changes
      to our iPhotonics business unit to reduce costs. Going forward, incremental
      personnel cost and lease payments are expected to average approximately $200,000
      and $8,000, respectively, per month. Other research and development and
      operational costs are expected to average just under $120,000 per month for
      the
      next twelve months. Revenues to date related to the iPhotonics' business unit
      have been insignificant relative to the related expenditures which, coupled
      with
      lower than expected revenues from our other operating units, continues to place
      significant strain on our cash and liquidity position.




To
      continue to operate under our current business model of which our iPhotonics
      business unit is integral and material, we will urgently need to raise
      additional funds by late November 2008. To obtain funds to continue our
      operations, we may utilize any of several potential options, including the
      issuance of debt or equity securities, the exercise of warrants issued to
      investors in conjunction with previous private offerings, and other arrangements
      with strategic partners. No assurance can be given that we will be able to
      obtain financing on favorable terms, if at all. If we are unable to obtain
      additional financing when needed, we could be required to modify our business
      plan including selling the iPhotonics business unit assets or shutting down
      its
      operations, or cease our operations altogether, depending on the extent of
      available financing. Our ability to continue as a going concern depends upon
      our
      ability to raise substantial funds for use in our operating plan and activities
      especially related to our iPhotonics business unit.




F-13




Because
      it is unclear whether the Company will be successful in accomplishing these
      objectives, there is uncertainty about the Company’s ability to continue as a
      going concern beyond November 2008. The accompanying consolidated financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.




**NOTE
      4 - RELATED PARTY TRANSACTIONS**





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





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





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





On
      September 19, 2007, TXP advanced $35,535 to the majority shareholder and Chief
      Executive Officer of the Company, Michael C. Shores, for bonus compensation
      related to completion of the 2007 performance-related objectives. The bonus
      compensation was paid on November 6, 2007 and the advance was repaid in
      full.





On
      February 6, 2008, the Company entered into a non-exclusive and non-assignable
      Manufacturer’s Representative Agreement with Marsh Technologies, Inc., an entity
      partially owned and controlled by Michael Shores, the Company’s President and
      Chief Executive Officer, pursuant to which the Company engaged Marsh as an
      independent sales representative for the sale of the Company’s products and/or
      services. In exchange for such services, the Company will pay to Marsh, in
      cash
      or in restricted shares of common stock, commissions equal to (i) 1% of ONT
      sales, (ii) 3% of prototyping and engineering services sales, and (iii) 4%
      on
      retrofit kit sales. At September 30, 2008, Marsh Technologies had not sold
      any
      of the Company's products and/or services.





On
      May
      15, 2008, the majority shareholder and Chief Executive Officer of the Company,
      Michael C. Shores loaned the Company $50,000 for working capital requirements.
      On May 19, 2008, the Company repaid this loan in full.




**NOTE
      5 - STOCK BASED COMPENSATION**




In
      June
      of 2006, a 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 Section 422 of the Internal
      Revenue Code 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
      initially provided 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. On March 26, 2008 an amendment to the 2006
      Stock Incentive Plan was adopted by the TXP board of directors for the sole
      purpose of increasing the number of authorized shares of common stock underlying
      awards available for issuance from 10,000,000 to 15,000,000 shares.




F-14




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





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




During
      2007, the Company granted or agreed to grant a total of 3,740,941 options and
      issued or agreed to issue 1,513,076 free-trading shares of common stock which
      includes the 1,404,870 free-trading shares discussed above.





In
      the
      first quarter of 2008, the Company granted a total of 3,639,400 options and
      issued or agreed to issue 176,000 free-trading shares of common stock. These
      grants included a 10-year option to purchase 2,714,400 shares of our common
      stock issued on January 11, 2008 to Greg Lowe, our Chief Operating Officer,
      at
      an exercise price equal to $0.48 per share as compensation for services
      performed on our behalf, of which one-third of such options vest on January
      11,
      2009, 2010 and 2011, respectively.




In
      the
      second quarter of 2008, the Company awarded a total of 162,500 free-trading
      shares of common stock to employees and consultants in consideration of services
      performed on our behalf.





In
      the
      third quarter of 2008, certain employees left the Company including Greg Lowe,
      the Chief Operating Officer, resulting in a significant number of options being
      forfeited during the period.





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.





A
      summary
      of stock option activity for the nine months ended September 30, 2008 is
      presented in the following table.




**Weighted****Weighted**
            
            
            
            **Average****Average**
            
            **Aggregate**
            
            **Remaining****Exercise**
            
            **Intrinsic**
            
            **Contractual****Options**
            
            **Price**
            
            **Value**
            
            **Life (years)****Outstanding
                at January 1, 2008**
            
            
            **5,458,270**
            
            **$**
            **0.33**
            
            
            **1,690,000**
            
            
            **9.25**Granted
            
            
            3,639,400
            
            
            **0.48**Exercised
            
            
            -Forfeited
            
            
            (3,628,411
            )
            
            **0.45**Expired
            
            
            (287,283
            )
            
            **0.31****Outstanding
                at September 30, 2008**
            
            
            **5,181,976**
            
            **$**
            **0.35**
            
            **$**
            **(259,103**
            **)**
            
            **8.71****Exercisable
                at September 30, 2008**
            
            
            **1,823,517**
            
            **$**
            **0.33**
            
            **$**
            **(54,706**
            **)**
            
            **8.49**




The
      Company adopted SFAS No. 123R effective January 1, 2006. Due to the
      significant number of options being forfeited, the Company's statement of
      operations for the quarter ended September 30, 2008 recorded a total of
      $(24,000) of compensation cost for stock option share-based payment arrangements
      and the issuance of free trading shares. No stock options were exercised during
      the quarter ended September 30, 2008.




F-15




The
      fair
      value of stock options is determined using the Black-Scholes valuation model.
      Expected volatility is based solely on historical volatility of the Company's
      common stock over the period commensurate with the expected term of the stock
      options. The Company relies solely on historical volatility because its traded
      options do not have sufficient trading activity to allow it to incorporate
      the
      mean historical implied volatility from traded options into the
      Company's estimate of future volatility. The expected term calculation for
      stock options is based on the “simplified” method described in Staff Accounting
      Bulletin No. 107, Share-Based Payment. The risk-free interest rate is based
      on the 3 year U.S. Treasury yield in effect at the time of grant for an
      instrument with a maturity that is commensurate with the expected term of the
      stock options. The dividend yield of zero is based on the fact that the Company
      has never paid cash dividends on its common stock, and the Company has no
      present intention to pay cash dividends. There were no options issued during
      the
      third quarter of 2008. The following assumptions were used for options granted
      during the nine months ended September 30, 2008:





**Expected
                volatility**
            
            
            **99**
            **%****Expected
                Term (years)**
            
            
            **6.0****Risk-free
                interest rate**
            
            
            **2.60**
            **%****Expected
                dividend yield**
            
            
            **0**
            **%****Forfeiture
                rate**
            
            
            **10**
            **%**





As
      of
      September 30, 2008 there was $1,219,813 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 1.71 years.





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




Basic
      net
      income (loss) 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 (loss) 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:**
            
            **September 30**
            
            **September 30****2008**
            
            **2007****Numerator:**Net
                loss available to common stockholders
            
            $
            (3,033,000
            )
            $
            (1,319,000
            )**Denominator:**For
                basic net income per share - weighted average shares
            
            
            116,864,230
            
            
            113,013,908Dilutive
                potential securities
            
            
            -
            
            
            -Denominator
                  for diluted net income per share—adjusted weighted average
                  shares
            
            
            116,864,230
            
            
            113,013,908Basic
                net loss per share
            
            $
            (0.03
            )
            $
            (0.01
            )Diluted
                net loss per share
            
            $
            (0.03
            )
            $
            (0.01
            )





For
      the
      quarters ended September 30, 2008 and 2007, certain potential shares of common
      stock have been excluded from diluted loss per share because the exercise price
      was greater than the average market price of TXP's common stock, and therefore,
      the effect on diluted loss per share would have been anti-dilutive. Other
      convertible securities and employee stock options were excluded because their
      inclusion was anti-dilutive.  The following table sets forth the number of
      potential shares of common stock that have been excluded from diluted net loss
      per share because their effect was anti-dilutive:





F-16





**For the Quarter Ended September 30,****2008**
            
            **2007**Warrants
                to purchase common shares
            
            
            31,777,500
            
            
            17,198,000Stock
                options issued under the 2006 incentive stock plan
            
            
            5,181,976
            
            
            2,808,929Convertible
                Debentures
            
            
            47,500,000
            
            
            10,105,714**Total**
            
            
            **84,459,476**
            
            
            **30,112,643**





**NOTE
      7 – PROPERTY AND EQUIPMENT**





Components
      of property, plant and equipment at September 30, 2008 and December 31, 2007
      follows:





**September 30, 2008**
            
            **December 31, 2007**Machinery
                and Equipment
            
            $
            2,823,000
            
            $
            2,645,000Computers
            
            
            222,000
            
            
            184,000Software
            
            
            719,000
            
            
            711,000Vehicles
            
            
            12,000
            
            
            12,000Furniture
                and fixtures
            
            
            183,000
            
            
            183,000Leasehold
                improvements
            
            
            77,000
            
            
            74,0004,036,000
            
            
            3,809,000Less:
                accumulated depreciation
            
            
            (1,547,000
            )
            
            (1,168,000
            )**Total
                Property & Equipment**
            
            **$**
            **2,489,000**
            
            **$**
            **2,641,000**




Depreciation
      expense totaled $400,000 for the nine months ended September 30, 2008 and
      $513,000 for the twelve months ended December 31, 2007. For the nine months
      ended September 30, 2008 a non-cash charge of $196,000 was incurred for certain
      equipment that was deemed to have an impaired value. The fair value of this
      equipment was determined by competitive bids received through an equipment
      broker. The Company has elected not to dispose of the equipment at this
      time.




**NOTE
      8 - LINES OF CREDIT**





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





As
      was
      previously disclosed in **NOTE
      3 - LIQUIDITY AND GOING CONCERN,** the **** Factoring
      Agreement with Landry Marks Partners, L.P. required that of the initial
      purchase(s) from Landry, $500,000 was to be used by the Company to repay, in
      full, that certain revolving line of credit with First Community Bank (f/k/a
      First Bank of Canyon Creek). On September 18, 2008 the Company fulfilled this
      requirement and paid off the loan in full, including accrued interest of
      $18,850.





***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. On August 14, 2007, the line of credit was amended
      to increase the Line from $3,000,000 to $3,500,000. The loan accrues interest
      at
      the Wall Street Journal Prime Rate or 8% per annum, whichever is higher, rounded
      to the nearest .00125%. 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 marketable securities by an investor of the Company (as more
      fully discussed in **NOTE 12 - 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.




F-17




On
      February 25, 2008, the Company consummated a fourth Loan Agreement (the “Loan
      Agreement”) dated as of February 14, 2008 with FBCC which renews and supersedes
      the prior Loan Agreement dated as of August 14, 2007 and increased the Company’s
      line of credit from $3,500,000 to $5,100,000 (the “Loan”) to be used by the
      Company for working capital and general corporate purposes. The entire Loan
      bears interest at a rate of 8.00% per annum rounded to the nearest .00125%
      and
      all principal, and accrued and unpaid interest, is due on January 16, 2009.
      The
      Company’s obligations under the Loan Agreement are secured by a pledge of an
      aggregate of $6,375,000 in Collateral by the Investor, James Von Ehr, II. In
      addition, the Company’s obligations under the Loan Agreement are further
      guaranteed personally and through the pledge of an aggregate of 4,000,000 shares
      of common stock beneficially owned by Michael Shores, the Company’s Chief
      Executive Officer. As of September 30, 2008 and December 31, 2007, the balance
      outstanding on the line of credit was $5,084,000 and $2,900,000,
      respectively.





**NOTE
      9 - 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 4). Monthly payments of $1,400 began May 15, 2004. The
      loan was repaid in full during the second quarter of 2007.




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 4). Monthly payments for this note
      are
      $11,000 and began February 18, 2004. The loan was repaid in full in the first
      quarter of 2007.




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
      4).
      The note has a one year term with a 10% interest rate and is unsecured.
      Principal and interest are contractually due at maturity. The Company repaid
      $37,500 of principal in 2006. The loan was repaid in full during the second
      quarter of 2007.




In
      November of 2006, TXP entered into a standard bank loan agreement for $300,000
      to purchase equipment from Global Investments, Inc., a Texas corporation,
      pursuant to which the Company purchased all of the SMT line production assets
      of
      G3. G3 is 100% owned and controlled by Mr. Michael C. Shores, the Company's
      Chief Executive Officer. The two year note bears interest at 9.25% and requires
      monthly payments of approximately $14,000. The loan is secured by the purchased
      assets, in addition to all of the assets of the Company. On September 23, 2008
      this loan was repaid in full.





In
      November of 2007, TXP entered into a Finance and Security Agreement for $174,000
      with Verizon Credit Inc. (VCI) to purchase telecommunications equipment. The
      note pays interest at a rate equal to 9.9% per annum. The principal amount
      and
      all accrued and unpaid interest is due on or prior to December 31, 2010. TXP
      provided a down payment of $50,000 to VCI and VCI was granted a security
      interest in the equipment. The balance outstanding on this note at September
      30,
      2008 and December 31, 2007 was $131,000 and $0, respectively.




**NOTE
      10 - 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 4). Monthly lease payments were $2,000 and began in
      June
      of 2005. The balance outstanding at September 30, 2008 and December 31, 2007
      was
      $0 and $10,000, respectively. The lease had been accounted for as a capitalized
      lease in accordance with generally accepted accounting principles.





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 4). Monthly lease payments are $1,000 and began in March of
      2006. The balance outstanding at September 30, 2008 and December 31, 2007 was
      $5,000 and $12,000, respectively. The lease has been accounted for as a
      capitalized lease in accordance with generally accepted accounting
      principles.





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
      4). Monthly lease payments are $1,000 and began in March of 2006. The balance
      outstanding at September 30, 2008 and December 31, 2007 was $0 and $10,000,
      respectively. The lease has been accounted for as a capitalized lease in
      accordance with generally accepted accounting principles.




F-18




In
      March
      of 2007, TXP entered into a standard lease agreement for $52,000 to lease
      certain software. The lease has a thirty-six month term and is secured by the
      software. Monthly lease payments are $2,000 and began in March of 2007. The
      balance outstanding at September 30, 2008 and December 31, 2007 was $29,000
      and
      $41,000, respectively. The lease has been accounted for as a capitalized lease
      in accordance with generally accepted accounting principles.





In
      March
      of 2007, TXP entered into a standard lease agreement for $52,000 to lease
      certain equipment. The lease has a thirty-six month term and is secured by
      the
      equipment. Monthly lease payments are $2,000 and began in March of 2007. The
      balance outstanding at September 30, 2008 and December 31, 2007 was $29,000
      and
      $41,000 respectively. The lease has been accounted for as a capitalized lease
      in
      accordance with generally accepted accounting principles.





In
      April
      of 2007, TXP entered into a standard lease agreement for $31,000 to lease
      certain software. The lease has a thirty-six month term and is secured by the
      software. Monthly lease payments are $1,000 and began in April of 2007. The
      balance outstanding at September 30, 2008 and December 31, 2007 was $18,000
      and
      $25,000 respectively. The lease has been accounted for as a capitalized lease
      in
      accordance with generally accepted accounting principles.





In
      July
      of 2007, TXP entered into a standard lease agreement for $65,000 to lease
      certain equipment. The lease has a twenty-four month term and is secured by
      the
      equipment. Monthly lease payments are $3,000 and began in July of 2007. The
      balance outstanding at September 30, 2008 and December 31, 2007 was $27,000
      and
      $51,000 respectively. The lease has been accounted for as a capitalized lease
      in
      accordance with generally accepted accounting principles.





In
      August
      of 2007, TXP entered into a standard lease agreement for $100,000 to lease
      certain software. The lease has a sixty month term and is secured by the
      software. Monthly lease payments are $2,000 and began in September of 2007.
      The
      balance outstanding at September 30, 2008 and December 31, 2007 was $84,000
      and
      $95,000, respectively. The lease has been accounted for as a capitalized lease
      in accordance with generally accepted accounting principles.





The
      following is a schedule by years of future minimum lease payments under the
      capital leases together with the present value of the net minimum lease payments
      as of September 30, 2008:





**Year**
            
            **Amount**10/01/08
                - 12/31/2008
            
            $
            35,00001/01/09
                - 12/31/2009
            
            
            112,00001/01/10
                - 12/31/2010
            
            
            40,00001/01/10
                - 12/31/2011
            
            
            26,00001/01/10
                - 12/31/2012
            
            
            21,000Total
                Minimum Lease Payments
            
            
            234,000Less
                amounts representing interest
            
            
            (42,000
            )**Present
                Value of Minimum Lease Payments**
            
            **$**
            **192,000**





**NOTE
      11 - FAIR VALUE INSTRUMENTS**





The
      Company adopted FAS 157 as of January 1, 2008, which defines fair value,
      establishes a frame work for measuring fair value and establishes a valuation
      hierarchy for disclosure of the inputs for the valuation used to measure fair
      value. The implementation of FAS 157 did not cause a change in the method of
      calculating the fair value of assets and liabilities as the primary impact
      from
      the adoption was additional disclosures.





The
      Company adopted FAS 157, except as it applies to those nonfinancial assets
      and
      nonfinancial liabilities addressed in FASB Staff Position FAS 157-2 (“FSP FAS
      157-2”). The FASB issued FSP FAS 157-2 which delays the effective date of FAS
      No. 157 to fiscal years beginning after November 15, 2008 for all nonfinancial
      assets and nonfinancial liabilities, except those that are recognized or
      disclosed at fair value in the financial statements on a recurring basis. FAS
      157 establishes a hierarchy for disclosure into three broad levels. The
      valuation hierarchy categorizes assets and liabilities measured at fair value
      into one of three different levels depending on the observability of the inputs
      employed in the measurement. The three levels are defined as
      follows:





·
            Level
                1 – inputs are quoted prices (unadjusted) in active markets for active
                markets for identical assets of
                liabilities.






F-19




·
            Level
                2 - inputs are quoted prices for similar assets and liabilities in
                active
                markets or inputs that are observable for the asset or liability,
                either
                directly or indirectly through market corroboration, for substantially
                the
                full term of the financial
                instrument.


·
            Level
                3 - inputs are unobservable inputs based on the Company’s assumptions used
                to measure assets and liabilities at fair
                value.





A
      financial asset or liability’s classification within the hierarchy is determined
      based on the lowest level input that is significant to the fair value
      measurement. The Company’s assessment of the significance of a particular input
      to the fair value measurement in its entirety requires judgment and considers
      factors specific to the asset or liability. The following table presents
      information about the Company’s liability measured at fair value on a recurring
      basis as of September 30, 2008, and indicates the fair value hierarchy of the
      valuation techniques utilized by the Company to determine such a fair value:





**Description:**
            
            **Level 1**
            
            **Level 2**
            
            **Level 3**
            
            **Total**Derivative
                Financial Instruments
            
            $
            -
            
            $
            9,743,000
            
            $
            -
            
            $
            9,743,000Total
            
            $
            -
            
            $
            9,743,000
            
            $
            -
            
            $
            9,743,000





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





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





On
      June
      5, 2006, the Company consummated a securities purchase agreement with YA Global
      that provided for the sale by the Company to YA Global 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
      Company also issued to YA Global 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. YA
      Global 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 YA Global exercises the warrants on a
      cashless basis, then the Company will not receive any proceeds. In addition,
      the
      exercise price of the warrants will be adjusted in the event the Company issues
      common stock at a price below market, with the exception of any securities
      issued as of the date of the warrants or issued in connection with the secured
      convertible notes issued pursuant to securities purchase agreement. There can
      be
      no assurance to how many, if any, of these warrants will be exercised. The
      exercise price of the warrants may be adjusted in certain circumstances such
      as
      if the Company pays a stock dividend, subdivides or combines outstanding shares
      of common stock into a greater or lesser number of shares, or takes such other
      actions as would otherwise result in dilution of the selling stockholders'
      position.




In
      addition, on June 5, 2006 the Company issued to YA Global 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 YA Global 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.





On
      October 11, 2006, the Company exercised its right to redeem both debentures
      issued on June 5, 2006. The Company paid YA Global $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.





The
      Company reassessed the classification of all contracts at September 30, 2008
      and
      determined that the provisions in Purchase Agreement consummated with YA Global
      on May 29, 2008 (as discussed in more detail below) that required the Company
      to
      issue Debentures and Warrants and to amend outstanding warrants and notes issued
      to YA Global affected the accounting for all outstanding warrants. Specifically,
      all warrants issued to YA Global now have adjustment provisions that could
      affect the exercise price and the number of warrant shares issuable. Therefore,
      since the Company has warrants that do not have limits on the net shares that
      potentially would have to be delivered in a net share settlement, the Company
      is
      precluded from concluding that it has sufficient shares authorized and unissued
      to net-settle any of its outstanding warrants and must fair value all warrants
      as a liability. Accordingly, under the provisions of EITF 00-19 the warrants
      issued to YA Global on June 5, 2006 were designated as a liability to be carried
      at fair value on the company’s balance sheet, with any changes in fair value
      recorded in the Company’s results of operations.




F-20




***YA
      Global Registration Rights Agreement***





In
      connection with all of the above secured convertible debentures and warrants
      issued to YA Global prior to the year 2007, the Company entered into
      registration rights agreements providing for the filing of a registration
      statement with the Securities and Exchange Commission registering the common
      stock issuable upon conversion of the debentures and exercise of the warrants.
      The Company is obligated to file the registration statement no later than 45
      days from the date of closing and to use its best efforts to cause the
      registration statement to be declared effective no later than 120 days after
      filing and to insure that the registration statement remains in effect until
      all
      of the shares of common stock issuable upon conversion of the debentures and
      exercise of the warrants have been sold. In the event of a default of its
      obligations under the registration rights agreement, including its agreement
      to
      file the registration statement with the Securities and Exchange Commission
      no
      later than 45 days from the date of closing, or if the registration statement
      is
      not declared effective within 120 days of filing, it is required that the
      Company pay to YA Global, as liquidated damages, for each month that the
      registration statement has not been filed or declared effective, as the case
      may
      be, either a cash amount or shares of the Company's common stock equal
      to 2% of the liquidated value of the debentures. The Company obtained a
      waiver from YA Global 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 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 Community
      Bank (f/k/a First Bank of Canyon Creek), or such other lending or financing
      institution as may be agreed upon between the parties (a “Lender”), as
      Collateral for a loan to be obtained by the Company from a Lender in an amount
      up to $2,000,000 with a term of up to 2 years (the “Term”), which will be
      further guaranteed personally and through the pledge of common stock
      beneficially owned by the Company's Chief Executive Officer.





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





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





As
      additional consideration of the Investor's agreement to pledge the Collateral
      to
      a Lender, the Company agreed to pay to the Investor a one-time commitment fee,
      during the Term, of $40,000 (the “Commitment Fee”) no later than 90 days after
      the Collateral is deposited into the account of a Lender; provided, however,
      that the Company shall pay an additional Commitment Fee within 90 days after
      the
      renewal of the Loan by a Lender. TXP consummated the loan facility with the
      First Community Bank (f/k/a First Bank of Canyon Creek) in early third quarter
      of 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. On the date the
      warrants were issued, the Company had convertible debenture instruments that
      did
      not have limits on the net shares that potentially would have to have been
      delivered in a net share settlement, the Company was precluded from concluding
      it had sufficient shares authorized and unissued to net-share settle the
      warrants and fair valued the warrants as a liability. Accordingly, under the
      provisions of EITF 00-19, these warrants were initially designated as a
      liability to be carried at fair value on a company's balance sheet, with any
      changes in fair value recorded in the company's results of
      operations.




F-21




EITF
      00-19 also requires that the classification of a contract should be reassessed
      at each balance sheet date. If the classification required under this issue
      changes as a result of events during the period, the contract should be
      reclassified as of the date of the event that caused the reclassification.
      At
      March 31, 2007, the Company reviewed the contracts, in its case the warrants,
      and determined because the convertible debenture that did not have limits on
      the
      net shares that would have to be delivered in net share settlement was fully
      converted during the period, that the Company now had sufficient authorized
      and
      unissued shares to net-share settle the warrants. Accordingly, these warrants
      and all other warrants were reclassified from liabilities to equity and no
      gains
      or losses recorded during the period that warrants were classified as
      liabilities were reversed. The Company reassessed the classification of all
      contracts at September 30, 2008 and determined that the provisions in Purchase
      Agreement consummated with YA Global on May 29, 2008 (as discussed in more
      detail below) that required the Company to issue Debentures and Warrants and
      to
      amend outstanding warrants and notes issued to YA Global affected the accounting
      for all outstanding warrants. Specifically, all warrants issued to YA Global
      now
      have adjustment provisions that could affect the exercise price and the number
      of warrant shares issuable. Therefore, since the Company has warrants that
      do
      not have limits on the net shares that potentially would have to be delivered
      in
      a net share settlement, the Company is precluded from concluding that it has
      sufficient shares authorized and unissued to net-settle any of its outstanding
      warrants and must fair value all warrants as a liability. Accordingly, under
      the
      provisions of ETIF 00-19 these warrants were designated as a liability to be
      carried at fair value on the company’s balance sheet, with any changes in fair
      value recorded in the Company’s results of operations.





***October
      2006 Warrants***





On
      October 12, 2006, the Company entered into an 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
      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 Community
      Bank (f/k/a First Bank of Canyon Creek), or such other lending or financing
      institution as may be agreed upon between the parties (a “Lender”), as
      Collateral for a loan to be obtained by the Company from a Lender in an amount
      up to $2,000,000 with a term of up to 1 year (the “Term”), which will be further
      guaranteed personally and through the pledge of common stock beneficially owned
      by Michael C. Shores, the Company's Chief Executive Officer.




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





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





As
      additional consideration of the investor's agreement to pledge the collateral
      to
      a Lender, the Company agreed to pay to the investor a one-time commitment fee
      during the term of 125,000 shares of the Company's common stock (the “Commitment
      Fee”) no 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 $3.5 million
      with First Community Bank (f/k/a First Bank of Canyon Creek) (See Note
      8).





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




F-22




EITF
      00-19 also requires that the classification of a contract should be reassessed
      at each balance sheet date. If the classification required under this issue
      changes as a result of events during the period, the contract should be
      reclassified as of the date of the event that caused the reclassification.
      At
      March 31, 2007, the Company reviewed the contracts, in its case the warrants,
      and determined because the convertible debenture that did not have limits on
      the
      net shares that would have to be delivered in net share settlement was fully
      converted during the period, that the Company now had sufficient authorized
      and
      unissued shares to net-share settle the warrants. Accordingly, these warrants
      and all other warrants were reclassified from liabilities to equity and no
      gains
      or losses recorded during the period that warrants were classified as
      liabilities were reversed. The Company reassessed the classification of all
      contracts at September 30, 2008 and determined that the provisions in Purchase
      Agreement consummated with YA Global on May 29, 2008 (as discussed in more
      detail below) that required the Company to issue Debentures and Warrants and
      to
      amend outstanding warrants and notes issued to YA Global affected the accounting
      for all outstanding warrants. Specifically, all warrants issued to YA Global
      now
      have adjustment provisions that could affect the exercise price and the number
      of warrant shares issuable. Therefore, since the Company has warrants that
      do
      not have limits on the net shares that potentially would have to be delivered
      in
      a net share settlement, the company is precluded from concluding that it has
      sufficient shares authorized and unissued to net-settle any of its outstanding
      warrants and must fair value all warrants as a liability. Accordingly, under
      the
      provisions of ETIF 00-19 these warrants were designated as a liability to be
      carried at fair value on the company’s balance sheet, with any changes in fair
      value recorded in the Company’s results of operations.





***October
      2006 Securities Purchase Agreement***





On
      October 11, 2006, TXP entered into a securities purchase agreement with a
      qualified institutional buyer pursuant to which the Company sold an aggregate
      of
      $1,500,000 in 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 $1.00 per share. 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 YA Global
      in
      June 2005 and June 2006, respectively, each at a 20% premium, for a total
      redemption price of approximately $1,392,000.





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





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





On
      June
      17, 2008, the investor agreed to waive its registration rights, as well as
      its
“piggy-back” registration rights, with respect to the shares and the shares
      underlying the warrants issued pursuant to the October 2006 securities purchase
      agreement. In exchange, we agreed to adjust the exercise prices of the warrants
      to $0.20 per share.





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




F-23




EITF
      00-19 also requires that the classification of a contract should be reassessed
      at each balance sheet date. If the classification required under this issue
      changes as a result of events during the period, the contract should be
      reclassified as of the date of the event that caused the reclassification.
      At
      March 31, 2007, the Company reviewed the contracts, in our case the warrants,
      and determined because the convertible debenture that did not have limits on
      the
      net shares that would have to be delivered in net share settlement was fully
      converted during the period, that the Company now had sufficient authorized
      and
      unissued shares to net-share settle the warrants. Accordingly, these warrants
      and all other warrants were reclassified from liabilities to equity and no
      gains
      or losses recorded during the period that warrants were classified as
      liabilities were reversed. The Company reassessed the classification of all
      contracts at September 30, 2008 and determined that the provisions in Purchase
      Agreement consummated with YA Global on May 29, 2008 (as discussed in more
      detail below) that required the Company to issue Debentures and Warrants and
      to
      amend outstanding warrants and notes issued to YA Global affected the accounting
      for all outstanding warrants. Specifically, all warrants issued to YA Global
      now
      have adjustment provisions that could affect the exercise price and the number
      of warrant shares issuable. Therefore, since the Company has warrants that
      do
      not have limits on the net shares that potentially would have to be delivered
      in
      a net share settlement, the company is precluded from concluding that it has
      sufficient shares authorized and unissued to net-settle any of its outstanding
      warrants and must fair value all warrants as a liability. Accordingly, under
      the
      provisions of ETIF 00-19 these warrants were designated as a liability to be
      carried at fair value on the company’s balance sheet, with any changes in fair
      value recorded in the Company’s results of operations.





***March
      2007 Securities Purchase Agreement***




On
      March
      30, 2007, TXP consummated a securities purchase agreement with YA Global
      providing for the sale by the Company to YA Global of its 6% secured convertible
      notes in the aggregate principal amount of $5,000,000. Under the purchase
      agreement, the Company also issued to YA Global 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 YA Global
      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 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.




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




F-24




The
      securities purchase agreement provides YA Global with rights of first refusal.
      From the date of the first closing until 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 YA Global 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.  YA Global shall have 10 business
      days from receipt of such notice of the sale or issuance of capital stock to
      accept or reject all or a portion of such capital raising offer.





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





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





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


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


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





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




F-25




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





Due
      to
      the entry into the purchase agreement on September 6, 2007 as discussed below,
      the Company has satisfied the requirement set forth in the notes to raise at
      least $1,000,000 in additional equity capital between the closing date and
      the
      date that is 210 days after the closing date and accordingly, the conversion
      price will not be adjusted to $0.25; *provided however* ,
      that
      the Company and YA Global mutually agreed that the interest rate of the notes
      will not revert back to 6%, but will be 8% per annum.





On
      December 13, 2007, we and YA Global entered into amendment no. 1 to the
      securities purchase agreement pursuant to which the second closing of $1,000,000
      was revised from the date on which we file the registration statement to
      December 13, 2007. Accordingly, on December 13, 2007 we and YA Global completed
      the second closing in which we received gross proceeds in the amount of
      $1,000,000 and we issued to YA Global a note in the principal amount of
      $1,000,000. In addition, we issued 48,781 shares of common stock to YA Global
      as
      an original issue discount which represents a number of shares equal to 2%
      of
      the second closing proceeds of $1,000,000 at a per share price equal to $0.41,
      which represents the fixed conversion price of the notes.





Moreover,
      on December 13, 2007 we and YA Global entered into amendment number 1 to the
      registration rights agreement pursuant to which the scheduled filing date was
      revised to 180 calendar days from the second closing date of December 13,
      2007.





The
      $4,000,000 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 of the embedded
      conversion option, and by $797,000 representing the fair value of the warrants
      issued in conjunction with the note. These discounts were being amortized over
      the life of the note for three years. Additionally, the $1,000,000 convertible
      debenture was originally discounted by $509,000. The discount included fees
      paid
      to the lender of $80,000 and 48,781 shares of common stock valued at $15,000.
      Additionally, the note was further discounted by $413,000 upon bifurcation
      and
      recording at fair value of the embedded conversion option. These discounts
      were
      also being amortized over the life of the note for three years.





In
      conjunction with the Purchase Agreement consummated with YA Global on May 29,
      2008 (as discussed below), we amended our outstanding warrants and notes issued
      to YA Global pursuant to the Company’s June 2006 and March 2007 private
      placements. The June 2006 and March 2007 warrants to purchase an aggregate
      of
      3,700,000 and 3,850,000 shares of common stock, respectively, were amended
      to
      reduce the exercise prices to $0.20 per share. The March 2007 notes in the
      aggregate principal amount of $4,000,000 were amended to reduce the conversion
      prices to $0.20 per share. Also, the interest rates were increased to 12% per
      annum and mandatory redemption payments by us in the amount of $100,000 per
      month, consisting of accrued and unpaid interest and principal, will commence
      on
      October 31, 2008. On November 13, 2008, the Company entered into a Deferral
      Agreement with YA Global deferring the mandatory redemption payments which
      were
      scheduled to be made on October 31, 2008 and November 30, 2008 to December
      15,
      2008.





To
      determine the correct accounting for effect of this transaction on the existing
      debentures we reviewed EITF 05-07 “Accounting for Modifications to Conversion
      Options Embedded in Debt Instruments and Related Issues” and EITF 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 on a present
      value
      basis exceeded 10%. Therefore, we recorded a loss on extinguishment debt of
      $1,253,000 in the consolidated statements of operations as a result of the
      modification. Additionally, we recorded the re-issuance of the convertible
      debentures on May 29, 2008. The $4,000,000 convertible note was issued with
      a
      discount of $2,750,000. This discount includes $1,630,000 upon bifurcation
      and
      recording at fair value the embedded conversion option, and by $1,120,000
      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
      September 30, 2008 the $4,000,000 convertible debenture had balance of
      $1,750,000 net $2,250,000 of unamortized discount. The effective interest rate
      on the debenture is the same as the stated interest rate of 12% since
      there were not any additional fees paid to the lender. The $1,000,000
      convertible note was issued with a discount of $568,000 with the entire amount
      being the fair value of the embedded conversion option. At September 30, 2008,
      the $1,000,000 convertible debenture had balance of $507,000 net $493,000 of
      unamortized discount. The effective interest rate on the
      debenture is the same as the stated interest rate of 12% since there
      were not any additional fees paid to the lender.




F-26




Additionally,
      the Company reassessed the classification of all contracts at September 30,
      2008
      and determined that the provisions in Purchase Agreement consummated with YA
      Global on May 29, 2008 (as discussed in more detail below) that required the
      Company to issue Debentures and Warrants and to amend outstanding warrants
      and
      notes issued to YA Global affected the accounting for all outstanding warrants.
      Specifically, all warrants issued to YA Global now have adjustment provisions
      that could affect the exercise price and the number of warrant shares issuable.
      Therefore, since the Company has warrants that do not have limits on the net
      shares that potentially would have to be delivered in a net share settlement,
      the Company is precluded from concluding that it has sufficient shares
      authorized and unissued to net-settle any of its outstanding warrants and must
      fair value all warrants as a liability. Accordingly, under the provisions of
      ETIF 00-19 these warrants were designated as a liability to be carried at fair
      value on the company’s balance sheet.




On
      June
      5, 2008,  we and YA Global entered into Amendment No. 2 to the Registration
      Rights Agreement dated as of March 30, 2007 pursuant to which the scheduled
      filing date of the registration statement required to be filed by us was revised
      from 180 days from the second closing date of December 13, 2007 to no later
      than
      30 days after receipt of written demand from YA Global; *provided
      that* ,
      YA
      Global may only deliver such written demand on or after July 7,
      2008.





***September
      2007 Securities Purchase Agreement***





On
      September 6, 2007, TXP entered into a securities purchase agreement with a
      strategic investor/qualified institutional buyer pursuant to which the Company
      sold an aggregate of $1,000,000 in shares of the Company's common stock, par
      value $.001 per share, at a per share purchase price of $0.25, together with
      (i)
      five year warrants to purchase 1,000,000 shares of common stock at an exercise
      price equal to $0.65 per share; (ii) five year warrants to purchase 1,000,000
      shares of common stock at an exercise price equal to $0.75 per share; (iii)
      five
      year warrants to purchase 1,000,000 shares of common stock at an exercise price
      equal to $0.85 per share; and (iv) five year warrants to purchase 1,000,000
      shares of common stock at an exercise price equal to $1.00 per
      share.





The
      Company reassessed the classification of all contracts at September 30, 2008
      and
      determined that the provisions in Purchase Agreement consummated with YA Global
      on May 29, 2008 (as discussed in more detail below) that required the Company
      to
      issue Debentures and Warrants and to amend outstanding warrants and notes issued
      to YA Global affected the accounting for all outstanding warrants. Specifically,
      all warrants issued to YA Global now have adjustment provisions that could
      affect the exercise price and the number of warrant shares issuable. Therefore,
      since the Company has warrants that do not have limits on the net shares that
      potentially would have to be delivered in a net share settlement, the Company
      is
      precluded from concluding that it has sufficient shares authorized and unissued
      to net-settle any of its outstanding warrants and must fair value all warrants
      as a liability. Accordingly, under the provisions of ETIF 00-19 these warrants
      were designated as a liability to be carried at fair value on the company’s
      balance sheet.





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 purchase agreement provides for the filing of a registration
      statement by the Company with the Securities and Exchange Commission registering
      the shares and the shares of common stock issuable upon exercise of the
      warrants. The Company is obligated to file the registration statement no later
      than December 15, 2007 and to use its best efforts to cause the registration
      statement to be declared effective by the Securities and Exchange Commission
      no
      later than 90 days after filing. If the Company does not meet the aforementioned
      filing and effectiveness deadlines (together, a “Non-Registration Event ”), it
      shall pay to the investor an amount equal to 1% of the purchase price of the
      shares and the warrants, in cash or at the investor's election in shares of
      common stock, for each 30 days or part thereof for the first 60 days after
      the
      occurrence of a Non-Registration Event and 2% for each 30 days or part thereof
      thereafter; provided, however, that the aforementioned liquidated damages shall
      only accrue, if at all, for 12 months after the closing date. As of September
      30, 2008, an aggregate of $173,000 in liquidated damages has accrued and been
      recorded as an expense.





***December
      2007 Agreement***




On
      December 28, 2007, the Company entered into an Agreement with an accredited
      investor pursuant to which the Company will, within 90 days from the date the
      Collateral (as defined below) is deposited into the account of a Lender (the
      “Closing Date”), issue to the investor seven-year warrants to purchase an
      aggregate of 1,280,000 shares of common stock as consideration for the investor
      agreeing to pledge an aggregate of $2,000,000 in free-trading shares of common
      stock of 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 the Company’s behalf in favor of First Community
      Bank (f/k/a 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 us from a Lender in an amount up to
      $2,000,000 with a term of January 16, 2009 (the “Term”), which will be further
      guaranteed personally and through the pledge of common stock beneficially owned
      by Michael Shores, the Company’s Chief Executive Officer, in an amount equal to
      the initial amount pledged by the investor at a per share price equal to $0.50.
      The warrants are exercisable into shares of the Company’s common stock at a
      price equal to $0.40 per share.




F-27




As
      additional consideration of the investor’s agreement to pledge the Collateral to
      a Lender, on or prior to the Closing Date the Company will pay to the investor
      a
      one-time commitment fee through the issuance of 100,000 restricted shares of
      common stock. In addition, the Company and the investor agreed to extend the
      permitted maturity dates of the Loans previously received by the Company from
      the Lender as set forth in the agreements entered into between the Company
      and
      the Investor on July 28, 2006 and October 12, 2006, from July 28, 2008 and
      October 12, 2007, respectively, to January 16, 2009.





The
      Company reassessed the classification of all contracts at September 30, 2008
      and
      determined that the provisions in Purchase Agreement consummated with YA Global
      on May 29, 2008 (as discussed in more detail below) that required the Company
      to
      issue Debentures and Warrants and to amend outstanding warrants and notes issued
      to YA Global affected the accounting for all outstanding warrants. Specifically,
      all warrants issued to YA Global now have adjustment provisions that could
      affect the exercise price and the number of warrant shares issuable. Therefore,
      since the Company has warrants that do not have limits on the net shares that
      potentially would have to be delivered in a net share settlement, the Company
      is
      precluded from concluding that it has sufficient shares authorized and unissued
      to net-settle any of its outstanding warrants and must fair value all warrants
      as a liability. Accordingly, under the provisions of ETIF 00-19 these warrants
      were designated as a liability to be carried at fair value on the company’s
      balance sheet.





***May
      2008 Securities Purchase Agreement***





On
      May
      29, 2008,  we consummated a Securities Purchase Agreement (the “Purchase
      Agreement”) with YA Global Investments, L.P. (“YA Global”) providing for the
      sale by us to YA Global of our 12% secured convertible debentures in the
      aggregate principal amount of $5,750,000 (the “Debentures”), of which a
      $3,000,000 Debenture was issued on May 29, 2008 (the “First Closing”), a
      $1,500,000 Debenture was issued August 14, 2008 (the “Second Closing”) and a
      $1,250,000 Debenture (the “Third Closing”) is scheduled to be issued on November
      15, 2008. On October 15, 2008,  we and YA Global entered into Amendment No.
      1 to the Purchase Agreement pursuant to which the date on which the Third
      Closing of the private placement is scheduled to occur was revised from October
      15, 2008 to November 15, 2008.





In
      addition, the Purchase Agreement provides for the issuance by us to YA Global
      of
      five-year warrants (the “Warrants”) to purchase an aggregate of 17,000,000
      shares of common stock, of which a warrant to purchase 8,870,000 shares of
      common stock was issued on the First Closing, a warrant to purchase 4,430,000
      shares of common stock was issued on the Second Closing, and a warrant to
      purchase 3,700,000 shares of common stock is scheduled to be issued on the
      Third
      Closing, each exercisable into common stock a price equal to $0.20 per share,
      subject to adjustment as set forth in the Warrants (the “Exercise
      Price”).




The
      Debentures mature on the third anniversary of the date of issuance (the
“Maturity Date”) and bear interest at a rate equal to 12% per annum. In
      addition, the Debentures are convertible at any time into shares of common
      stock
      at a conversion price per share equal to $0.20, subject to adjustment as set
      forth in the Debentures (the “Conversion Price”). Beginning on October 31, 2008
      and each monthly anniversary thereafter until paid in full, we will be required
      to redeem the outstanding principal amount of the Debentures in installments
      equal to $167,777 per month, in cash or in common stock (the “Redemption
      Shares”) at our option and if certain additional conditions are met, at a per
      share price equal to the lesser of (i) the Conversion Price, or (ii) a 25%
      discount to the lowest daily volume weighted average price for the common stock
      for the 20 trading days prior to the redemption payment date; provided
      that *,* the
      Redemption Share component of each redemption payment will be limited to 15%
      of
      the dollar value of the common stock traded over the previous 30 trading days.
      Moreover, we have 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 no event of default has occurred or is continuing. On November 13, 2008,
      the Company entered into a Deferral Agreement with YA Global deferring the
      mandatory redemption payments which were scheduled to be made on October 31,
      2008 and November 30, 2008 to December 15, 2008.





This
      $3,000,000 convertible note was discounted by $3,000,000 since the total
      discount fees including the embedded conversion option and warrants totaled
      $4,449,000. The difference of $1,449,000 was recorded as a “change in the fair
      value of derivative financial instrument” and recognized as an expense during
      the current reporting period. The discount included $660,000 in fees paid to
      the
      lender and $10,000 in legal fees. Additionally, the note was further discounted
      by $2,002,000 upon bifurcation and recording at fair value the embedded
      conversion option, and by $1,777,000 representing the fair value of the warrants
      issued in conjunction with the note. The discount is being amortized over the
      life of the notes of three years. At September 30, 2008, the convertible
      debenture had balance of $333,000 net $2,667,000 of unamortized discount. The
      effective interest rate on the debenture is 19.4% compared to the
      stated interest of 12% which takes into account the debt discount and issue
      costs related to the debenture. Our obligations under the Purchase Agreement
      and
      the Debentures are secured by all of our intellectual property and
      assets.




F-28




In
      connection with the Purchase Agreement, we also entered into a registration
      rights agreement (the “Registration Rights Agreement”) providing for the filing
      of a registration statement (the “Registration Statement”) with the Securities
      and Exchange Commission registering 100% of the shares of common stock issuable
      upon conversion of the Debentures and exercise of the Warrants within 30 days
      of
      receipt of written demand of YA Global. We are obligated to use our best efforts
      to cause the Registration Statement to be declared effective no later than
      120
      days after filing and to ensure that the registration statement remains in
      effect until all of the shares of common stock issuable upon conversion of
      the
      Debentures and exercise of the Warrants have been sold or may permanently
      be sold. In the event of a default of its obligations under the Registration
      Rights Agreement, including our agreement to file the Registration Statement
      with the Securities and Exchange Commission no later than 30 days from receipt
      of a written demand from YA Global, or if the Registration Statement is not
      declared effective within 120 days of filing, we will be required pay to YA
      Global, 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 Debentures.
      Notwithstanding the foregoing, we shall not be liable for Liquidated Damages
      with respect to any Warrants or warrant shares and the maximum aggregate
      Liquidated Damages payable to YA Global by us, if any, shall be 24% of the
      aggregate purchase price paid by YA Global pursuant to the Purchase
      Agreement.





On
      May
      29, 2008, Mr. Shores granted YA Global a five-year option to purchase an
      aggregate of 35,000,000 shares of common stock of our company beneficially
      owned
      by Mr. Shores at an exercise price equal to $0.01 per share, of which the option
      to purchase 18,261,000 shares vested on the First Closing, the option to
      purchase 9,130,000 shares vests on the Second Closing, and the option to
      purchase 7,609,000 shares vests on the Third Closing.





***Second
      Closing of*** ****** ***May
      2008 Securities Purchase Agreement***





As
      previously reported, on May 29, 2008,  we consummated a Securities Purchase
      Agreement (the “Purchase Agreement”) with YA Global Investments, L.P. (“YA
      Global”) providing for the sale by us to YA Global of our 12% secured
      convertible debentures in the aggregate principal amount of $5,750,000 (the
      “Debentures”), of which a $3,000,000 Debenture was issued on May 29, 2008. On
      August 14, 2008, the Company issued a $1,500,000 Debenture pursuant to the
      second closing contemplated by this agreement.





This
      $1,500,000 convertible note was discounted by $1,500,000 since the total
      discount fees including the embedded conversion option and warrants totaled
      $1,765,000. The difference of $265,000 was recorded as a “change in the fair
      value of derivative financial instrument” and recognized as an expense during
      the current reporting period. The discount included $16,000 in fees paid to
      the
      lender. Additionally, the note was further discounted by $963,000 upon
      bifurcation and recording at fair value the embedded conversion option, and
      by
      $786,000 representing the fair value of the warrants issued in conjunction
      with
      the note. The discount is being amortized over the life of the notes of three
      years. At September 30, 2008, the convertible debenture had balance of $65,000
      net $1,435,000 of unamortized discount. The effective interest rate on the
      debenture is 12.4% compared to the stated interest of 12% which takes
      into account the debt discount and issue costs related to the
      debenture





***May
      2008 Amendments with YA Global***





On
      May
      29, 2008 we amended our outstanding warrants and notes issued to YA Global
      pursuant to the Company’s June 2006 and March 2007 private placements. The June
      2006 and March 2007 warrants to purchase an aggregate of 3,700,000 and 3,850,000
      shares of common stock, respectively, were amended to reduce the exercise prices
      to $0.20 per share. The March 2007 notes in the aggregate principal amount
      of
      $4,000,000 were amended to reduce the conversion prices to $0.20 per share.
      Also, the interest rates were increased to 12% per annum and mandatory
      redemption payments by us in the amount of $100,000 per month, consisting of
      accrued and unpaid interest and principal, will commence on October 31, 2008.
      On
      November 13, 2008, the Company entered into a Deferral Agreement with YA Global
      deferring the mandatory redemption payments which were scheduled to be made
      on
      October 31, 2008 and November 30, 2008 to December 15, 2008.





***August
      2008 Letter Agreement with Yorkville and YA
      Global***





On
      August
      20, 2008,  the Company entered into a letter agreement (the “Agreement”)
      with Yorkville Advisors, LLC, on its behalf and as Investment Manager to YA
      Global Investments, L.P. (collectively, “Yorkville”), pursuant to which the
      Company agreed to redeem, without a redemption premium, all outstanding
      convertible notes and convertible debentures issued by the Company to Yorkville,
      and any other term loans which have been issued by Yorkville to the Company
      (collectively, the “Debt”) in an amount equal to the outstanding principal
      amount of the Debt plus accrued and unpaid interest as follows: (i) the Company
      shall pay to Yorkville $7,500,000 (the “Partial Redemption”) upon the
      consummation of a financing (the “Financing”) by the Company for up to
      $15,000,000 in gross proceeds to be completed within 100 days from the date
      of
      the Agreement; and (ii) the remaining principal amount and accrued interest
      shall be exchanged for a non-convertible 2-year promissory note paying interest
      at 10% per annum, which shall be subordinate to any account receivables, account
      payables and inventory financings which the Company may in the future
      consummate. In addition, Yorkville agreed to relinquish all warrant issuance
      rights tied to the redemption of any Debt instruments.




F-29




Under
      the
      Agreement, Yorkville will retain its existing 9,616,681 shares of the Company’s
      common stock (the “Existing Shares”); *provided
      that* ,
      effective upon receipt of the Partial Redemption from the Company, Yorkville
      agreed to limit its sales of the Existing Shares on a daily basis to no more
      than that number of shares equal to the trailing 60-day average daily volume
      of
      the Company’s common stock. Notwithstanding the foregoing, Yorkville may sell
      portions of the Existing Shares in block trades of 500,000 shares or
      larger.




In
      addition, upon receipt of the Partial Redemption from the Company, Yorkville
      will relinquish 10,850,000 of its 20,850,000 warrants to purchase shares of
      the
      Company’s common stock at an exercise price equal to $0.20 per share, which
      shall be cancelled by the Company upon their return. The Company will adjust
      the
      exercise prices of the remaining 10,000,000 warrants to the lower of (i) $0.10,
      or (ii) the same price as the lowest conversion price, conversion ratio, or
      exercise price of the securities issued by the Company in the Financing.
      Yorkville will permanently waive all remaining anti-dilution provisions on
      the
      remaining 10,000,000 warrants; *provided
      that* ,
      it
      shall be entitled to anti-dilution and reset provisions consistent with those
      contained in the securities issued in the Financing.





Moreover,
      Yorkville will relinquish all of its rights of first refusal on future financing
      transactions of the Company previously granted to Yorkville pursuant to all
      prior financing agreements entered into with the Company; *provided
      that* ,
      Yorkville will retain a right of participation proportionate with its equity
      position in the Company on future financing transactions but will waive such
      right in connection with the Financing. Yorkville will also relinquish all
      of
      its registration rights and rights to liquidated damages previously granted
      to
      Yorkville pursuant to all prior financing agreements entered into with the
      Company.





In
      connection with that certain 5-year option to purchase an aggregate of
      35,000,000 shares of common stock of the Company beneficially owned by Michael
      Shores (the “Option”) which was granted by Mr. Shores to Yorkville on May
      29, 2008, Yorkville agrees that, provided no event of default has occurred
      under
      the financing arrangements entered into between Yorkville to the Company,
      Yorkville will refrain from exercising any shares underlying the Option for
      a
      period of 100 days from the date of the Agreement (the “Expiration Date”). So
      long as the Company completes the Financing on or before the Expiration Date
      and
      pays the Partial Redemption, Yorkville shall return the Option to Mr. Shores,
      which Option will be cancelled, and simultaneously the Company shall issue
      to
      Yorkville 11,000,000 restricted shares of common stock.





The
      consummation of all of the transactions contemplated by the Agreement are
      subject to the consummation of the Financing by the Company. There can be no
      assurance that the Financing or the transactions contemplated by the Agreement
      will be completed.





***Summary
      of Secured Convertible Notes and Warrants***





Presented
      below is summary of the secured convertible notes and warrants at September
      30,
      2008:





**Fair Value of****Principal**
            
            **Unamortized**
            
            **Derivative**
            
            **Accrued****Description:**
            
            **Balance**
            
            **Discount**
            
            **Instrument**
            
            **Interest**March
                2007 Secured Convertible Note
            
            $
            4,000,000
            
            $
            2,250,000
            
            $
            2,377,000
            
            $
            464,000December
                2007 Secured Convertible Note
            
            $
            1,000,000
            
            $
            493,000
            
            $
            652,000
            
            $
            77,000May
                2008 Secured Convertible Note
            
            $
            3,000,000
            
            $
            2,667,000
            
            $
            2,010,000
            
            $
            122,000August
                2008 Secured Convertible Note
            
            $
            1,500,000
            
            $
            1,436,000
            
            $
            1,012,000
            
            $
            23,000Total
                Convertible Notes
            
            $
            9,500,000
            
            $
            6,846,000
            
            $
            6,051,000
            
            $
            686,000




F-30




**Fair Value of****Derivative****Description
                of Warrant**
            
            **Instrument**June
                2006 warrants; 3,700,000 @ $.20
            
            $
            493,000July
                2006 warrants; 320,000 @ $.50
            
            $
            13,000October
                2006 warrants; 640,000 @ $.50
            
            $
            25,000October
                2006 warrants; 2,343,750 @ $.50
            
            $
            92,000October
                2006 warrants; 2,343,750 @ 1.00
            
            $
            18,000March
                2007 warrants; 3,850,000 @ $.20
            
            $
            577,000September
                2007 warrants; 1,000,000 @ $.65
            
            $
            46,000September
                2007 warrants; 1,000,000 @ $.75
            
            $
            38,000September
                2007 warrants; 1,000,000 @ $.85
            
            $
            31,000September
                2007 warrants; 1,000,000 @ $1.00
            
            $
            24,000December
                2007 warrants; 1,280,000 @ $.40
            
            $
            167,000May
                2008 warrants; 8,870,000 @ $.20
            
            $
            1,434,000August
                2008 warrants; 4,430,000 @ $.20
            
            
            734,000Total
                Warrants
            
            $
            3,692,000Total
                Convertible Notes and Warrants
            
            $
            9,743,000





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




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





**$4 Million**
            
            **1 Million**
            
            **3 Million**
            
            **1.5 Million****Warrants**
            
            **Note**
            
            **Note**
            
            **Note**
            
            **Note****Expected
                volatility**
            
            
            58%
                - 75
            %
            
            63
            %
            
            66
            %
            
            64
            %
            
            62
            %**Expected
                Term (years)**
            
            
            1.4
                - 3.1
            
            
            0.7
            
            
            1.1
            
            
            1.3
            
            
            1.4**Risk-free
                interest rate**
            
            
            1.78% -2.28
            %
            
            1.60
            %
            
            1.78
            %
            
            1.78
            %
            
            1.78
            %**Expected
                dividend yield**
            
            
            0
            %
            
            0
            %
            
            0
            %
            
            0
            %
            
            0
            %





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





**NOTE
      13 - COMMON STOCK**





In
      June
      of 2006, the Company issued 923,657 shares of common stock to YA Global 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.




F-31




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





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





In
      October of 2006, the Company issued 2,324,841 shares of common stock to YA
      Global 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 12).




In
      March
      of 2007, the Company issued 195,122 shares of common stock which were related
      to
      fees paid to YA Global in conjunction with the securities purchase agreement
      consummated on March 30, 2007 between the company and YA Global. (See Note
      12).





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





In
      May of
      2007, the Company issued 125,000 share of common stock to an accredited investor
      to settle a commitment fee (See Note 12).





In
      September of 2007, the Company issued 4,000,000 shares of common stock to a
      strategic investor/qualified institutional buyer for $1,000,000 in a private
      placement pursuant to a securities purchase agreement dated September 6,
      2007.





In
      December of 2007, the Company issued 48,781 shares of common stock to YA Global
      (formerly known as Cornell Capital) in conjunction with amendment no. 1 of
      the
      securities purchase agreement consummated on March 30, 2007 between the company
      and YA Global. (See Note 12).





In
      January of 2008, the Company issued 100,000 shares of common stock to
      Undiscovered Equities Inc. and 20,000 shares of Common Stock to PQL Research
      at
      a per share price equal to $.48 for investor relations services provided by
      such
      consultants on behalf of the Company.





In
      June
      of 2008, the Company issued 112,000 shares of common stock to an employee as
      compensation for general employment with the Company.





In
      August
      of 2008, the Company issued 150,000 shares of common stock to a consultant
      for
      services performed for the Company.





**NOTE
      14 - COMMITMENTS**





TXP
      executed a new lease with its landlord in December 2004. The new lease began
      March 15, 2005 and will last for five years. The Company's lease was amended
      effective November 15, 2006 to include approximately 16,500 additional square
      feet. On February 21, 2007 an additional amendment was made to the schedule
      of
      annual rent and monthly installments. The incremental monthly lease payment
      is
      approximately $8,000 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**
            
            **Amount**10/01/08
                - 12/31/2008
            
            $
            82,00001/01/09
                - 12/31/2009
            
            
            335,00001/01/10
                - 12/31/2010
            
            
            70,000Total
                Payments
            
            
            487,000




F-32




Rent
      expense for the nine months ended September 30, 2008 and 2007 amounted to
      $250,000 and $236,000 respectively.




**NOTE
      15 - MAJOR CUSTOMERS**





During
      the nine months ending September 30, 2008 and 2007, TXP recorded revenue
      from five customers which amounted to 63% and 55% respectively. Tellabs Inc.,
      Avanex Corporation and AMX Corporation accounted for 22%, 13% and 12%
      respectively through the third quarter 2008 while no other customer accounted
      for more than 10% for 2008. Tellabs Inc and AMX Corporation accounted for
      29% and 13% respectively of revenues in 2007 while no other customer accounted
      for more than 10% of revenues for 2007.





**NOTE
      16 - 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. On March 26, 2008 an amendment to the 2006
      Stock Incentive Plan was adopted by the TXP board of directors for the sole
      purpose of increasing the number of authorized shares of common stock underlying
      awards available for issuance from 10,000,000 to 15,000,000 shares. As of
      September 30, 2008, 5,181,976 stock options and 1,935,870 shares of common
      stock
      have been awarded to employees, directors or consultants under this plan. As
      discussed previously in **NOTE
      5 - STOCK BASED COMPENSATION** ,
      a
      significant amount of options were forfeited in the third quarter causing the
      Company to recognize $(24,000) of stock compensation expense in selling, general
      and administrative expense in the statement of operations for quarter ended
      September 30, 2008.





**NOTE
      17 - NONMONETARY EXCHANGE TRANSACTION**





December
      of 2006, TXP completed a reciprocal exchange transaction with Siemens Networks
      GmbH Co. KG 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 the first quarter of 2007. TXP recognizes design and
      development services revenue using the percentage-of-completion method of
      accounting, in accordance with SOP 81-1, “Accounting for Performance of
      Construction-Type and Certain Production-Type Contracts.” Revenues are
      recognized primarily based on costs incurred to date compared with total
      estimated contract costs. Generally, the Company's design services costs consist
      of engineering labor costs.





**NOTE
      18 - SUBSEQUENT EVENTS**





***October
      2008 Amendments with YA Global***





On
      October 15, 2008,  the Company and YA Global Investments, L.P. (“YA
      Global”) entered into Amendment No. 1 (the “Amendment”) to the Securities
      Purchase Agreement dated as of May 29, 2008 (the “Purchase Agreement”) pursuant
      to which the date on which the third closing of the private placement is
      scheduled to occur was revised from October 15, 2008 to November 15,
      2008.




F-33




In
      addition, under the original Purchase Agreement, the Company must (i) enter
      into
      a contract (or series of contracts) for the development and sale of optical
      network terminals on terms that are satisfactory to YA Global in total value
      of
      contracts, counterparty, and gross product margins to the Company, and (ii)
      complete an equity raise resulting in proceeds to the Company of at least
      $5,000,000 (collectively, the “Milestones”). If the Company fails to achieve at
      least one of the Milestones on or before October 15, 2008, then the third
      closing will not occur and YA Global will have the right to require the Company
      to sell the business or the assets of its iPhotonics business unit before
      December 31, 2008. The Company shall apply at least 80% of the proceeds of
      any
      such sale directly from the sale towards the redemption of the
      debentures.





Under
      the
      Amendment, the date by which the Company is required to achieve at least one
      of
      the Milestones was revised from October 15, 2008 to November 15, 2008. Moreover,
      the date by which the Company must complete the sale of the business or the
      assets of its iPhotonics business unit if at least one of the Milestones is
      not
      achieved by the Company and if so elected by YA Global was revised from December
      31, 2008 to January 31, 2009. As of November 14, 2008 neither of the above
      referenced milestones have been achieved.





***Amendments
      to Factoring Agreement with Landry Marks Partner,
      LP***





In
      accordance with the Factoring Agreement described in **NOTE
      3 - LIQUIDITY AND GOING CONCERN,** on
      October 8, 2008 **** the
      Company paid YA Global $200,000 to be applied in reduction of the Company’s
      indebtedness and other obligations to YA Global. On October 22, 2008, the
      Factoring Agreement was modified to a have Landry Marks distribute directly
      to
      the Company any advances actually made by Landry Marks pursuant to the Factoring
      Agreement until the Company has received $1,000,000 or YA Global notifies Landry
      Marks that an event of default has occurred as defined in the Intercreditor
      Agreement. In connection with this amendment to the Factoring Agreement, TXP
      and
      YA Global agreed that YA Global is under no obligation to purchase the
      $1,250,000 convertible debentures that was to be purchased at the Third Closing
      as defined in the Securities Purchase Agreement (the “Purchase Agreement”) with
      YA Global Investments, L.P. dated May 29, 2008. **(See
      NOTE 12 - CONVERTIBLE DEBENTURES, WARRANTS, AND
      SECURITIES).**





***Deferral
      Agreement with*** ***YA
      Global***





On
      November 13, 2008, the Company entered into a Deferral Agreement with YA Global
      deferring the mandatory redemption payments which were scheduled to be made
      on
      October 31, 2008 and November 30, 2008 to December 15, 2008 **(See NOTE 12 – CONVERTIBLE DEBENTURES, WARRANTS, AND
      SECURITIES)** .





F-34


**Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of
      Operation** **s.**





**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-Q 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-Q 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.




1




On
      June
      13, 2005, we and a wholly-owned subsidiary of Stock Market Solutions, Inc.
      (SMS)
      entered into an agreement and plan of merger with Texas Prototypes, Inc. (TXP)
      whereby SMS, following the effectuation of a 1 for 10 reverse stock split,
      issued shares of its common stock to TXP on May 4, 2006 equal to 94.7% of its
      total outstanding shares of common stock, or 89,298,042 shares, within ten
      days
      after completion of the closing conditions under the agreement and plan of
      merger, the principal requirement being the completion of the reverse stock
      split. On March 31, 2006, SMS obtained the majority vote of its shareholders
      necessary to effect the 1-for-10 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.




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.





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 former chief financial officer 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 agreement and plan of
      merger on April 28, 2006.




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.





On
      June
      29, 2008, we entered into a non-binding letter of intent with Cambridge
      Industries Group (“ CIG ”)
      which
      set forth preliminary terms for a proposed merger of the two companies (the
      “ Proposed
      Merger ”).
      On
      August 18, 2008, the parties entered into a non-binding memorandum of
      understanding for the Proposed Merger. The Proposed Merger is expected to close
      before year-end. However, there can be no assurance that satisfactory due
      diligence will be completed, that a definitive merger agreement will be entered
      into, that all closing conditions will be satisfied, or that the Proposed Merger
      will be consummated.





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.





We
      have
      developed a position in the outside plant cabinet retrofit business. Our kits
      cover a diverse range of cabinets of differing sizes and line counts from a
      majority of the industry’s access vendors. We believe that our retrofit kits
      offer carriers the ability to upgrade their network infrastructure for
      substantially less cost than using new cabinets. Retrofits are generally
      deployed due to a generational change of access equipment supporting the latest
      telecom services which require power and/or cooling upgrades.





In
      December of 2006, we created a new business unit, iPhotonics, which focuses
      primarily on the development and sale of Optical Network Terminals (“ONTs”) and
      related accessories and to a lesser extent related design and development
      services. The iPhotonics business unit operates 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]).
      Our
      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.




2




**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***





We account
      for our 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,” 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 our
      common stock. 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.





We
      have
      penalty provisions in the registration rights agreement executed prior to the
      year 2007 of our YA Global debentures and warrants that require us to file
      a
      registration statement no later than 45 days from the date of closing and to
      use
      our 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 our obligations under the registration rights agreements,
      including our 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, we are required that we pay to YA Global, 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 YA Global'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 YA Global elect to be paid liquidated damages in common stock.
      We
      obtained a waiver from YA Global waiving any claim or payment of liquidated
      damages up through and including May 15, 2007. On May 14, 2007, the SEC declared
      our 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 us with the Securities and
      Exchange Commission registering the shares and the shares common stock issuable
      upon exercise of the warrants. We are obligated to file the registration
      statement no later than December 15, 2006 and to use our best efforts to cause
      the registration statement to be declared effective no later than 90 days after
      filing. If we do not meet the aforementioned filing and effectiveness deadlines,
      we 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.
       We 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 our registration statement effective for the aforementioned
      shares and the shares of common stock issuable upon exercise of the warrants.
      On
      June 17, 2008, the investor agreed to waive its registration rights, as well
      as
      its “piggy-back” registration rights, with respect to the shares and the shares
      underlying the warrants issued pursuant to the October 2006 securities purchase
      agreement. In exchange, we agreed to adjust the exercise prices of the warrants
      to $0.20 per share.




3




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 YA Global. We are obligated to use our 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 our obligations under the registration rights agreements,
      including our agreement to file the registration statement with the
      Securities and Exchange Commission no later than 30 days from receipt of a
      written demand from YA Global, or if the registration statement is not declared
      effective within 90 days of filing we are required pay to YA Global, as
      liquidated damages, for each month that the registration statement has not
      been
      filed or declared effective, as the case may be, a cash amount equal to 2%
      of
      the liquidated value of the notes. Notwithstanding the foregoing, we shall
      not
      be liable for liquidated damages with respect to any warrants or warrant shares
      and the maximum aggregate liquidated damages payable to YA Global by us, if
      any,
      shall be 15% of the aggregate purchase price paid by YA Global pursuant to
      the
      purchase agreement. On December 13, 2007, we and YA Global entered into
      Amendment No. 1 to the Registration Rights Agreement pursuant to which the
      scheduled filing date was revised to 180 calendar days from December 13, 2007.
      On June 5, 2008,  we and YA Global entered into Amendment No. 2 to the
      Registration Rights Agreement dated as of March 30, 2007 pursuant to which
      the
      scheduled filing date of the registration statement required to be filed by
      us
      was revised from 180 days from the second closing date of December 13, 2007
      to
      no later than 30 days after receipt of written demand from YA Global; *provided
      that* ,
      YA
      Global may only deliver such written demand on or after July 7,
      2008.





On
      September 6, 2007, we entered into a securities purchase agreement with a
      strategic investor/qualified institutional buyer pursuant to which provides
      for
      the filing of a registration statement by us with the Securities and Exchange
      Commission registering the shares and the shares of common stock issuable upon
      exercise of the warrants. We are obligated to file the registration statement
      no
      later than December 15, 2007 and to use our best efforts to cause the
      registration statement to be declared effective by the Securities and Exchange
      Commission no later than 90 days after filing. If we do not meet the
      aforementioned filing and effectiveness deadlines, we shall pay to the investor
      an amount equal to 1% of the purchase price of the shares and warrants, in
      cash
      or, at the investor's election, in shares of common stock, for each 30 days
      or
      part thereof for the first 60 days after the occurrence of a non-registration
      event and 2% for each 30 days or part thereof thereafter; provided, however,
      that the aforementioned liquidated damages shall only accrue, if at all, for
      12
      months after the closing date. We did not file the registration statement by
      December 15, 2007 and are currently in default of this obligation. As of
      September 30, 2008, an aggregate of $173,000 in liquidated damages has been
      accrued and been recorded as an expense. **** As
      of
      November 14, 2008, an aggregate of $203,000 in liquidated damages has been
      accrued.





On
      May
      29, 2008, we entered into a registration rights agreement with YA Global
      providing 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 debentures and exercise of the warrants within 30 days of
      receipt of written demand of YA Global. We are obligated to use our best efforts
      to cause the registration statement to be declared effective no later than
      120
      days after filing and to ensure that the registration statement remains in
      effect until all of the shares of common stock issuable upon conversion of
      the
      debentures and exercise of the warrants have been sold or may permanently
      be sold. In the event of a default of its obligations under the registration
      rights agreement, including our agreement to file the registration statement
      with the Securities and Exchange Commission no later than 30 days from receipt
      of a written demand from YA Global, or if the registration statement is not
      declared effective within 120 days of filing, we will be required pay to YA
      Global, as liquidated damages, for each month that the registration statement
      has not been filed or declared effective, as the case may be, a cash amount
      equal to 2% of the liquidated value of the debentures. Notwithstanding the
      foregoing, we shall not be liable for liquidated damages with respect to any
      warrants or warrant shares and the maximum aggregate liquidated damages payable
      to YA Global by us, if any, shall be 24% of the aggregate purchase price paid
      by
      YA Global pursuant to the May 2008 purchase agreement.





We
      account for these penalties as contingent liabilities, applying the accounting
      guidance of Financial Accounting Standard No. 5, “Accounting for Contingencies”.
      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.





To
      determine the correct accounting for effect of this transaction on the existing
      debentures we reviewed EITF 05-07 “Accounting for Modifications to Conversion
      Options Embedded in Debt Instruments and Related Issues” and EITF 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 on a present
      value
      basis exceeded 10%. Therefore, we recorded a loss on extinguishment debt of
      $1,253,000 in the consolidated statements of operations as a result of the
      modification. And we recorded the re-issuance of the convertible debentures
      on
      May 29, 2008.




4




Additionally,
      the provisions in Purchase Agreement consummated with YA Global on May 29,
      2008
      that required the Company to issue Debentures and Warrants and to amend
      outstanding warrants and notes issued to YA Global affected the accounting
      for
      all outstanding warrants. Specifically, all warrants issued to YA Global now
      have adjustment provisions that could affect the exercise price and the number
      of warrant shares issuable. Therefore, since the Company has warrants that
      do
      not have limits on the net shares that potentially would have to be delivered
      in
      a net share settlement, the company is precluded from concluding that it has
      sufficient shares authorized and unissued to net-settle any of its outstanding
      warrants and must fair value all warrants as a liability. Accordingly, under
      the
      provisions of ETIF 00-19 these warrants were designated as a liability to be
      carried at fair value on the company’s balance sheet, with any changes in fair
      value recorded in the Company’s results of operations.





On
      August
      20, 2008,  the Company entered into a letter agreement (the “Agreement”)
      with Yorkville Advisors, LLC, on its behalf and as Investment Manager to YA
      Global Investments, L.P. (collectively, “Yorkville”), pursuant to which the
      Company agreed, among other things, to relinquish all of its registration rights
      and rights to liquidated damages previously granted to Yorkville pursuant to
      all
      prior financing agreements entered into with the Company. The consummation
      of
      all of the transactions contemplated by the Agreement are subject to the
      consummation of the Financing by the Company. There can be no assurance that
      the
      Financing or the transactions contemplated by the Agreement will be completed
      (See NOTE 12 - CONVERTIBLE DEBENTURES, WARRANTS, AND SECURITIES).





***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;


·
            Telecom
                cabinet retrofit kits and design
                solutions;


·
            Optical
                network terminal product and accessory sales;
                and


·
            ONT
                design and development services.





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





Prototyping
      and assembly services typically consist of assembling and designing surface
      mount technology and other build-to-order products in accordance
      with 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 collectability 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 consist of assembling and
      designing optical and optical related products in accordance
      with 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 collectability
      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 consist of locating and procuring materials
      according to customer design specifications, qualifying components and auditing
      vendors, inventorying materials, and providing dual vendor sourcing if
      necessary. 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 collectability 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.





Telecom
      cabinet retrofit revenue and design solutions typically consist of designing
      and
      assembling retrofit kits to enable incumbent local exchange carriers to upgrade
      their local access service delivery infrastructure. 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 collectability
      is probable. These criteria are generally met after an internal quality control
      review of the product and at the time product is shipped.




5




Optical
      network terminal (ONT) product and accessory sales. In December of 2006, we
      created a new business unit, iPhotonics, which focuses primarily on the
      development and sale of ONT's and related accessories. ONTs are the customer
      premise located devices used by a carrier to serve residential and business
      customers over a PON-based (passive optical networking) system. PON is a
      maturing point-to-multipoint technology which is being adopted by telephone
      companies globally because of its cost effectiveness in extending fiber-based
      service delivery all the way to the customer premise (fiber-to-the-home [FTTH]
      or fiber-to-the-premise [FTTP]). Our 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 collectability 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. We offer contract services related to the
      design and development of ONT products and accessories. We recognize 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 and the costs of third party
      services.





**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 collectability 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.




**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.





**Results
      of Operations**





***Three
      months ended September 30, 2008 (“2008”) as compared to the three months ended
      September 30, 2007 (“2007”)***





*Revenues*





We
      currently derive the majority of our 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. Our material supply chain management services are priced on a cost
      of the material plus basis. Prototyping and assembly and material supply chain
      services projects are typically purchase order driven rather than driven by
      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 .5% from $2,665,000 for the three months ended September
      30,
      2007 to $2,677,000 for the three months ended September 30, 2008, or by $12,000.
      Material supply chain management services decreased .6% from $896,000 in 2007
      to
      $845,000 in 2008. Prototyping and assembly services decreased 15% from
      $1,016,000 for the three months ended September 30, 2007 to $866,000 for the
      three months ended September 30, 2008. Revenues from sales of retrofit kits
      increased from $331,000 in 2007 to $603,000 in 2008. We also had revenues of
      $363,000 related to gigabit passive optical network (GPON) and broadband passive
      optical network (BPON) ONT product and accessory sales for the three months
      ended September 30, 2008 compared to $95,000 for the three months ended
      September 30, 2007, as the iPhotonics group was not formed until late fourth
      quarter of 2006 and most of 2007 was spent developing the product for launch
      and
      establishing distribution channels for the product. There were not any design
      and development services performed in 2008. The revenues recorded for design
      and
      development services in 2007 was work performed for Siemens as consideration
      given by us in a non-monetary transaction (see **NOTE
      17 - NONMONETARY EXCHANGE TRANSACTION).**




6




The
      small increase in revenues is attributed primarily to increases in ONT and
      Retrofit Solutions sales offset by a small decline in the Prototyping business
      due to its cyclical nature. We expanded our customer base from 139 in 2007
      to
      141 in 2008. Total active customers for the quarters ended September 30, 2008
      and 2007 were 46 and 49, respectively. Our top five customers accounted for
      56%
      of revenue in 2008 and 56% of revenue in 2007.





*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 $ 1,810,000
      for the three months ended September 30, 2007
      to
      $ 2,210,000
      for the three months ended September 30, 2008,
      or
      by $ 400,000 .
      Other
      direct material costs and production supplies increased from $ 1,254,000 in
      2007
      to $ 1,583,000 in
      2008,
      or by $ 329,000 .
      Manufacturing overhead and labor cost increased from $ 556,000
      for the three months ended September 30, 2007
      to
      $ 627,000
      for the three months ended September 30, 2008,
      or
      by $ 71,000. Depreciation charged to cost of sales decreased from $ 52,000
      for the three months ended September 30, 2007
      to
      $ 27,000
      for the three months ended September 30, 2008 as
      certain assets acquired in 2002 and 2003 are fully depreciated.




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. Gross profit
      decreased from $ 855,000
      for the three months ended September 30, 2007
      to
      $ 467,000
      for the three months ended September 30, 2008,
      or
      by $ 388,000.
      This decrease is attributed to a higher
      percentage of projects requiring a turn-key solution, sales of excess inventory
      at low margins and increased sales of lower margin ONT products.





*Selling,
      General and Administrative Expenses*





Selling,
      general and administrative expense consists of personnel costs including taxes
      and benefits, rent and utilities, contract labor, insurance, professional fees,
      marketing, telecommunication, internet costs, and other administrative expenses.
      Selling, general administrative expenses increased by $ 60,000 from
      $ 1,243,000
      for the three months ended September 30, 2007
      to
      $ 1,303,000
      for the three months ended September 30, 2008.
      Personnel costs decreased from $ 770,000
      for the three months ended September 30, 2007
      to
      $ 682,000
      for the three months ended September 30, 2008,
      or
      by $ 88,000 .
      This
      decrease in personnel costs is primarily driven by headcount reductions and
      associated personnel costs. Other drivers of the increased cost for selling,
      general and administrative expenses include increases in legal fees of
      $ 39,000 ,
      professional fees of $ 56,000,
      software maintenance of $31,000, and
      $ 61,000 of
      liquidated damages accrued through September 30, 2008, as previously discussed
      in the “Accounting for Convertible Debentures, Warrants and Derivative
      Instruments” section of Note 2 to the unaudited financial statements set forth
      herein.





*Research
      and Development*





Research
      and development 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. Research and development decreased $218,000 from $ 1,271,000
      for the three months ended September 30, 2007
      to
      $ 1,053,000
      for the three months ended September 30, 2008
      primarily driven by a reduction in our ONT engineering staff and contract labor
      utilized for ONT and Retrofit product development.





*Depreciation
      Expense*





Depreciation
      expense, net amounts included as a component of cost of sales, increased from
      $44,000 for the three months ended September 30, 2007 to $48,000 for the three
      months ended September 30, 2008. The increase was in-line with capital
      expenditures and depreciable asset base.




*Net
      Interest Expense*





Net
      interest expense increased from $ 488,000
      for the three months ended September 30, 2007
      to
      $ 1,335,000
      for the three months ended September 30, 2008,
      or
      by $ 847,000 .
      Approximately $ 634,000 of
      the
      increase relates to additional amortization of note discounts and accrued
      interest on our secured convertible debentures issued to YA Global.
      Additionally, interest expense on our lines of credit increased by $ 83,000
      as we increased the lines of credit by $2,834,000 from September 30,
      2007
      to September 30,
      2008.




7




*Change
      in Fair Value of Derivative Financial Instruments*





Income
      from change in fair value of derivative financial instruments **** was
      $ 6,305,000
      for the three months ended September 30, 2008
      compared to $ 869,000 in
      income for
      the three months ended September 30, 2007.
      The
      significant change in fair value for the three months ended September 30, 2008
      is a result of a lower stock price combined with a shorter expected term and
      a
      lower volatility ratio based on the expected term. We account for all derivative
      financial instruments in accordance with SFAS No. 133. Derivative financial
      instruments are initially recorded as liabilities in the consolidated balance
      sheet, at fair value. Derivative instrument liabilities are re-valued at the
      end
      of each reporting period, with changes in the fair value of the derivative
      liability recorded in our consolidated statement of operations as “Changes in
      Fair Value of Derivative Financial Instruments” in the period in which the
      changes occur. As a result, our financial statements may fluctuate from
      quarter-to-quarter based on factors, such as the price of our stock at the
      balance sheet date, the amount of shares converted by note holders and/or
      exercised by warrant holders. Consequently, our financial position and results
      of operations may vary from quarter-to-quarter based on conditions other than
      our operating revenues and expenses.





***Nine
      months ended September 30, 2008 (“2008”) as compared to the nine months ended
      September 30, 2007 (“2007”)***




*Revenues*





We
      currently derive the majority of our 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. Our material supply chain management services are priced on a cost
      of the material plus basis. Prototyping and assembly and material supply chain
      services projects are typically purchase order driven rather than driven by
      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 4% from $8,145,000 for the nine months ended September 30,
      2007 to $8,485,000 for the nine months ended September 30, 2008, or by $340,000.
      Material supply chain management services increased 12% from $2,870,000 in
      2007
      to $3,210,000 in 2008. Prototyping and assembly services decreased 12% from
      $3,644,000 for the nine months ended September 30, 2007 to $3,211,000 for the
      nine months ended September 30, 2008. Revenues from sales of retrofit kits
      increased from $809,000 in 2007 to $1,268,000 in 2008. In addition, we had
      revenues of $699,000 for the nine months ended September 30, 2007 related to
      royalties and design and development services performed by our iPhotonics group
      which was formed in the fourth quarter of 2006. Included in design and
      development services revenue is $332,000 attributable to design and development
      work performed for Siemens related to completing certain optical network
      terminal (ONT) development hardware and software releases. The recognition
      of
      this revenue was a one-time occurrence in 2007. The Siemens design and
      development project was consideration given by us in a non-monetary transaction
      whereby we received certain ONT assets from Siemens (see Note 17 of the
      unaudited financial statements included herein for further discussion of the
      non-monetary transaction). We also had revenues of $123,000 related to gigabit
      passive optical network (GPON) and broadband passive optical network (BPON)
      ONT
      product and accessory sales for the nine months ended September 30, 2007
      compared to $796,000 for the nine months ended September 30, 2008, as the
      iPhotonics group was not formed until late fourth quarter of 2006 and most
      of
      2007 was spent developing the product for launch and establishing distribution
      channels for the product. The overall increase in revenues is attributed
      increases in Retrofit Solutions and ONT sales along with an increasing customer
      base and continued demand from existing customers. We expanded our customer
      base
      from 139 in 2007 to 141 in 2008. Total active customers for the nine months
      ended September 30, 2007 and 2008 were 71 and 68, respectively. Our top five
      customers accounted for 55% of revenue in 2007 and 63% of revenue in
      2008.





*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 $ 5,267,000
      for the nine months ended September 30, 2007
      to
      $ 6,290,000
      for the nine months ended September 30, 2008,
      or
      by $ 1,023,000 .
      Other
      direct material costs and production supplies increased from $ 3,599,000 in
      2007
      to $ 4,463,000 in
      2008,
      or by $ 864,000 .
      Included in this increase was excess inventory sold at low margins.
      Manufacturing overhead and labor cost increased from $ 1,668,000
      for the nine months ended September 30, 2007
      to
      $ 1,827,000
      for the nine months ended September 30, 2008,
      or
      by $ 159,000. Depreciation
      charged to cost of sales decreased slightly from $ 156,000
      for the nine months ended September 30, 2007
      to
      $ 122,000
      for the nine months ended September 30, 2008 as
      certain assets acquired in 2002 and 2003 are fully depreciated Direct labor
      and
      personnel costs attributable to design and development services performed by
      our
      iPhotonic’s business unit were $ 332,000 for
      the nine months
      ended September 30, 2007
      and $ 0 for the nine months
      ended September 30,
      2008.




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. Gross profit
      decreased from $ 2,878,000
      for the nine months ended September 30, 2007
      to
      $ 2,195,000
      for the nine months ended September 30, 2008,
      or
      by $ 683,000.
      This decrease is driven by a
      combination of factors including the large amount of inventory sold at low
      margin as mentioned above, a higher percentage of projects requiring a turn-key
      solution and $ 804,000 ONT
      sales
      at virtually no margin.




8




*Selling,
      General and Administrative Expenses*





Selling,
      general and administrative expense consists of personnel costs including taxes
      and benefits, rent and utilities, contract labor, insurance, professional fees,
      marketing, telecommunication, internet costs, and other administrative expenses.
      Selling, general and administrative expenses increased by $ 977,000 from
      $ 3,493,000
      for the nine months ended September 30, 2007
      to
      $ 4,470,000
      for the nine months ended September 30, 2008.
      Personnel costs increased from $ 2,233,000
      for the nine months ended September 30, 2007
      to
      $ 2,763,000
      for the nine months ended September 30, 2008,
      or
      by $ 530,000 .
      This
      increase in personnel costs are primarily driven by increased headcount from
      2007 to 2008 as the full effect of the reductions did not begin to occur until
      the third quarter.. Other drivers of the increased cost for selling, general
      and
      administrative expenses include increases in legal fees of $ 146,000 ,
      professional fees of $ 92,000,
      software maintenance of $54,000 and
      of
      $ 173,000 of
      liquidated damages accrued through the nine
      months ended September 30,
      2008, as previously discussed in the “Accounting for Convertible Debentures,
      Warrants and Derivative Instruments” section of Note 2 to the unaudited
      financial statements set forth herein.





*Research
      and Development*





Research
      and development 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. Research and development increased from $ 3,278,000
      for the nine months ended September 30, 2007
      to
      $ 3,764,000
      for the nine months ended September 30, 2008
      as
      our iPhotonics' business unit continued in the development of our next
      generation optical network terminals and retrofit kits. As noted above, the
      full
      effect of the headcount reductions did not begin to occur until the third
      quarter and therefore did not fully offset the increases incurred during the
      first half of the year. Additionally, in first quarter 2007, direct labor and
      personnel costs attributable to design and development services performed by
      our
      iPhotonic’s business unit as a result of the “Non-Monetary Exchange Transaction”
(Note 17) were recorded as Cost of Sales as described above. These personnel
      costs were shifted to research and development after March 31, 2007 and account
      for approximately $ 332,000 of the
      increase.





*Depreciation
      Expense*





Depreciation
      expense, net of amounts included as a component of cost of sales, increased
      from
      $113,000 for the nine months ended September 30, 2007 to $165,000 for the nine
      months ended September 30, 2008. The increase was in-line with capital
      expenditures and depreciable asset base.




*Net
      Interest Expense*





Net
      interest expense increased from $ 1,189,000
      for the nine months ended September 30, 2007
      to
      $ 2,825,000
      for the nine months ended September 30, 2008,
      or
      by $ 1,636,000 .
      Approximately $ 1,139,000 of
      the
      increase relates to additional amortization of note discounts and accrued
      interest on our secured convertible debentures issued to YA Global.
      Additionally, interest expense on our lines of credit increased by $ 214,000
      as we increased the lines of credit by $2,834,000 from September 30, 2007
      to September 30,
      2008.





*Change
      in Fair Value of Derivative Financial Instruments*





Income
      from change in fair value of derivative financial instruments **** was
      $ 3,424,000
      for the nine months ended September 30, 2008
      compared to $ 2,041,000 in
      income for
      the nine months ended September 30, 2007.
      We
      account for all derivative financial instruments in accordance with SFAS No.
      133. Derivative financial instruments are initially recorded as liabilities
      in
      the consolidated balance sheet, at fair value. Derivative instrument liabilities
      are re-valued at the end of each reporting period, with changes in the fair
      value of the derivative liability recorded in our consolidated statement of
      operations as “Changes in Fair Value of Derivative Financial Instruments” in the
      period in which the changes occur. As a result, our financial statements may
      fluctuate from quarter-to-quarter based on factors, such as the price of our
      stock at the balance sheet date, the amount of shares converted by note holders
      and/or exercised by warrant holders. Consequently, our financial position and
      results of operations may vary from quarter-to-quarter based on conditions
      other
      than our operating revenues and expenses.





**Liquidity
      and Capital Resources**





Our
      principal potential sources of liquidity are cash on hand, cash generated from
      current revenues and cash provided from financing activities. As of September
      30, 2008, we had cash and cash equivalents of $ 416,000 .




9




During,
      2008, we used $ 4,840,000 in
      operating activities compared to using $ 5,179,000 during
      2007. Cash used in operating activities during 2008 reflects $ 7,054,000 in
      net
      loss, $ 400,000 in
      depreciation, $ 196,000 in
      loss
      on impairment of fixed assets, $ 1,576,000 in
      debt
      discount amortization, $ 1,253,000 charge
      for the early extinguishment of debt, $ 479,000 in
      stock
      compensation, $ 3,424,000
      credit due to the change in
      the
      fair value of derivative financial instruments and $ 17,000 in
      deferred revenue. Accounts receivable, other current assets, and other assets
      decreased by $ 455,000,
      $351,000, $63,000 respectively, along with an increase in accounts payable accrued expenses of
      $398,000 and $ 771,000 to
      increase cash flow by $ 2,038,000 .
      cash
      flow decreased by $ 287,000 due
      to an
      increase in inventory.





Cash
      used
      in operating activities during 2007 reflects $3,151,000 in net loss, $378,000
      in
      depreciation, $10,000 in provision for bad debt, $3,000 in gain on sale of
      fixed
      assets, $797,000 in debt discount amortization, $429,000 in stock compensation,
      $2,041,000 in change (credit) in fair value of derivative financial instruments
      and $245,000 in deferred revenue. Accounts receivable and inventory increased
      by
      $569,000 and $1,286,000, respectively along with a decrease in other current
      assets of $46,000, to decrease cash flow by $1,901,000. We obtained cash from
      working capital changes of $548,000 consisting of increases in accounts payable
      and accrued expenses of $241,000 and $307,000, respectively.





During
      2008, we used $ 275,000 in
      investing activities reflecting capital expenditures for plant, property and
      equipment and software .





During
      2007, we used $161,000 in investing activities reflecting capital expenditures
      for plant, property and equipment and software of $181,000 net of $20,000 in
      proceeds received from the sale of fixed assets.




During
      2008, financing activities provided net cash of $ 5,321,000 as
      the
      result of the issuance of $4,500,000 in convertible debentures to YA Global
      offset by fees of $686,000 to secure the transaction, and proceeds from draw
      downs on our line of credit of $ 1,784,000 offset
      by
      payments on loans and capital lease obligations of $ 277,000.




During
      2007, financing activities provided net cash of $ 5,171,000 as
      the
      result of issuances of $ 4,000,000 in
      convertible debentures to YA Global partially offset by fees and offering costs
      incurred of $ 385,000 to
      secure
      the transaction and proceeds from sale of common stock and warrants of
      $1,000,000. We received proceeds from draw downs on our lines of credit of
      $ 850,000 .
      Total
      repayments on loans and capital lease obligations amounted to $ 294,000 .





Our
      consolidated financial statements for the three and nine months ended September
      30, 2008 have been prepared under the assumption that we will continue as a
      going concern for the year ending December 31, 2008. Our independent registered
      public accounting firm issued a report that was included in our annual report
      on
      Form 10KSB/A for the year ended December 31,2007 that was filed on October
      14,
      2008 which included an explanatory paragraph expressing substantial doubt in
      our
      ability to continue as a going concern without additional capital becoming
      available. Our ability to continue as a going concern ultimately is dependent
      on
      our ability to generate a profit which is likely dependant upon our ability
      to obtain additional equity or debt financing, attain further operating
      efficiencies and, ultimately, to achieve profitable operations. The financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.





Although
      the Company consummated a Securities Purchase Agreement (the “Purchase
      Agreement”) with YA Global Investments, L.P. (“YA Global”) on May 29, 2008 (as
      discussed above) the Company continues to urgently need to raise additional
      financing to fund its operations. The cash required to operate our iPhotonics
      business unit which was formed in the fourth quarter of 2006 is significant.
      The
      formation of the iPhotonics business unit resulted in us adding 35 full-time
      employees and amending our lease in November of 2006 to expand the operating
      facility by 16,000 square feet. In April of 2008 we reduced headcount and made
      other changes to our iPhotonics business unit to reduce costs. Going forward,
      incremental personnel cost and lease payments are expected to average
approximately $200,000 and $8,000, respectively, per month. Other research
      and
      development and operational costs are expected to average just under $120,000
      per month for the next twelve months. Revenues to date related to the
      iPhotonics' business unit have been insignificant relative to the related
      expenditures which, coupled with lower than expected revenues from our other
      operating units, continues to place significant strain on our cash and
      liquidity position.





To
      continue to operate under our current business model of which our iPhotonics
      business unit is integral and material, we urgently need to raise additional
      funds. To obtain funds to continue our iPhotonics activities, we may
      utilize any of several potential options, including the issuance of debt or
      equity securities, the exercise of warrants issued to investors in conjunction
      with previous private offerings, and other arrangements with strategic partners.
      No assurance can be given that we will be able to obtain financing on favorable
      terms, if at all. If we are unable to obtain additional financing when needed,
      we could be required to modify our business plan including selling the
      iPhotonics business unit assets or shutting down its operations, or cease
      our operations altogether, depending on the extent of available financing.
      Our
      ability to continue as a going concern depends upon our ability to raise
      substantial funds for use in our operating plan and activities especially
      related to our iPhotonics business unit. If the company cannot secure additional
      funds, it will not be able to meet its obligations as they come due. The
      accompanying consolidated financial statements do not include any adjustments
      that might result from the outcome of this uncertainty.




10




**Financing
      Transactions**





*June
      5, 2006 Secured Convertible Debentures and Warrants*





On
      June
      5, 2006, we consummated a securities purchase agreement dated June 5, 2006
      with
      YA Global providing for the sale by us to YA Global of our 10% secured
      convertible debentures in the aggregate principal amount of $1,127,000 with
      principal and interest due on or before June 5, 2009.





We
      also
      issued to YA Global 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. YA Global 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 YA Global 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 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 shareholders' position.




In
      addition, on June 5, 2006 we issued to YA Global 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 YA Global 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.





On
      October 11, 2006, we exercised our right to redeem both debentures issued on
      June 5, 2006. We paid YA Global $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. We recorded a $304,000 loss in the consolidated statements of
      operations on extinguishment of debt related to the redemption in October of
      2006.





The
      Company reassessed the classification of all contracts at September 30, 2008
      and
      determined that the provisions in Purchase Agreement consummated with YA Global
      on May 29, 2008 (as discussed in more detail below) that required the Company
      to
      issue Debentures and Warrants and to amend outstanding warrants and notes issued
      to YA Global affected the accounting for all outstanding warrants. Specifically,
      all warrants issued to YA Global now have adjustment provisions that could
      affect the exercise price and the number of warrant shares issuable. Therefore,
      since the Company has warrants that do not have limits on the net shares that
      potentially would have to be delivered in a net share settlement, the company
      is
      precluded from concluding that it has sufficient shares authorized and unissued
      to net-settle any of its outstanding warrants and must fair value all warrants
      as a liability. Accordingly, under the provisions of ETIF 00-19 these warrants
      were designated as a liability to be carried at fair value on the company’s
      balance sheet, with any changes in fair value recorded in the Company’s results
      of operations.





*YA
      Global Registration Rights Agreement*





In
      connection with all of the above secured convertible debentures and warrants
      issued to YA Global prior to the year 2007, we 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. We are obligated
      to
      file the registration statement no later than 45 days from the date of closing
      and to use our 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 our obligations under the registration
      rights agreement, including our 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 YA Global, 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. We obtained a waiver from YA Global waiving any claim or
      payment of liquidated damages up through and including May 15, 2007. On May
      14,
      2007, the SEC declared our registration statement effective for the
      aforementioned shares of common stock issuable upon conversion of the debentures
      and exercise of the warrants.




11




*July
      2006 Warrants*





On
      July
      28, 2006, we entered into an agreement with James Von Ehr, II, an accredited
      investor, pursuant to which we issued to the investor five-year warrants to
      purchase an aggregate of 320,000 shares of common stock 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 is to be pledged on our behalf in favor of First Community Bank
      (f/k/a First Bank of Canyon Creek), or such other lending or financing
      institution as may be agreed upon between the parties, as collateral for a
      loan
      to be obtained by us from a lender in an amount up to $2,000,000 with a term
      of
      up to 2 years, which will be further guaranteed personally and through the
      pledge of common stock beneficially owned by our chief executive
      officer.




The
      warrants are exercisable into shares of our 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 shareholders' position.





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





As
      additional consideration of the investor's agreement to pledge the collateral
      to
      a lender, we agreed to pay to the investor a one-time commitment fee, during
      the
      term, of $40,000 no later than 90 days after the collateral is deposited into
      the account of a lender; provided, however, that we shall pay an additional
      commitment fee within 90 days after the renewal of the loan by a lender. We
      consummated the loan facility with First Community Bank (f/k/a First Bank of
      Canyon Creek) in early third quarter of 2006 (See Note 8 to the unaudited
      financial statements included herein).





We
      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,” which requires freestanding contracts that are settled in
      a company's own stock, including common stock warrants, to be designated as
      an
      equity instrument, asset or a liability. On the date the warrants were issued,
      we 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, we were precluded from concluding it had sufficient shares
      authorized and unissued to net-share settle the warrants and fair valued the
      warrants as a liability. Accordingly, under the provisions of EITF 00-19, these
      warrants were initially designated as a liability to be carried at fair value
      on
      a company's balance sheet, with any changes in fair value recorded in the
      company's results of operations.





EITF
      00-19 also requires that the classification of a contract should be reassessed
      at each balance sheet date. If the classification required under this issue
      changes as a result of events during the period, the contract should be
      reclassified as of the date of the event that caused the reclassification.
      At
      March 31, 2007, we reviewed the contracts, in its case the warrants, and
      determined because the convertible debenture that did not have limits on the
      net
      shares that would have to be delivered in net share settlement was fully
      converted during the period, that we 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. We reassessed the classification of all contracts at September
      30, 2008 and determined that the provisions in Purchase Agreement consummated
      with YA Global on May 29, 2008 (as discussed in more detail below) that required
      the Company to issue Debentures and Warrants and to amend outstanding warrants
      and notes issued to YA Global affected the accounting for all outstanding
      warrants. Specifically, all warrants issued to YA Global now have adjustment
      provisions that could affect the exercise price and the number of warrant shares
      issuable. Therefore, since the Company has warrants that do not have limits
      on
      the net shares that potentially would have to be delivered in a net share
      settlement, the company is precluded from concluding that it has sufficient
      shares authorized and unissued to net-settle any of its outstanding warrants
      and
      must fair value all warrants as a liability. Accordingly, under the provisions
      of ETIF 00-19 these warrants were designated as a liability to be carried at
      fair value on the company’s balance sheet, with any changes in fair value
      recorded in the Company’s results of operations.





*October
      2006 Warrants*





On
      October 12, 2006, we entered into an agreement with James Von Ehr, II, an
      accredited investor pursuant to which we issued to the investor five-year
      warrants to purchase an aggregate of 640,000 shares of common stock 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.





12





The
      collateral is to be pledged on our behalf in favor of First Community Bank
      (f/k/a First Bank of Canyon Creek), or such other lending or financing
      institution as may be agreed upon between the parties, as collateral for a
      loan
      to be obtained by us from a lender in an amount up to $2,000,000 with a term
      of
      up to 1 year, which will be further guaranteed personally and through the pledge
      of common stock beneficially owned by Michael C. Shores, our chief executive
      officer.





The
      warrants are exercisable into shares of our 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 shareholders' position.





In
      addition, the agreement provides for the filing of a registration statement
      by
      us 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. We are obligated to file the registration statement no later
      than 65 days from the date of closing and to use our best efforts to cause
      the
      registration statement to be declared effective no later than 120 days after
      filing and to insure that the registration statement remains in effect until
      all
      of the shares of common stock issuable upon exercise of the warrants have been
      sold. There are no liquidating damages clauses related to the warrant or
      agreement with the investor. On May 14, 2007, the SEC declared our registration
      statement effective for the aforementioned shares of common stock issuable
      upon
      exercise of the warrants.




As
      additional consideration of the investor's agreement to pledge the collateral
      to
      a lender, we agreed to pay to the investor a one-time commitment fee during
      the
      term of 125,000 shares of our common stock no later than 90 days after the
      collateral is deposited into the account of a lender; provided, however, that
      we
      shall pay an additional commitment fee within 90 days after the renewal of
      the
      loan by a lender. We increased our line of credit from $1 million to $3.0
      million with First Community Bank (f/k/a First Bank of Canyon Creek) in the
      fourth quarter of 2006 (See Note 8 to the unaudited financial statements
      included herein).




We
      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,” which requires freestanding contracts that are settled in
      a company's own stock, including common stock warrants, to be designated as
      an
      equity instrument, asset or a liability. On the date the warrants were issued
      we
      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,
      we
      were precluded from concluding we 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 our results of
      operations.





EITF
      00-19 also requires that the classification of a contract should be reassessed
      at each balance sheet date. If the classification required under this issue
      changes as a result of events during the period, the contract should be
      reclassified as of the date of the event that caused the reclassification.
      At
      March 31, 2007, 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 we 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. We reassessed the classification of all contracts at September
      30, 2008 and determined that the provisions in Purchase Agreement consummated
      with YA Global on May 29, 2008 (as discussed in more detail below) that required
      the Company to issue Debentures and Warrants and to amend outstanding warrants
      and notes issued to YA Global affected the accounting for all outstanding
      warrants. Specifically, all warrants issued to YA Global now have adjustment
      provisions that could affect the exercise price and the number of warrant shares
      issuable. Therefore, since the Company has warrants that do not have limits
      on
      the net shares that potentially would have to be delivered in a net share
      settlement, the company is precluded from concluding that it has sufficient
      shares authorized and unissued to net-settle any of its outstanding warrants
      and
      must fair value all warrants as a liability. Accordingly, under the provisions
      of ETIF 00-19 these warrants were designated as a liability to be carried at
      fair value on the company’s balance sheet, with any changes in fair value
      recorded in the Company’s results of operations.





*October
      2006 Securities Purchase Agreement*





On
      October 11, 2006, we entered into a securities purchase agreement with a
      qualified institutional buyer pursuant to which we sold an aggregate of
      $1,500,000 in shares of our 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 $1.00 per share. The entire purchase price of the shares
      and the warrants was used by us to redeem our principal amount $550,000 and
      $577,000 10% secured convertible debentures issued to YA Global Investments,
      L.P. in June 2005 and June 2006, respectively, each at a 20% premium, for a
      total redemption price of approximately $1,392,000.


13





The
      exercise prices of the warrants are subject to adjustment in certain events,
      including, without limitation, our consolidation, merger or sale of all or
      substantially all of our assets, a reclassification of our common stock, or
      any
      stock splits, combinations or dividends with respect to our common stock. In
      addition, we have the option to call all or a portion of the warrants so long
      as
      (i) the closing bid price of our 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 us
      with the Securities and Exchange Commission registering the shares and the
      shares common stock issuable upon exercise of the warrants. We are obligated
      to
      file the registration statement no later than December 15, 2006 and to use
      our
      best efforts to cause the registration statement to be declared effective no
      later than 90 days after filing. If we do not meet the aforementioned filing
      and
      effectiveness deadlines, we 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.  We 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 our registration statement effective for the
      aforementioned shares and the shares common stock issuable upon exercise of
      the
      warrants.





On
      June
      17, 2008, the investor agreed to waive its registration rights, as well as
      its
“piggy-back” registration rights, with respect to the shares and the shares
      underlying the warrants issued pursuant to the October 2006 securities purchase
      agreement. In exchange, we agreed to adjust the exercise prices of the warrants
      to $0.20 per share.





We
      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,” which requires freestanding contracts that are settled in
      a company's own stock, including common stock warrants, to be designated as
      an
      equity instrument, asset or a liability. On the date the warrants were issued
      we
      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,
      we
      were precluded from concluding we 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 our results of
      operations.





EITF
      00-19 also requires that the classification of a contract should be reassessed
      at each balance sheet date. If the classification required under this issue
      changes as a result of events during the period, the contract should be
      reclassified as of the date of the event that caused the reclassification.
      At
      March 31, 2007, 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 we 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. We reassessed the classification of all contracts at September
      30, 2008 and determined that the provisions in Purchase Agreement consummated
      with YA Global on May 29, 2008 (as discussed in more detail below) that required
      the Company to issue Debentures and Warrants and to amend outstanding warrants
      and notes issued to YA Global affected the accounting for all outstanding
      warrants. Specifically, all warrants issued to YA Global now have adjustment
      provisions that could affect the exercise price and the number of warrant shares
      issuable. Therefore, since the Company has warrants that do not have limits
      on
      the net shares that potentially would have to be delivered in a net share
      settlement, the company is precluded from concluding that it has sufficient
      shares authorized and unissued to net-settle any of its outstanding warrants
      and
      must fair value all warrants as a liability. Accordingly, under the provisions
      of ETIF 00-19 these warrants were designated as a liability to be carried at
      fair value on the company’s balance sheet, with any changes in fair value
      recorded in the Company’s results of operations.





*March
      2007 Securities Purchase Agreement*




On
      March
      30, 2007, TXP consummated a securities purchase agreement with YA Global
      providing for the sale by the Company to YA Global of its 6% secured convertible
      notes in the aggregate principal amount of $5,000,000. Under the purchase
      agreement, the Company also issued to YA Global 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




14





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 YA Global
      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 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.




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





The
      securities purchase agreement provides YA Global with rights of first refusal.
      From the date of the first closing until 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 YA Global 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.  YA Global shall have 10 business
      days from receipt of such notice of the sale or issuance of capital stock to
      accept or reject all or a portion of such capital raising offer.





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


15





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





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


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


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





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





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





Due
      to
      the entry into the purchase agreement on September 6, 2007 as discussed below,
      the Company has satisfied the requirement set forth in the notes to raise at
      least $1,000,000 in additional equity capital between the closing date and
      the
      date that is 210 days after the closing date and accordingly, the conversion
      price will not be adjusted to $0.25; *provided however* ,
      that
      the Company and YA Global mutually agreed that the interest rate of the notes
      will not revert back to 6%, but will be 8% per annum.





On
      December 13, 2007, we and YA Global entered into amendment no. 1 to the
      securities purchase agreement pursuant to which the second closing of $1,000,000
      was revised from the date on which we file the registration statement to
      December 13, 2007. Accordingly, on December 13, 2007 we and YA Global completed
      the second closing in which we received gross proceeds in the amount of
      $1,000,000 and we issued to YA Global a note in the principal amount of
      $1,000,000. In addition, we issued 48,781 shares of common stock to YA Global
      as
      an original issue discount which represents a number of shares equal to 2%
      of
      the second closing proceeds of $1,000,000 at a per share price equal to $0.41,
      which represents the fixed conversion price of the notes.





Moreover,
      on December 13, 2007 we and YA Global entered into amendment number 1 to the
      registration rights agreement pursuant to which the scheduled filing date was
      revised to 180 calendar days from the second closing date of December 13,
      2007.





The
      $4,000,000 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 of the embedded
      conversion option, and by $797,000 representing the fair value of the warrants
      issued in conjunction with the note. These discounts were being amortized over
      the life of the note for three years. Additionally, the $1,000,000 convertible
      debenture was originally discounted by $509,000. The discount included fees
      paid
      to the lender of $80,000 and 48,781 shares of common stock valued at $15,000.
      Additionally, the note was further discounted by $413,000 upon bifurcation
      and
      recording at fair value of the embedded conversion option. These discounts
      were
      also being amortized over the life of the note for three years.


16





In
      conjunction with the Purchase Agreement consummated with YA Global on May 29,
      2008 (as discussed below), we amended our outstanding warrants and notes issued
      to YA Global pursuant to the Company’s June 2006 and March 2007 private
      placements. The June 2006 and March 2007 warrants to purchase an aggregate
      of
      3,700,000 and 3,850,000 shares of common stock, respectively, were amended
      to
      reduce the exercise prices to $0.20 per share. The March 2007 notes in the
      aggregate principal amount of $4,000,000 were amended to reduce the conversion
      prices to $0.20 per share. Also, the interest rates were increased to 12% per
      annum and mandatory redemption payments by us in the amount of $100,000 per
      month, consisting of accrued and unpaid interest and principal, will commence
      on
      October 31, 2008. On November 13, 2008, the Company entered into a Deferral
      Agreement with YA Global deferring the mandatory redemption payments which
      were
      scheduled to be made on October 31, 2008 and November 30, 2008 to December
      15,
      2008.





To
      determine the correct accounting for effect of this transaction on the existing
      debentures we reviewed EITF 05-07 “Accounting for Modifications to Conversion
      Options Embedded in Debt Instruments and Related Issues” and EITF 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 on a present
      value
      basis exceeded 10%. Therefore, we recorded a loss on extinguishment debt of
      $1,253,000 in the consolidated statements of operations as a result of the
      modification. Additionally, we recorded the re-issuance of the convertible
      debentures on May 29, 2008. The $4,000,000 convertible note was issued with
      a
      discount of $2,750,000. This discount includes $1,360,000 upon bifurcation
      and
      recording at fair value the embedded conversion option, and by $1,120,000
      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
      September 30, 2008 the $4,000,000 convertible debenture had balance of $1,750000
      net $2,250,000 of unamortized discount. The effective interest rate on the
      debenture is the same as the stated interest rate of 12% since there
      were not any additional fees paid to the lender. The $1,000,000 convertible
      note
      as issued with a discount of $568,000 with the entire amount being the fair
      value of the embedded conversion option. At September 30, 2008, the $1,000,000
      convertible debenture had balance of $507,000 net $493,000 of unamortized
      discount. The effective interest rate on the debenture is the same as
      the stated interest rate of 12% since there were not any additional fees paid
      to
      the lender.





Additionally,
      the Company reassessed the classification of all contracts at September 30,
      2008
      and determined that the provisions in Purchase Agreement consummated with YA
      Global on May 29, 2008 (as discussed in more detail below) that required the
      Company to issue Debentures and Warrants and to amend outstanding warrants
      and
      notes issued to YA Global affected the accounting for all outstanding warrants.
      Specifically, all warrants issued to YA Global now have adjustment provisions
      that could affect the exercise price and the number of warrant shares issuable.
      Therefore, since the Company has warrants that do not have limits on the net
      shares that potentially would have to be delivered in a net share settlement,
      the company is precluded from concluding that it has sufficient shares
      authorized and unissued to net-settle any of its outstanding warrants and must
      fair value all warrants as a liability. Accordingly, under the provisions of
      ETIF 00-19 these warrants were designated as a liability to be carried at fair
      value on the company’s balance sheet.




On
      June
      5, 2008,  we and YA Global entered into Amendment No. 2 to the Registration
      Rights Agreement dated as of March 30, 2007 pursuant to which the scheduled
      filing date of the registration statement required to be filed by us was revised
      from 180 days from the second closing date of December 13, 2007 to no later
      than
      30 days after receipt of written demand from YA Global; *provided
      that* ,
      YA
      Global may only deliver such written demand on or after July 7,
      2008.





*September
      2007 Securities Purchase Agreement*





On
      September 6, 2007, TXP entered into a securities purchase agreement with a
      strategic investor/qualified institutional buyer pursuant to which the Company
      sold an aggregate of $1,000,000 in shares of the Company's common stock, par
      value $.001 per share, at a per share purchase price of $0.25, together with
      (i)
      five year warrants to purchase 1,000,000 shares of common stock at an exercise
      price equal to $0.65 per share; (ii) five year warrants to purchase 1,000,000
      shares of common stock at an exercise price equal to $0.75 per share; (iii)
      five
      year warrants to purchase 1,000,000 shares of common stock at an exercise price
      equal to$0.85 per share; and (iv) five year warrants to purchase 1,000,000
      shares of common stock at an exercise price equal to $1.00 per
      share.





The
      Company reassessed the classification of all contracts at September 30, 2008
      and
      determined that the provisions in Purchase Agreement consummated with YA Global
      on May 29, 2008 (as discussed in more detail below) that required the Company
      to
      issue Debentures and Warrants and to amend outstanding warrants and notes issued
      to YA Global affected the accounting for all outstanding warrants. Specifically,
      all warrants issued to YA Global now have adjustment provisions that could
      affect the exercise price and the number of warrant shares issuable. Therefore,
      since the Company has warrants that do not have limits on the net shares that
      potentially would have to be delivered in a net share settlement, the company
      is
      precluded from concluding that it has sufficient shares authorized and unissued
      to net-settle any of its outstanding warrants and must fair value all warrants
      as a liability. Accordingly, under the provisions of ETIF 00-19 these warrants
      were designated as a liability to be carried at fair value on the company’s
      balance sheet.


17





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 purchase agreement provides for the filing of a registration
      statement by the Company with the Securities and Exchange Commission registering
      the shares and the shares of common stock issuable upon exercise of the
      warrants. The Company is obligated to file the registration statement no later
      than December 15, 2007 and to use its best efforts to cause the registration
      statement to be declared effective by the Securities and Exchange Commission
      no
      later than 90 days after filing. If the Company does not meet the aforementioned
      filing and effectiveness deadlines (together, a “Non-Registration Event ”), it
      shall pay to the investor an amount equal to 1% of the purchase price of the
      shares and the warrants, in cash or at the investor's election in shares of
      common stock, for each 30 days or part thereof for the first 60 days after
      the
      occurrence of a Non-Registration Event and 2% for each 30 days or part thereof
      thereafter; provided, however, that the aforementioned liquidated damages shall
      only accrue, if at all, for 12 months after the closing date. As of September
      30, 2008, an aggregate of $173,000 in liquidated damages has accrued and been
      recorded as an expense.





*December
      2007 Agreement*




On
      December 28, 2007, the Company entered into an Agreement with an accredited
      investor pursuant to which the Company will, within 90 days from the date the
      Collateral (as defined below) is deposited into the account of a Lender (the
      “Closing Date”), issue to the investor seven-year warrants to purchase an
      aggregate of 1,280,000 shares of common stock as consideration for the investor
      agreeing to pledge an aggregate of $2,000,000 in free-trading shares of common
      stock of 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 the Company’s behalf in favor of First Community
      Bank (f/k/a 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 us from a Lender in an amount up to
      $2,000,000 with a term of January 16, 2009 (the “Term”), which will be further
      guaranteed personally and through the pledge of common stock beneficially owned
      by Michael Shores, the Company’s Chief Executive Officer, in an amount equal to
      the initial amount pledged by the investor at a per share price equal to $0.50.
      The warrants are exercisable into shares of the Company’s common stock at a
      price equal to $0.40 per share.





As
      additional consideration of the investor’s agreement to pledge the Collateral to
      a Lender, on or prior to the Closing Date the Company will pay to the investor
      a
      one-time commitment fee through the issuance of 100,000 restricted shares of
      common stock. In addition, the Company and the investor agreed to extend the
      permitted maturity dates of the Loans previously received by the Company from
      the Lender as set forth in the agreements entered into between the Company
      and
      the Investor on July 28, 2006 and October 12, 2006, from July 28, 2008 and
      October 12, 2007, respectively, to January 16, 2009.





The
      Company reassessed the classification of all contracts at September 30, 2008
      and
      determined that the provisions in Purchase Agreement consummated with YA Global
      on May 29, 2008 (as discussed in more detail below) that required the Company
      to
      issue Debentures and Warrants and to amend outstanding warrants and notes issued
      to YA Global affected the accounting for all outstanding warrants. Specifically,
      all warrants issued to YA Global now have adjustment provisions that could
      affect the exercise price and the number of warrant shares issuable. Therefore,
      since the Company has warrants that do not have limits on the net shares that
      potentially would have to be delivered in a net share settlement, the company
      is
      precluded from concluding that it has sufficient shares authorized and unissued
      to net-settle any of its outstanding warrants and must fair value all warrants
      as a liability. Accordingly, under the provisions of ETIF 00-19 these warrants
      were designated as a liability to be carried at fair value on the company’s
      balance sheet.





*May
      2008 Securities Purchase Agreement*





On
      May
      29, 2008,  we consummated a Securities Purchase Agreement (the “Purchase
      Agreement”) with YA Global Investments, L.P. (“YA Global”) providing for the
      sale by us to YA Global of our 12% secured convertible debentures in the
      aggregate principal amount of $5,750,000 (the “Debentures”), of which a
      $3,000,000 Debenture was issued on May 29, 2008 (the “First Closing”), a
      $1,500,000 Debenture was issued August 14, 2008 (the “Second Closing”), and a
      $1,250,000 Debenture (the “Third Closing”) is
      scheduled to be issued on November 15, 2008. On October 15, 2008,  we and
      YA Global entered into Amendment No. 1 (the “Amendment”) to the Purchase
      Agreement pursuant to which the date on which the third closing of the private
      placement is scheduled to occur was revised from October 15, 2008 to November
      15, 2008.


18





In
      addition, the Purchase Agreement provides for the issuance by us to YA Global
      of
      five-year warrants (the “Warrants”) to purchase an aggregate of 17,000,000
      shares of common stock, of which a warrant to purchase 8,870,000 shares of
      common stock was issued on the First Closing, a warrant to purchase 4,430,000
      shares of common stock was issued on the Second Closing, and a warrant to
      purchase 3,700,000 shares of common stock is
      scheduled to be
      issued on the Third Closing, each exercisable into common stock a price equal
      to
      $0.20 per share, subject to adjustment as set forth in the Warrants (the
“Exercise Price”).




The
      Debentures mature on the third anniversary of the date of issuance (the
“Maturity Date”) and bear interest at a rate equal to 12% per annum. In
      addition, the Debentures are convertible at any time into shares of common
      stock
      at a conversion price per share equal to $0.20, subject to adjustment as set
      forth in the Debentures (the “Conversion Price”). Beginning on October 31, 2008
      and each monthly anniversary thereafter until paid in full, we will be required
      to redeem the outstanding principal amount of the Debentures in installments
      equal to $167,777 per month, in cash or in common stock (the “Redemption
      Shares”) at our option and if certain additional conditions are met, at a per
      share price equal to the lesser of (i) the Conversion Price, or (ii) a 25%
      discount to the lowest daily volume weighted average price for the common stock
      for the 20 trading days prior to the redemption payment date; provided
      that *,* the
      Redemption Share component of each redemption payment will be limited to 15%
      of
      the dollar value of the common stock traded over the previous 30 trading days.
      Moreover, we have 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 no event of default has occurred or is continuing. On November 13, 2008,
      the Company entered into a Deferral Agreement with YA Global deferring the
      mandatory redemption payments which were scheduled to be made on October 31,
      2008 and November 30, 2008 to December 15, 2008.





This
      $3,000,000 convertible note was discounted by $3,000,000 since the total
      discount fees including the embedded conversion option and warrants totaled
      $4,449,000. The difference of $1,449,000 was recorded as a “change in the fair
      value of derivative financial instrument” and recognized as an expense during
      the current reporting period. The discount included $660,000 in fees paid to
      the
      lender and $10,000 in legal fees. Additionally, the note was further discounted
      by $2,002,000 upon bifurcation and recording at fair value the embedded
      conversion option, and by $1,777,000 representing the fair value of the warrants
      issued in conjunction with the note. The discount is being amortized over the
      life of the notes of three years. At September 30, 2008, the convertible
      debenture had balance of $333,000 net $2,667,000 of unamortized discount. The
      effective interest rate on the debenture is 19.4% compared to the
      stated interest of 12% which takes into account the debt discount and issue
      costs related to the debenture. Our obligations under the Purchase Agreement
      and
      the Debentures are secured by all of our intellectual property and
      assets.





Under
      the **** Purchase
      Agreement, we must (i) enter into a contract (or series of contracts) for the
      development and sale of optical network terminals on terms that are satisfactory
      to YA Global in total value of contracts, counterparty, and gross product
      margins to the Company, and (ii) complete an equity raise resulting in proceeds
      to us of at least $5,000,000 (collectively, the “Milestones”). If we fail to
      achieve at least one of the Milestones on or before November 15, 2008, then
      the
      Third Closing will not occur and YA Global will have the right to require us
      to
      sell the business or the assets of our iPhotonics business unit before January
      31, 2009. We shall apply at least 80% of the proceeds of any such sale directly
      from the sale towards the redemption of the Debentures.





In
      connection with the Purchase Agreement, we also entered into a registration
      rights agreement (the “Registration Rights Agreement”) providing for the filing
      of a registration statement (the “Registration Statement”) with the Securities
      and Exchange Commission registering 100% of the shares of common stock issuable
      upon conversion of the Debentures and exercise of the Warrants within 30 days
      of
      receipt of written demand of YA Global. We are obligated to use our best efforts
      to cause the Registration Statement to be declared effective no later than
      120
      days after filing and to ensure that the registration statement remains in
      effect until all of the shares of common stock issuable upon conversion of
      the
      Debentures and exercise of the Warrants have been sold or may permanently
      be sold. In the event of a default of its obligations under the Registration
      Rights Agreement, including our agreement to file the Registration Statement
      with the Securities and Exchange Commission no later than 30 days from receipt
      of a written demand from YA Global, or if the Registration Statement is not
      declared effective within 120 days of filing, we will be required pay to YA
      Global, 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 Debentures.
      Notwithstanding the foregoing, we shall not be liable for Liquidated Damages
      with respect to any Warrants or warrant shares and the maximum aggregate
      Liquidated Damages payable to YA Global by us, if any, shall be 24% of the
      aggregate purchase price paid by YA Global pursuant to the Purchase
      Agreement.





On
      May
      29, 2008, Mr. Shores granted YA Global a five-year option to purchase an
      aggregate of 35,000,000 shares of common stock of our company beneficially
      owned
      by Mr. Shores at an exercise price equal to $0.01 per share, of which the option
      to purchase 18,261,000 shares vested on the First Closing, the option to
      purchase 9,130,000 shares vests on the Second Closing, and the option to
      purchase 7,609,000 shares vests on the Third Closing.


19





*Second
      Closing of May 2008 Securities Purchase Agreement*





As
      previously reported, on May 29, 2008,  we consummated a Securities Purchase
      Agreement (the “Purchase Agreement”) with YA Global Investments, L.P. (“YA
      Global”) providing for the sale by us to YA Global of our 12% secured
      convertible debentures in the aggregate principal amount of $5,750,000 (the
      “Debentures”), of which a $3,000,000 Debenture was issued on May 29, 2008. On
      August 14, 2008, the Company issued a $1,500,000 Debenture pursuant to the
      second closing contemplated by this agreement.





This
      $1,500,000 convertible note was discounted by $1,500,000 since the total
      discount fees including the embedded conversion option and warrants totaled
      $1,765,000. The difference of $265,000 was recorded as a “change in the fair
      value of derivative financial instrument” and recognized as an expense during
      the current reporting period. The discount included $16,000 in fees paid to
      the
      lender. Additionally, the note was further discounted by $963,000 upon
      bifurcation and recording at fair value the embedded conversion option, and
      by
      $786,000 representing the fair value of the warrants issued in conjunction
      with
      the note. The discount is being amortized over the life of the notes of three
      years. At September 30, 2008, the convertible debenture had balance of $65,000
      net $1,435,000 of unamortized discount. The effective interest rate on the
      debenture is 12.4% compared to the stated interest of 12% which takes
      into account the debt discount and issue costs related to the
      debenture





*May
      2008 Amendments with YA Global*





On
      May
      29, 2008 we amended our outstanding warrants and notes issued to YA Global
      pursuant to the Company’s June 2006 and March 2007 private placements. The June
      2006 and March 2007 warrants to purchase an aggregate of 3,700,000 and 3,850,000
      shares of common stock, respectively, were amended to reduce the exercise prices
      to $0.20 per share. The March 2007 notes in the aggregate principal amount
      of
      $4,000,000 were amended to reduce the conversion prices to $0.20 per share.
      Also, the interest rates were increased to 12% per annum and mandatory
      redemption payments by us in the amount of $100,000 per month, consisting of
      accrued and unpaid interest and principal, will commence on October 31, 2008.
      On
      November 13, 2008, the Company entered into a Deferral Agreement with YA Global
      deferring the mandatory redemption payments which were scheduled to be made
      on
      October 31, 2008 and November 30, 2008 to December 15, 2008.





*Letter
      of Intent and Memorandum of Understanding with CIG*





On
      June
      29, 2008, we entered into a non-binding letter of intent with Cambridge
      Industries Group (“ CIG ”)
      which
      set forth preliminary terms for a proposed merger of the two companies (the
      “ Proposed
      Merger ”).
      On
      August 18, 2008, the parties entered into a non-binding memorandum of
      understanding for the Proposed Merger. The Proposed Merger is expected to close
      before year-end. However, there can be no assurance that satisfactory due
      diligence will be completed, that a definitive merger agreement will be entered
      into, that all closing conditions will be satisfied, or that the Proposed Merger
      will be consummated.





*Factoring
      and Security Agreement*





On
      August
      13, 2008,  the Company entered into a Factoring and Security Agreement (the
“Factoring Agreement”) with Landry Marks Partners, L.P. (“Landry”) pursuant to
      which Landry shall have to option to purchase certain account receivables (the
      “Purchased Accounts”) from the Company, from time to time on a revolving basis,
      up to a maximum amount of $1,500,000 at any one time (the “Purchase Price”), of
      which, in the initial purchase(s) from Landry (i) $500,000 was used by the
      Company to repay, in full, that certain revolving line of credit with First
      Community Bank (f/k/a First Bank of Canyon Creek); and (ii) $750,000 will be
      used by the Company to redeem certain outstanding convertible notes previously
      issued to YA Global Investments, L.P. (“YA Global”). The Company granted a first
      priority security interest to Landry in all of the Purchased Accounts, future
      acquired accounts, and all other rights of payment owed to the Company, which
      became effective when the revolving line of credit with First Community Bank
      (f/k/a First Bank of Canyon Creek) was repaid.





However,
      subsequent to September 30, 2008, the Company revised the second clause of
      the
      agreement to defer a portion of the amount due to YA Global **(See
      Note 18 –
      SUBSEQUENT EVENTS)** .





Under
      the
      Factoring Agreement, Landry may require us to repurchase, within 5 business
      days
      after written demand from Landry, or charge the Reserve Account (as defined
      below) (i) any Purchased Account the payment of which has been disputed by
      an
      account debtor obligated thereon; (ii) any Purchased Account owing from an
      account debtor which in Landry’s reasonable judgment has become insolvent; (iii)
      all Purchased Accounts upon the occurrence of an event of default under the
      Factoring Agreement; and (iv) any Purchased Account which remains unpaid beyond
      60 days from the date the Purchased Account was purchased by Landry or 90 days
      from the invoice date of such Purchased Account, whichever is
      earlier.


20





We
      are
      required to maintain a reserve account (the “Reserve Account”) with Landry
      representing an unpaid portion of the Purchase Price in an amount equal to
      15%
      multiplied by the unpaid balance of the Purchased Accounts (the “Required
      Reserve Amount”). We are required to pay to Landry, on demand, any amount by
      which the Reserve Account is less than the Required Reserve Amount. Landry
      may
      charge the Reserve Account with any obligation owed by us to Landry under the
      Factoring Agreement. In addition, so long as no event of default of our company
      has occurred and is continuing, we may request that Landry pay to us any amount
      by which the Reserve Account exceeds the Required Reserve Amount; *provided
      that,* we
      shall
      be entitled to make such demand not more than twice in any one calendar month.





The
      Purchase Price for each Purchased Account shall be discounted by 2% of the
      face
      amount due on a Purchased Account at the time of purchase. A discount in the
      amount of 1% of the face amount of any Purchased Account shall be paid by us
      to
      Landry on all Purchased Accounts not closed within 45 days after the purchase,
      and every 15 days thereafter, which amount may also be charged against the
      Reserve Account until such Purchased Account has closed. In addition, an amount
      equal to 15% of the amount of any payment on a Purchased Account which has
      been
      received by us and not delivered to Landry on the second business day following
      receipt by us, shall be paid by us or charged against the Reserve Account
      immediately upon accrual. Moreover, 15% of the face amount of any Purchased
      Account in which an invoice that is sent by us to Landry fails to contain a
      notice of assignment to Landry shall be paid by us to Landry or charged against
      the Reserve Account immediately upon accrual.





On
      August
      13, 2008, we entered into an Intercreditor and Subordination Agreement with
      Landry and YA Global pursuant to which YA Global’s first priority security
      interests in all of our assets granted under the March 2007 and May 2008
      Security Agreements will be subordinated to Landry’s first priority security
      interest granted under the Factoring Agreement with respect to all of the
      Purchased Accounts, future acquired accounts, and all other rights of payment
      owed to us. In addition, YA Global shall have the right to purchase from Landry
      all of Landry’s debt owed by us to Landry under the Factoring Agreement for cash
      equal to the outstanding principal amount of such debt plus accrued and unpaid
      interest.





*August
      2008 Letter Agreement with Yorkville and YA Global*





On
      August
      20, 2008,  we entered into a letter agreement (the “Agreement”) with
      Yorkville Advisors, LLC, on its behalf and as Investment Manager to YA Global
      Investments, L.P. (collectively, “Yorkville”), pursuant to which we agreed to
      redeem, without a redemption premium, all outstanding convertible notes and
      convertible debentures issued by us to Yorkville, and any other term loans
      which
      have been issued by Yorkville to us (collectively, the “Debt”) in an amount
      equal to the outstanding principal amount of the Debt plus accrued and unpaid
      interest as follows: (i) we shall pay to Yorkville $7,500,000 (the “Partial
      Redemption”) upon the consummation of a financing (the “Financing”) by us for up
      to $15,000,000 in gross proceeds to be completed within 100 days from the date
      of the Agreement; and (ii) the remaining principal amount and accrued interest
      shall be exchanged for a non-convertible 2-year promissory note paying interest
      at 10% per annum, which shall be subordinate to any account receivables, account
      payables and inventory financings which we may in the future consummate. In
      addition, Yorkville agreed to relinquish all warrant issuance rights tied to
      the
      redemption of any Debt instruments.




Under
      the
      Agreement, Yorkville will retain its existing 9,616,681 shares of our common
      stock (the “Existing Shares”); *provided
      that* ,
      effective upon receipt of the Partial Redemption from us, Yorkville agreed
      to
      limit its sales of the Existing Shares on a daily basis to no more than that
      number of shares equal to the trailing 60-day average daily volume of our common
      stock. Notwithstanding the foregoing, Yorkville may sell portions of the
      Existing Shares in block trades of 500,000 shares or larger.




In
      addition, upon receipt of the Partial Redemption from us, Yorkville will
      relinquish 10,850,000 of its 20,850,000 warrants to purchase shares of our
      common stock at an exercise price equal to $0.20 per share, which shall be
      cancelled by us upon their return. We will adjust the exercise prices of the
      remaining 10,000,000 warrants to the lower of (i) $0.10, or (ii) the same price
      as the lowest conversion price, conversion ratio, or exercise price of the
      securities issued by us in the Financing. Yorkville will permanently waive
      all
      remaining anti-dilution provisions on the remaining 10,000,000 warrants; *provided
      that* ,
      it
      shall be entitled to anti-dilution and reset provisions consistent with those
      contained in the securities issued in the Financing.





Moreover,
      Yorkville will relinquish all of its rights of first refusal on future financing
      transactions of our company previously granted to Yorkville pursuant to all
      prior financing agreements entered into with us; *provided
      that* ,
      Yorkville will retain a right of participation proportionate with its equity
      position in our company on future financing transactions but will waive such
      right in connection with the Financing. Yorkville will also relinquish all
      of
      its registration rights and rights to liquidated damages previously granted
      to
      Yorkville pursuant to all prior financing agreements entered into with
      us.





In
      connection with that certain 5-year option to purchase an aggregate of
      35,000,000 shares of our common stock beneficially owned by Michael Shores
      (the
“Option”) which was granted by Mr. Shores to Yorkville on May 29, 2008,
      Yorkville agrees that, provided no event of default has occurred under the
      financing arrangements entered into between Yorkville and us, Yorkville will
      refrain from exercising any shares underlying the Option for a period of 100
      days from the date of the Agreement (the “Expiration Date”). So long as we
      completes the Financing on or before the Expiration Date and pay the Partial
      Redemption, Yorkville shall return the Option to Mr. Shores, which Option will
      be cancelled, and simultaneously we shall issue to Yorkville 11,000,000
      restricted shares of common stock.


21





The
      consummation of all of the transactions contemplated by the Agreement are
      subject to the consummation of the Financing by us. There can be no assurance
      that the Financing or the transactions contemplated by the Agreement will be
      completed.





**Formation
      of iPhotonics business unit in fourth quarter of 2006**





We
      hired
      Siemens' former ONT development team effective at the beginning of the fourth
      quarter of 2006. As a result, we added 35 full-time employees and amended our
      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 $200,000 and $8,000, respectively, per month.





In
      the
      fourth quarter of 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. We were 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 our behalf related to BPON or GPON ONTs would become
      vested to us.





We
      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
      17
      to the unaudited financial statements included herein for full details of
      accounting for this transaction). Further that we 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 we pay to Siemens a
      license fee for three years equal to 5% of revenue generated for any of
      our BPON products sales in accordance with current BPON design or 2.5% of
      revenues should we create a variant of the current BPON design. Additionally,
      we
      will pay Siemens a license fee for three years or $20,000,000, whichever comes
      first, equal to 5% of revenue generated for any of our GPON products sales
      in accordance with current GPON design or 2.5% of revenues should we create
      a
      variant of the current GPON design. The license fees will be payable within
      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 original 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.





**Cash
      Requirements and Liquidity**





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





We
      are
      currently unable to register the shares of common stock issuable to YA Global
      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 YA Global 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, we cannot currently
      rely upon access to the $15,000,000 standby equity distribution agreement.





Additionally,
      until the March 2007 and May 2008 YA Global secured convertible notes are fully
      repaid or fully converted, we are required to obtain YA Global's consent prior
      to selling or issuing (i) any common stock or preferred stock without
      consideration or for a consideration per share less than its lowest bid price
      determined immediately prior to its issuance, (ii) issue or sell any
      preferred stock, warrant, option, right, contract, call, or other security
      or
      instrument granting the holder thereof the right to acquire common stock without
      consideration or for a consideration per share less than such common stock's
      fair market value determined immediately prior to its issuance, each
      of which will restrict our ability to obtain future
      financing.


22





Our
      consolidated financial statements as of September 30, 2008 have been prepared
      under the assumption that we will continue as a going concern for the year
      ending December 31, 2008. Our independent registered public accounting firm
      issued a report that was included in Form 10KSB/A filed on April 16, 2008 which
      included an explanatory paragraph expressing substantial doubt in our ability
      to
      continue as a going concern without additional capital becoming available.
      Our
      ability to continue as a going concern ultimately is dependent on our ability
      to
      generate a profit which is likely dependant upon our ability to obtain
      additional equity or debt financing, attain further operating efficiencies
      and,
      ultimately, to achieve profitable operations. The financial statements do not
      include any adjustments that might result from the outcome of this uncertainty.





The
      Company urgently needs to raise additional financing to fund its operations.
      The
      cash required to operate the iPhotonics business unit, which was formed in
      the
      fourth quarter of 2006, is significant. The formation of the iPhotonics business
      unit resulted in TXP adding 35 full-time employees and amending its lease in
      November of 2006 to expand the operating facility by 16,000 square feet. In
      April of 2008 we reduced headcount and made other changes to our iPhotonics
      business unit to reduce costs. Going forward, incremental personnel cost and
      lease payments are expected to average approximately $200,000 and $8,000,
      respectively, per month. Other research and development and operational costs
      are expected to average just under $120,000 per month for the next twelve
      months. Revenues to date related to the iPhotonics' business unit have been
      insignificant relative to the related expenditures which, coupled with lower
      than expected revenues from our other operating units, continues to place
      significant strain on our cash and liquidity position.





To
      continue to operate under our current business model of which our iPhotonics
      business unit is integral and material, we will urgently need to raise
      additional funds by late November, 2008. To obtain funds to continue our
      operations, we may utilize any of several potential options, including the
      issuance of debt or equity securities, the exercise of warrants issued to
      investors in conjunction with previous private offerings, and other arrangements
      with strategic partners. No assurance can be given that we will be able to
      obtain financing on favorable terms, if at all. If we are unable to obtain
      additional financing when needed, we could be required to modify our business
      plan including selling the iPhotonics business unit assets or shutting down
      its
      operations, or cease our operations altogether, depending on the extent of
      available financing. Our ability to continue as a going concern depends upon
      our
      ability to raise substantial funds for use in our operating plan and activities
      especially related to our iPhotonics business unit.





Because
      it is unclear whether we will be successful in accomplishing these objectives,
      there is uncertainty about the Company’s ability to continue as a going concern
      beyond November of 2008. The accompanying consolidated financial statements
      do
      not include any adjustments that might result from the outcome of this
      uncertainty.




*Recently
      Issued Accounting Standards*





In
      December 2007, the FASB issued SFAS No. 141(R), *Business Combinations* ,
      which
      changes the accounting for business combinations including the measurement
      of
      acquirer shares issued in consideration for a business combination, the
      recognition of contingent consideration, the accounting for pre-acquisition
      gain
      and loss contingencies, the accounting for acquisition-related restructuring
      cost accruals, the treatment of acquisition-related transaction costs and the
      recognition of changes in the acquirer’s income tax valuation allowance. This
      Statement is effective for financial statements issued for fiscal years
      beginning after December 15, 2008. The Company is in the process of
      evaluating the impact that the adoption of SFAS No. 141(R) will have
      on its financial position, results of operations and cash flows.




In
      March
      2008, the FASB issued SFAS No. 161, *Disclosures about Derivative Instruments and Hedging Activities — An
      Amendment of FASB Statement No. 133,* which
      requires entities to provide enhanced disclosures about (a) how and why an
      entity uses derivative instruments, (b) how derivative instruments and
      related hedged items are accounted for under Statement No. 133 and its
      related interpretations, and (c) how derivative instruments and related
      hedged items affect an entity’s financial position, financial performance and
      cash flows. SFAS No. 161 is effective for financial statements issued
      for fiscal years beginning after November 15, 2008. The Company is in the
      process of evaluating the impact of the adoption of
      SFAS No. 161.





In
      May 2008, FASB issued SFAS No. 162, *The
      Hierarchy of Generally Accepted Accounting Principles* (“FAS
      162”). FAS 162 identifies the sources of accounting principles and the framework
      for selecting the principles to be used in the preparation of financial
      statements of nongovernmental entities that are presented in conformity with
      GAAP (the “GAAP hierarchy”). This statement is effective 60 days after
      September 16, 2008 which was the date of the SEC’s approval of the Public
      Company Accounting Oversight Board amendments to AU
      Section 411, *The
      Meaning of Present Fairly in Conformity With Generally Accepted Accounting
      Principles* .
      We have
      not yet determined the impact that this requirement may have on our consolidated
      financial position, results of operations, cash flows or financial statement
      disclosures.


23





**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.





**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk.**





Not
      applicable.





**Item
      4. Controls and Procedures.**





(a) ***Evaluation of Disclosure Controls and Procedures*** .
      Based
      on an evaluation of our disclosure controls and procedures (as defined in
      Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
      1934, as amended) required by paragraph (b) of Rule 13a-15 or
      Rule 15d-15, as of September 30, 2008, our Chief Executive Officer and
      Chief Financial Officer have concluded that our disclosure controls and
      procedures were effective in ensuring that information required to be disclosed
      by us in the reports that we file or submit under the Exchange Act is recorded,
      processed, summarized and reported within the time periods specified in the
      Commission's rules and forms. Our Chief Executive Officer and Chief
      Financial Officer also concluded that, as of September 30, 2008, our disclosure
      controls and procedures were effective in ensuring that information required
      to
      be disclosed by us in the reports that we file or submit under the Exchange
      Act
      is accumulated and communicated to our management, including our Chief Executive
      Officer and Chief Financial Officer, to allow timely decisions regarding
      required disclosure.





(b) ***Changes in internal controls*** .
      During
      the three months ended September 30, 2008, there were no changes in our internal
      control over financial reporting identified in connection with the evaluation
      required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially
      affected, or is reasonably likely to materially affect, our internal control
      over financial reporting.




24


**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings.**





There
      are
      no pending legal proceedings in which we are a party.





**Item
      1A. Risk Factors.**





**RISK
      FACTORS**





*You
      should carefully consider the risks described below in conjunction with
      our*  *forward
      looking statement related risks as set forth in the beginning of this
      report,*  *as
      well as the other information in this report, when evaluating our business
      and*  *future
      prospects. Should any of the following risks actually occur, our
      business,*  *financial
      condition and results of operations could be seriously harmed. In
      that*  *event,
      the market price of our common stock could decline and investors could
      lose*  *all
      or a portion of the value of their investment in our common
      stock.*





**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
      three months ended September 30, 2008 and 2007, we generated revenues of
      $2,677,000 and $2,665,000, respectively. For the nine months ended September
      30,
      2008 and 2007, we generated revenues of $8,485,000 and $8,145,000, respectively.
      Our accumulated deficit was $21,171,000 at September 30, 2008 and $8,341,000
      at
      September 30, 2007. For the year ended December 31, 2007 and 2006, we generated
      revenues of $10,986,000 and $8,228,000, respectively. Our accumulated deficit
      was $14,117,000 at December 31, 2007 and $5,190,000 at December 31, 2006. 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.





The
      Company urgently needs to raise additional financing to fund its operations.
      The
      cash required to operate the iPhotonics business unit, which was formed in
      the
      fourth quarter of 2006, is significant. The formation of the iPhotonics business
      unit resulted in TXP adding 35 full-time employees and amending its lease in
      November of 2006 to expand the operating facility by 16,000 square feet. In
      April of 2008 we reduced headcount and made other changes to our iPhotonics
      business unit to reduce costs. Going forward, incremental personnel cost and
      lease payments are expected to average approximately $200,000 and $8,000,
      respectively, per month. Other research and development and operational costs
      are expected to average just under $120,000 per month for the next twelve
      months. Revenues to date related to the iPhotonics' business unit have been
      insignificant relative to the related expenditures which, coupled with lower
      than expected revenues from our other operating units, continues to place
      significant strain on our cash and liquidity position.





To
      continue to operate under our current business model of which our iPhotonics
      business unit is integral and material, we will urgently need to raise
      additional funds by late November 2008. To obtain funds to continue our
      operations, we may utilize any of several potential options, including the
      issuance of debt or equity securities, the exercise of warrants issued to
      investors in conjunction with previous private offerings, and other arrangements
      with strategic partners. No assurance can be given that we will be able to
      obtain financing on favorable terms, if at all. If we are unable to obtain
      additional financing when needed, we could be required to modify our business
      plan including selling the iPhotonics business unit assets or shutting down
      its
      operations, or cease our operations altogether, depending on the extent of
      available financing. Our ability to continue as a going concern depends upon
      our
      ability to raise substantial funds for use in our operating plan and activities
      especially related to our iPhotonics business unit.




***Our
      independent registered public accounting firm has expressed doubt about our
      ability to continue as a going concern, which may hinder our ability to obtain
      future financing.***




Our
      consolidated financial statements as of September 30, 2008 have been prepared
      under the assumption that we will continue as a going concern for the year
      ending December 31, 2008. Our independent registered public accounting firm
      issued a report that was included in our annual report on Form 10KSB/A for
      the
      year ended December 31, 2007 that was filed on April 16, 2008 and October 14,
      2008 which included an explanatory paragraph expressing substantial doubt in
      our
      ability to continue as a going concern without additional capital becoming
      available. Our ability to continue as a going concern ultimately is dependent
      on
      our ability to generate a profit which is likely dependant upon our ability
      to obtain additional equity or debt financing, attain further operating
      efficiencies and, ultimately, to achieve profitable operations. The financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.


25





***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


·
            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 61% of our net sales in fiscal 2007. Tellabs Inc. and
      AMX Corporation accounted for 29%, and 13%, respectively, of net sales in 2007,
      while no other customer accounted for more than 10% of net sales for 2007. During
      the nine months ending September 30, 2008, TXP had sales to five customers
      which
      amounted to 63% of net sales. Tellabs
      Inc., Avanex Corporation, and AMX Corporation accounted for 22%, 13% and 12%
      respectively of net sales through the third quarter 2008 while no other customer
      accounted for more than 10% of net sales for 2008. 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 and cause our operating results
      to suffer.





***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 our 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.


26





***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.





Six
      companies represented approximately 70 %
      of our
      net trade accounts receivable at September 30, 2008, with individual percentages
      for those companies ranging from 18 %
      to 7 %.
      Our
      original equipment manufacturer customers direct their sales to a relatively
      limited number of electronics manufacturing services 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.





***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. If we are unable to accomplish
      the foregoing, we will be unable to attract new customers which will adversely
      affect our financial results.




***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.




27





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;


·
            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 original equipment
      manufacturers (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.


28





***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.




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





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





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





Our
      success is highly dependent on our ability to attract and retain qualified
      scientific and management personnel. We are highly dependent on our management,
      including Mr. Michael C. Shores, our Chief Executive Officer, who has been
      critical to the development of our technologies and business. The loss of the
      services of Mr. Shores could have a material adverse effect on our operations.
      We do not have an employment agreement with Mr. Shores and do not maintain
      key
      main life insurance with respect to 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 employees, 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
      Will Need to Raise Additional Funds In Order Achieve ONT Business
      Objectives.***





There
      is
      a high probability that we will be required to raise additional capital in
      order
      to meet our liquidity needs and satisfy our current business plan prior to
      the
      receipt of significant revenues from sales of our ONT products. At the present
      time, we have no legally binding commitments for any additional financing,
      and
      there can be no assurance that additional capital will be available to us on
      commercially acceptable terms or at all. We may have difficulty obtaining
      additional funds as and when needed, and we may have to accept terms that would
      adversely affect our shareholders. 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.


29





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 our assets or shut down the iPhotonics business unit and cease
      its operations.





In
      addition, under our **** May
      2008
      securities **** purchase
      Agreement with YA Global, we must (i) enter into a contract (or series of
      contracts) for the development and sale of optical network terminals on terms
      that are satisfactory to YA Global in total value of contracts, counterparty,
      and gross product margins to us, and (ii) complete an equity raise resulting
      in
      proceeds to us of at least $5,000,000 (collectively, the “Milestones”). If we
      fail to achieve at least one of the Milestones on or before November 15, 2008,
      YA Global will have the right to require us to sell the business or the assets
      of our iPhotonics business unit before January 31, 2009.





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





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





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





·
            the
                rate of market acceptance of fiber to premise in general and the
                demand
                for our products in particular;


·
            our
                ability to acquire customers and contracts for our
                products;


·
            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


·
            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:


30





·
            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
      Associated with 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
      September 30, 2008, we had 116,966,428 shares
      of
      common stock issued and outstanding. In connection with the financing
      arrangements that we entered into on March 30, 2007, September 6, 2007, December
      13, 2007, December 31, 2007 and May 29, 2008, we also had outstanding secured
      convertible notes and accrued interest that may be converted into
      approximately 47,500,000 shares
      of
      common stock at current market prices. In addition, we had outstanding warrants
      to purchase 31,777,500 shares
      of
      common stock.





The
      shares underlying the convertible note and warrants have not been registered
      but
      we may register a portion of such shares under a Form S-1 in 2008 or 2009.
      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. Even if such shares
      are
      not included in a registration statement, these holders may be eligible to
      sell
      all or some of their shares of common stock by means of ordinary brokerage
      transactions in the open market pursuant to Rule 144. The sale of these shares
      may adversely affect the market price of our common stock. Any substantial
      sale
      of our common stock pursuant to a registration statement or pursuant to Rule
      144, may have a material adverse effect on the market price of the common
      stock.




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





The
      convertible notes have 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 notes issued to YA Global
      Investments, L.P., and exercise of warrants issued to YA Global Investments,
      L.P. and Dyna Porter International Limited may result in substantial dilution
      to
      the interests of other shareholders since the selling shareholders may
      ultimately convert and sell the full amount issuable on
      conversion.***





The
      issuance of shares upon conversion of the convertible notes issued to YA Global
      Investments, L.P., and exercise of warrants issued to YA Global Investments,
      L.P. and Dyna Porter International Limited, may result in substantial dilution
      to the interests of other shareholders since the selling shareholders may
      ultimately convert and sell the full amount issuable on conversion and/or
      exercise.


31





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





Our
      March
      and December 2007 convertible notes mature three years from the date of
      issuance, unless sooner converted into shares of our common stock. Beginning
      on
      April 1, 2008, we began to make monthly interest payments and beginning in
      month
      eighteen (September 30, 2008) we are required to make principal payments in
      the amount of $100,000. The principal and interest payments may be deferred
      but
      only at the option of YA Global. The May 2008 convertible notes mature three
      years from the date of issuance, unless sooner converted into shares of our
      common stock. Beginning on October 31, 2008 and each monthly anniversary
      thereafter until paid in full, we will be required to redeem the outstanding
      principal amount of the convertible notes in installments equal to $167,777
      per
      month, in cash or in common stock (the “Redemption Shares”) at our option and if
      certain additional conditions are met, at a per share price equal to the lesser
      of (i) the conversion price of the convertible notes ($0.20), or (ii) a 25%
      discount to the lowest daily volume weighted average price for the common stock
      for the 20 trading days prior to the redemption payment date; *provided
      that,* the
      Redemption Share component of each redemption payment will be limited to 15%
      of
      the dollar value of the common stock traded over the previous 30 trading days.
      On November 13, 2008, the Company entered into a Deferral Agreement with YA
      Global deferring the mandatory redemption payments which were scheduled to
      be
      made on October 31, 2008 and November 30, 2008 to December 15,
      2008.





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 the registration statement or have the registration
      statement declared effective unless waived by YA Global, could render the entire
      convertible notes and accrued interest immediately due and payable. If we were
      required to repay the entire convertible notes, 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 notes 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 YA Global Investments, L.P. March 2007
      and
      May 2008 Securities Purchase Agreements, Secured Convertible Notes, Warrants,
      Security Agreements, or Intellectual Property Security Agreement, YA Global
      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 and May 28, 2008, we executed Security Agreements in favor of YA Global
      Investments, L.P. granting them a security interest in all of our goods,
      inventory, contractual rights and general intangibles, receivables, documents,
      instruments, chattel paper and intellectual property; which has provided us
      with
      a line of credit and their first priority security interest secures our
      obligations under such line of credit. The Security Agreements state that if
      an
      event of default occurs under the Securities Purchase Agreements, Convertible
      Notes, Warrants, Security Agreements, or Intellectual Property Security
      Agreement, ****** YA
      Global
      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;


·
            our
                ability to integrate operations, technology, products and
                services;


32


·
            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 a concentration of stock ownership and control, which may have the effect
      of delaying, preventing, or deterring a change of
      control.***





Our
      common stock ownership is highly concentrated. Through his ownership of shares
      of our common stock, Michael Shores, our chief executive officer, beneficially
      owns 68.5% of our total outstanding common stock. As a result of the
      concentrated ownership of our stock, a relatively small number of shareholders,
      acting together, will be able to control all matters requiring shareholder
      approval, including the election of directors and approval of mergers and other
      significant corporate transactions. This concentration of ownership may have
      the
      effect of delaying, preventing or deterring a change in control of our company.
      It may 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
      2. Unregistered Sales of Equity Securities and Use of Proceeds.***





In
      connection with that certain 5-year option to purchase an aggregate of
      35,000,000 shares of our common stock beneficially owned by Michael Shores
      (the
“ Option ”)
      which
      was granted by Mr. Shores to Yorkville on May 29, 2008, Yorkville agrees
      that, provided no event of default has occurred under the financing arrangements
      entered into between Yorkville and us, Yorkville will refrain from exercising
      any shares underlying the Option for a period of 100 days from the date of
      the
      Agreement (the “ Expiration
      Date ”).
      So
      long as we completes the financing on or before the Expiration Date and pay
      the
      Partial Redemption, Yorkville shall return the Option to Mr. Shores, which
      Option will be cancelled, and simultaneously we shall issue to Yorkville
      11,000,000 restricted shares of common stock.


33





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





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




On
      September 6, 2007, we entered into a securities purchase agreement with a
      strategic investor/qualified institutional buyer pursuant to which provides
      for
      the filing of a registration statement by us with the Securities and Exchange
      Commission registering the shares and the shares of common stock issuable upon
      exercise of the warrants. We are obligated to file the registration statement
      no
      later than December 15, 2007 and to use our best efforts to cause the
      registration statement to be declared effective by the Securities and Exchange
      Commission no later than 90 days after filing. If we do not meet the
      aforementioned filing and effectiveness deadlines, we shall pay to the investor
      an amount equal to 1% of the purchase price of the shares and warrants, in
      cash
      or, at the investor's election, in shares of common stock, for each 30 days
      or
      part thereof for the first 60 days after the occurrence of a non-registration
      event and 2% for each 30 days or part thereof thereafter; provided, however,
      that the aforementioned liquidated damages shall only accrue, if at all, for
      12
      months after the closing date.





We
      did
      not file the registration statement by December 15, 2007 and are currently
      in
      default of this obligation. As of September 30, 2008, an aggregate of $173,000
      liquidated damages has been accrued and been recorded as an expense. As of
      November 14, 2008, an aggregate of $203,000 in liquidated damages has been
      accrued.





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





None.





**Item
      5. Other Information.**





In
      accordance with the Factoring Agreement described in **NOTE
      3 - LIQUIDITY AND GOING CONCERN,** on
      October 8, 2008 **** the
      Company paid YA Global $200,000 to be applied in reduction of the Company’s
      indebtedness and other obligations to YA Global. On October 22, 2008, the
      Factoring Agreement was modified to a have Landry Marks distribute directly
      to
      the Company any advances actually made by Landry Marks pursuant to the Factoring
      Agreement until the Company has received $1,000,000 or YA Global notifies Landry
      Marks that an event of default has occurred as defined in the Intercreditor
      Agreement. In connection with this amendment to the Factoring Agreement, TXP
      and
      YA Global agreed that YA Global is under no obligation to purchase the
      $1,250,000 convertible debentures that was to be purchased at the third closing
      as defined in the Securities
      Purchase Agreement (the “Purchase Agreement”) with YA Global Investments, L.P.
      dated May 29, 2008. **(See** **NOTE 12 - CONVERTIBLE DEBENTURES, WARRANTS, AND
      SECURITIES).**





**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.




34





**Signatures**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, **** the
      Registrant has duly caused this report to be signed on its behalf by the
      undersigned, thereunto duly authorized, on this 14 th day
      of November 2008.




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




*/s/ R.
                Christopher Ryan*R.
                Christopher Ryan*Chief
                Financial Officer (Principal Accounting and Financial
                Officer)*




35