**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**









**FORM
      10-QSB**




(Mark
                One)x
            **QUARTERLY
                REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
                1934****For
                the quarterly period ended September 30, 2006****or**£
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934****For
                the transition period from __________ to
                __________**










**TXP
      CORPORATION**


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




**Nevada**
            **88-0443110**(State
                or other jurisdiction of
              incorporation
                or organization)
            (I.R.S.
                Employer
              Identification
                No.)**1299
                Commerce Drive**
              **Richardson,
                Texas**
            **75081**(Address
                of principal
              executive
                offices)
            (Zip
                Code)





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




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




**APPLICABLE
      ONLY TO CORPORATE ISSUERS**




The
      number of shares issued and outstanding of the registrant’s common stock, par
      value $.001 per share, as of November 13, 2006 was 99,393,123
      shares.




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














**TXP
      CORPORATION**




**September
      30, 2006 FORM 10-QSB QUARTERLY REPORT**




**INDEX**





PagePART
                I –
                FINANCIAL INFORMATION
            
            
            F-1Item
                1.**-**Financial Statements
            
            
            F-1Item
                2 - Management's Discussion and Analysis or Plan of
                Operation
            
            
            1Item
                3 - Controls and Procedures
            
            
            16PART
                II – OTHER INFORMATION
            
            
            17Item
                1 - Legal Proceedings.
            
            
            17Item
                2 - Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            
            17Item
                3 - Defaults Upon Senior Securities
            
            
            17Item
                4 - Submission of Matters to a Vote of Security Holders
            
            
            17Item
                5 - Other Information
            
            
            17Item
                6 - Exhibits.
            
            
            18







**PART
      I**





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





TXP
      CORPORATION


CONSOLIDATED
      BALANCE SHEETS


September
      30, 2006 and December 31, 2005





**2006**
              **(unaudited)**
            
            **2005**
              **(audited)**ASSETSCurrent
                assetsCash
            
            $
            107,000
            
            $
            342,000Accounts
                receivable, net of allowance of $7,400
            
            
            1,012,000
            
            
            695,000Inventory
            
            
            301,000
            
            
            118,000Other
                assets
            
            
            303,000
            
            
            79,000Total
                current assets
            
            
            1,723,000
            
            
            1,234,000Property
                and equipment, net
            
            
            953,000
            
            
            914,000Deferred
                offering costs
            
            
            697,000
            
            
            688,000Other
                assets
            
            
            13,000
            
            
            25,000TOTAL
                ASSETS
            
            $
            3,386,000
            
            $
            2,861,000LIABILITIES
                AND STOCKHOLDERS' DEFICITCurrent
                liabilitiesCurrent
                maturities of notes payable
            
            $
            171,000
            
            $
            143,000Current
                capital lease obligation
            
            
            44,000
            
            
            19,000Line
                of credit
            
            
            400,000
            
            
            250,000Accounts
                payable
            
            
            453,000
            
            
            477,000Accrued
                expenses
            
            
            322,000
            
            
            174,000Total
                current liabilities
            
            
            1,390,000
            
            
            1,063,000Notes
                payable, net of current maturities
            
            
            —
            
            
            15,000Capital
                lease obligation, net of current obligation
            
            
            44,000
            
            
            33,000Convertible
                debentures, net of unamortized discount of $1,797,000 and
                $163,000 as of September 30,2006 and December 31, 2005,
                respectively.
            
            
            585,000
            
            
            2,187,000Derivative
                financial instruments
            
            
            3,698,000
            
            
            —Deferred
                tax liability
            
            
            48,000
            
            
            48,000TOTAL
                LIABILITIES
            
            
            5,765,000
            
            
            3,346,000STOCKHOLDERS'
                DEFICIT:Common
                stock, $.001 par value, 300,000,000 shares authorized, 97,068,282
                and
                94,295,715 shares issued and outstanding as of September 30, 2006
                and
                December 31, 2005, respectively.
            
            
            97,000
            
            
            94,000Additional
                paid in capital
            
            
            205,000
            
            
            12,000Retained
                earnings
            
            
            (2,688,000
            )
            
            (598,000
            )Accumulated
                other comprehensive income
            
            
            7,000
            
            
            7,000TOTAL
                STOCKHOLDERS' DEFICIT
            
            
            (2,379,000
            )
            
            (485,000
            )TOTAL
                LIABILITIES AND STOCKHOLDERS' DEFICIT
            
            $
            3,386,000
            
            $
            2,861,000




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


F-1




TXP
      CORPORATION


CONSOLIDATED
      STATEMENTS OF OPERATIONS


Three
      Months and Nine Months Ended September 30, 2006 and 2005
      (unaudited)




**Three
                Months Ended September 30**
            
            **Nine
                Months Ended September 30****2006****(unaudited)**
            
            **2005****(unaudited)**
            
            **2006****(unaudited)**
            
            **2005****(unaudited)**RevenuesPrototyping
                and assembly
            
            $
            1,232,000
            
            $
            5,660,000
            
            $
            3,487,000
            
            $
            6,968,000Material
                management services
            
            
            427,000
            
            
            286,000
            
            
            1,614,000
            
            
            1,535,000Total
                Revenues
            
            
            1,659,000
            
            
            5,946,000
            
            
            5,101,000
            
            
            8,503,000Cost
                of sales
            
            
            984,000
            
            
            4,613,000
            
            
            3,199,000
            
            
            6,320,000Gross
                profit
            
            
            675,000
            
            
            1,333,000
            
            
            1,902,000
            
            
            2,183,000Costs
                and expensesSelling,
                general & administrative
            
            
            866,000
            
            
            642,000
            
            
            2,182,000
            
            
            1,810,000Depreciation
            
            
            24,000
            
            
            15,000
            
            
            66,000
            
            
            41,000Total
                costs and expenses
            
            
            890,000
            
            
            657,000
            
            
            2,248,000
            
            
            1,851,000Operating
                income (loss)
            
            
            (215,000
            )
            
            676,000
            
            
            (346,000
            )
            
            332,000Interest
                expense, net
            
            
            (388,000
            )
            
            (271,000
            )
            
            (714,000
            )
            
            (354,000
            )Change
                in fair value of derivativefinancial
                instruments
            
            
            2,660,000
            
            
            —
            
            
            (1,663,000
            )
            
            —Gain on
                early extinguishment of debt
            
            
            —
            
            
            —
            
            
            465,000
            
            
            —Other
                Income
            
            
            150,000
            
            
            —
            
            
            150,000
            
            
            —Gain
                on sale of fixed assets
            
            
            —
            
            
            —
            
            
            18,000
            
            
            —Income
                (loss) before income taxes
            
            
            2,207,000
            
            
            405,000
            
            
            (2,090,000
            )
            
            (22,000
            )Income tax
                expense
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                Income (loss)
            
            
            2,207,000
            
            
            405,000
            
            
            (2,090,000
            )
            
            (22,000
            )Foreign
                currency translationadjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            1,000Comprehensive
                income (loss)
            
            $
            2,207,000
            
            $
            405,000
            
            $
            (2,090,000
            )
            $
            (21,000
            )Basic
                earnings per share
            
            
            .02
            
            
            —
            
            
            (.02
            )
            
            (—
            )Diluted
                earnings per share
            
            
            .02
            
            
            —
            
            
            (.02
            )
            
            (—
            )Basic
                weighted average shares outstanding:
            
            
            96,971,108
            
            
            94,295,715
            
            
            95,409,963
            
            
            94,295,715Diluted
                weighted average shares outstanding:
            
            
            97,349,482
            
            
            94,295,715
            
            
            95,409,963
            
            
            94,295,715




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


F-2




TXP
      COPORATION


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


Nine
      Months Ended September 30, 2006 and 2005 (unaudited)





**2006**
              **(unaudited)**
            
            **2005**
              **(unaudited)**CASH
                FLOWS USED IN OPERATING ACTIVITIESNet
                loss
            
            $
            (2,090,000
            )
            $
            (22,000
            )Adjustments
                to reconcile net loss to cash used in operating
                activities:Depreciation
            
            
            187,000
            
            
            161,000Gain
                on sale of fixed assets
            
            
            (18,000
            )
            
            —Amortization
                of discount on convertible notes
            
            
            557,000
            
            
            57,000Gain on
                extinguishment of debt
            
            
            (465,000
            )
            
            —Stock
                compensation
            
            
            69,000
            
            
            45,000Changes
                in assets and liabilities:Accounts
                receivable
            
            
            (317,000
            )
            
            (1,982,000
            )Inventory
            
            
            (183,000
            )
            
            12,000Other
                current assets
            
            
            (103,000
            )
            
            —Other
                assets
            
            
            12,000
            
            
            99,000Accounts
                payable
            
            
            (24,000
            )
            
            697,000Accrued
                expenses
            
            
            15,000
            
            
            63,000Change
                in fair value of derivative financial instruments
            
            
            1,663,000
            
            
            —Deferred
                revenue
            
            
            —
            
            
            24,000CASH
                FLOWS USED IN OPERATING ACTIVITIES
            
            
            (697,000
            )
            
            (846,000
            )CASH
                FLOWS USED INVESTING ACTIVITIESCapital
                expenditures
            
            
            (206,000
            )
            
            (325,000
            )Proceeds
                from sale of fixed assets
            
            
            60,000
            
            
            —CASH
                FLOWS USED IN INVESTING ACTIVITIES
            
            
            (146,000
            )
            
            (325,000
            )CASH
                FLOWS FROM FINANCING ACTIVITIESDeferred
                offering costs
            
            
            (9,000
            )
            
            (79,000
            )Proceeds
                from convertible debenture
            
            
            480,000
            
            
            485,000Line
                of credit, net
            
            
            150,000
            
            
            80,000Proceeds
                from notes payable
            
            
            150,000
            
            
            250,000Repayment
                of notes payable and capital lease obligation
            
            
            (163,000
            )
            
            (117,000
            )CASH
                FLOWS FROM FINANCING ACTIVITIES
            
            
            608,000
            
            
            619,000Effect
                of currency translation on cash balances
            
            
            —
            
            
            1,000NET
                DECREASE IN CASH
            
            
            (235,000
            )
            
            (551,000
            )Cash,
                beginning of period
            
            
            342,000
            
            
            649,000Cash,
                end of period
            
            $
            107,000
            
            $
            98,000




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




F-3




TXP
      COPORATION


CONSOLIDATED
      STATEMENTS OF CASH FLOWS -continued


Nine
      Months Ended September 30, 2006 and 2005 (unaudited)





**SUPPLEMENTAL
      DISCLOSURE OF CASH AND NONCASH INVESTING AND FINANCING ACTIVITIES
      (unaudited):**





**2006**
              **(unaudited)**
            
            **2005**
              **(unaudited)****Cash**Interest
                paid
            
            $
            21,000
            
            $
            26,000Taxes
              paid
            
            $
            —
            
            $
            —**NONCASH
                INVESTING AND FINANCING ACTIVITIES**1,700,000
                shares issued to extinguish debt
            
            $
            684,000
            
            $
            —Liabilities
                assumed upon merger
            
            $
            744,000
            
            $
            —923,657
                shares issued on conversion of debt
            
            $
            145,000
            
            $
            —Debt
                issue costs recorded on issuance of 320,000 warrants
            
            $
            120,000Property
                acquired under capital lease obligations
            
            $
            63,000
            
            $
            96,000Modification
                of debt treated as extinguishment and new debt
            
            $
            619,000
            
            $
            —




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


F-4




TXP
      CORPORATION


STATEMENTS
      OF STOCKHOLDERS' DEFICIT


Nine
      Months Ending September 30, 2006 (unaudited)


**Common
                    Stock****Shares**
                
                **Amount**
                
                **Additional**
                    **paid
                      in**
                    **capital**
                
                **Retained**
                    **earnings**
                    **(deficit)**
                
                **Accumulated**
                    **Other**
                    **comprehensive**
                    **income**
                
                **Total**Balance,
                    December 31, 2005
                
                
                221,054,400
                
                $
                221,000
                
                $
                (115,000
                )
                $
                (598,000
                )
                $
                7,000
                
                $
                (485,000
                )**Retroactive
                    restatement due to recapitalization (See Note
                    3):**Exchange
                    and cancellation of Texas Prototypes, Inc, shares
                
                
                (221,054,400
                )
                
                (221,000
                )
                
                221,000
                
                
                —
                
                
                —
                
                
                —Issuance
                    of YTXP shares to Texas Prototypes shareholders
                
                
                89,298,042
                
                
                89,000
                
                
                (89,000
                )
                
                —
                
                
                —
                
                
                —Addition
                    of YTXP shares
                
                
                4,997,673
                
                
                5,000
                
                
                (5,000
                )
                
                —
                
                
                —
                
                
                —**Balance,
                    December 31, 2005 retroactively restated**
                
                
                94,295,715
                
                
                94,000
                
                
                12,000
                
                
                (598,000
                )
                
                7,000
                
                
                (485,000
                )Liabilities
                    assumed upon merger
                
                
                —
                
                
                —
                
                
                (744,000
                )
                
                —
                
                
                —
                
                
                (744,000
                )Net
                    Loss
                
                
                —
                
                
                —
                
                
                —
                
                
                (2,090,000
                )
                
                —
                
                
                (2,090,000
                )Issuance
                    of shares to extinguish debt
                
                
                1,700,000
                
                
                2,000
                
                
                848,000
                
                
                —
                
                
                —
                
                
                850,000Stock
                    compensation: options awarded to employees
                
                
                —
                
                
                —
                
                
                8,000
                
                
                —
                
                
                —
                
                
                8,000Stock
                    compensation: shares awarded to employees
                
                
                149,000
                
                
                —
                
                
                61,000
                
                
                
                
                
                
                
                
                61,000Shares
                    issued in conversion of debentures
                
                
                923,567
                
                
                1,000
                
                
                144,000
                
                
                —
                
                
                —
                
                
                145,000Unamortized
                    debt discount charged to APIC on conversion of debentures
                
                
                —
                
                
                —
                
                
                (124,000
                )
                
                —
                
                
                —
                
                
                (124,000
                )Balance,
                    September 30, 2006
                
                
                97,068,282
                
                $
                97,000
                
                $
                205,000
                
                $
                (2,688,000
                )
                $
                7,000
                
                $
                (2,379,000
                )
  The
        accompanying notes are an integral part of the consolidated financial statements.
 
 F-5


TXP
      CORPORATION


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




**NOTE
      1 - BASIS OF PRESENTATION**





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 8-K/A filed May 4, 2006. 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 2005 as reported in the
      8-K/A filed May 4, 2006, have been omitted.





**NOTE
      2 - ORGANIZATION**





TXP
      specializes in quick-turn complex circuit card assemblies and optoelectronic
      prototyping, new product introduction, and pilot production of electronic
      assemblies for Technology Innovators and Original Equipment Manufacturers (OEM)
      and Contract Manufacturers (CM) in the United States of America. The company
      is
      located in a 31,000 square-foot high-tech facility, located in Richardson,
      Texas.





The
      Company was originally formed in Nevada in June of 1994 under the name Cyber
      Synergy, Inc. to develop stock market related software applications. The
      Corporate name has changed several times to date including in November 1999
      to
“Jesse Livemore.com” and in December 2001 to “Stock Market Solutions, Inc.” and
      in April of 2006 to “YTXP Corporation”. On April 28, 2006, the merger between
      YTXP and its wholly owned subsidiary was consummated with Texas Prototypes,
      Inc
      - a private company. The transaction was treated as a recapitalization of Texas
      Prototypes, Inc with Texas Prototypes, Inc treated as the accounting acquirer
      and continuing reporting entity. A change of control was deemed to have occurred
      as a result of the transaction. In June of 2006, the articles of incorporation
      were amended and the Company's name was changed to TXP Corporation (See NOTE
      3
      Merger and Recapitalization).





**NOTE
      3 - ACCOUNTING POLICIES**





***Merger
      and Recapitalization***





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





On
      April
      28, 2006, YTXP Corporation (f/k/a Stock Market Solutions, Inc.) issued
      89,248,902 shares or 94.7% of the issued and outstanding shares to the
      shareholders of Texas Prototypes, Inc. and acquired all of the outstanding
      shares of Texas Prototypes, Inc. As contemplated with the agreement and
      concurrent with closing of the transaction, all directors and officers of YTXP
      resigned and were replaced by appointees of the current shareholders of YTXP.
      A
      change of control was deemed to have occurred as a result of the merger. For
      accounting purposes, the acquisition has been treated as recapitalization of
      Texas Prototypes, Inc. with Texas Prototypes, Inc. as the acquirer and as the
      continuing reporting entity. Accordingly, financial statements filed for
      post-merger periods will depict the acquisition of YTXP by the accounting
      acquirer and will include financial statements of the accounting acquirer for
      the pre-merger comparable periods. As of April 28, 2006, the Company completed
      a
      recapitalization transaction which resulted in new common shares outstanding
      of
      94,295,715, after giving effect of cancellation of shares in the transaction
      and
      reissuance per the related merger agreement. As required by accounting guidance,
      authorized shares, issued and outstanding shares and per share amounts have
      been
      retroactively restated throughout these consolidated financial statements and
      the accompanying notes.





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





***Consolidation***





As
      of
      September 30, 2006, TXP had one wholly owned subsidiary, TXP-Asia. All material
      inter-company balances and inter-company transactions have been
      eliminated.





***Basis
      of Accounting***





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


F-6




***Use
      of Estimates***





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





***Foreign
      Currency Translation***





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




***Cash
      and Cash Equivalents***





TXP
      considers all highly liquid debt instruments and other short-term investments
      with an initial maturity of three months or less to be cash or cash equivalents.
      TXP maintains cash and cash equivalents with a financial institution that
      periodically exceed the limit of insurability under Federal Deposit Insurance
      Corporation. At September 30, 2006 and December 31, 2005, the cash balance
      exceeded the insured limits by $7,000 and $242,000, respectively.





***Allowance
      for Doubtful Accounts***





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





***Inventory***





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





***Deferred
      Offering Costs***





Deferred
      offering costs are costs incurred by TXP related to entering into the
      $15,000,000 Standby Equity Distribution Agreement (See Note 8 of Financial
      Statements). These costs consist of related legal, accounting, and commitment
      fees and will be netted ratably with the proceeds from the issuance and sale
      of
      common stock under the Standby Equity Distribution Agreement. In the event,
      TXP
      does not issue and sell the entire amount of $15,000,000 of common stock under
      the stock equity distribution by the end of the two-year term, the remaining
      deferred offering cost will be expensed.





***Property
      and Equipment***





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





***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.”


F-7




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





We
      have
      penalty provisions in the registration rights agreement of our debentures and
      warrants that require us to file the Registration Statement no later than 45
      days from the date of closing and to use its best efforts to cause the
      Registration Statement to be declared effective no later than 120 days after
      filing and to insure that the registration statement remains in effect until
      all
      of the shares of common stock issuable upon conversion of the Debentures and
      exercise of the Warrants have been sold. In the event of a default of its
      obligations under the Registration Rights Agreements, including its agreement
      to
      file the Registration Statement with the Securities and Exchange Commission
      no
      later than 45 days from the date of closing, or if the Registration Statement
      is
      not declared effective within 120 days of filing, it is required that we pay
      to
      Cornell, as liquidated damages, for each month that the registration statement
      has not been filed or declared effective, as the case may be, either a cash
      amount or shares of our common stock equal to 2% of the liquidated value of the
      debentures. The Company obtained a waiver from Cornell Capital extending the
      deadline for filing of the registration statement until August 31, 2006. The
      Company is currently in negotiations with Cornell Capital to amend the
      registration rights agreement to extend the date by which we have to file the
      Registration Statement to December 15, 2006, and to extend the date by which
      we
      have to cause the Securities and Exchange Commission to declare the Registration
      Statement effective to March 14, 2007.





EITF
      05-04, which has not been adopted, “The Effect of a Liquidated Damages Clause on
      a Freestanding Financial Instrument Subject to Issue No. 00-19”, “Accounting for
      Derivative Financial Instruments Indexed to, and Potentially Settled in, a
      Company's Own Stock” is pending the FASB reaching a conclusion as to whether a
      registration rights agreement meets the definition of a derivative
      instrument. In March 2006, the FASB staff reported that the EITF postponed
      further deliberations on Issue No. 05-04 until future meetings. We currently
      record any registration delay payments as expenses in the period when they
      are
      incurred. If the FASB were to adopt an alternative view, we could be required
      to
      account for the registration delay payments as a separate derivative.
      Accordingly, we would need to record the fair value of the estimated payments,
      although no authoritative methodology currently exists for evaluating such
      computation.





***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.





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





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





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





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


F-8





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.





***Income
      Taxes***





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





***Stock-Based
      Compensation***




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





In
      June
      of 2006, the majority of shareholders approved the "2006 Stock Incentive Plan."
      The plan provides for up to 10,000,000 shares of TXP's common stock to be issued
      in the form of incentive and/or non-qualified common stock for employees,
      directors and consultants to TXP. As of September 30, 2006, 1,543,334 stock
      options and 149,000 shares of common stock have been issued to employees,
      directors or consultants under this plan of which the company recognized $8,000
      and $61,000, respectively, of stock compensation expense in SG&A in the
      statement of operations for three and nine months ended September 30, 2006.





***Net
      Loss Per Share***





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




***Reclassifications***





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





**NOTE
      4 - RELATED PARTY TRANSACTIONS**





TXP
      leases operating equipment from its majority shareholder and Chief Executive
      Officer, Michael Shores, for $180,000 per year. The lease was renewed under
      the
      same payment terms in May of 2005 for a 2-year term through April of 2007.
      For
      the nine months ending September 30, 2006 and for the twelve months ending
      December 2005, TXP paid the majority shareholder $150,000 and $180,000,
      respectively. Included in other current assets at September 30, 2006 is $15,000
      which represents one month lease pre-payment made to the majority shareholder,
      Michael Shores.





In
      September 2004, TXP invested in TXP-Asia, which is located in Gwangju City,
      South Korea by transferring $50,000 to a South Korean bank account. The
      investment was used to fund certain costs and expenses while TXP-Asia evaluates
      plans to co-locate within KOPTI (Korean Photonics Institute) and use its
      existing business model to penetrate the Asian Photonics market. The ownership
      of TXP-Asia is 100% owned by the majority shareholder, Michael Shores, of TXP,
      Inc. The majority shareholder, Michael Shores, will contribute his ownership
      of
      TXP-Asia when he is legally allowed by South Korean law. During December of
      2005
      TXP-Asia transferred $14,000 to the majority shareholder, Michael Shores, and
      effectively closed the South Korean bank account. Included within other currents
      assets as of December 31, 2005 is a receivable from the majority shareholder,
      Michael Shores, for the amount of transferred funds. In Q1 2006, the majority
      shareholder, Michael Shores, paid the receivable in full. TXP-Asia will continue
      to evaluate plans to co-locate within KOPTI (Korean Photonics Institute) and
      use
      its existing business model to penetrate the Asian Photonics market.





In
      Q4
      2005, the majority shareholder and Chief Executive Officer of the Company,
      Michael Shores, purchased two company owned vehicles for $48,000 by arranging
      to
      pay-off the loans on both vehicles. The purchase price approximated the fair
      values of the vehicles in aggregate. The company realized an accounting loss
      on
      the sale of $14,000.


F-9




In
      Q2
      2006, the majority shareholder and Chief Executive Officer of the Company,
      Michael Shores, loaned the company $150,000. The unsecured loan has a one-year
      term and bears interest at 10%. The loan principal and interest are due at
      maturity. The Company repaid $30,000 of principal in Q3 2006. The balance on
      the
      note at September 30, 2006 was $120,000.





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





**NOTE
      5 - STOCK BASED COMPENSATION**




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





In
      Q3
      2006, the Company issued a combined 149,000 free-trading shares which were
      registered under a registration statement on Form S-8 to all of its employees
      who were employed as of April 28, 2006 except for the CFO and CEO. In our
      statement of operations for the three and nine months ended September 30, 2006,
      we recorded $61,000 and $61,000, respectively, of compensation cost for the
      issuance of these shares based on the closing price of our stock on the issue
      date.





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, 2006 is
      presented in the following table.




**Options**
            
            **Weighted**
              **average**
              **exercise**
              **price**
            
            **Aggregate**
              **intrinsic**
              **value**
            
            **Weighted**
              **average**
              **remaining**
              **contractual**
              **life
                (years)**Outstanding
                at January 1, 2006
            
            
            —
            
            $
            —Granted
            
            
            1,543,334
            
            
            0.30
            
            
            61,733
            
            
            9.93Exercised
            
            
            —
            
            
            —Forfeited
            
            
            —
            
            
            —Expired
            
            
            —
            
            
            —Outstanding
                at September 30, 2006
            
            
            1,543,334
            
            $
            0.30
            
            $
            61,733
            
            
            9.93Exercisable
                at September 30, 2006
            
            
            —
            
            $
            —
            
            $
            —
            
            
            —




We
      adopted SFAS No. 123R effective January 1, 2006. In our statement of
      operations for the three and nine months ended September 30, 2006, we recorded
      $8,000 and $8,000, respectively, of compensation cost for share-based payment
      arrangements. No stock options were exercised during the six months ended
      June 30, 2006.




The
      fair
      value of stock options is determined using the Black-Scholes valuation model.
      During the three and nine months ended September 30, 2006, the fair value
      of each stock option award was determined as of the date of grant using the
      Black-Scholes option-pricing model with the following assumptions:




Expected
                volatility
            
            
            115
            %Expected
                term (years)
            
            
            6.0Risk-free
                interest rate
            
            
            4.56
            %Expected
                dividend yield
            
            
            0
            %Forfeiture
                rate
            
            
            12
            %




F-10




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




As
      of
      September 30, 2006, there was $303,000 of total unrecognized compensation
      cost, which includes the impact of expected forfeitures related to unvested
      share-based compensation arrangements. That cost is expected to be recognized
      over a weighted-average period of 2.9 years.





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




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




**Three
                months ended**
              **September 30,**
            
            **Nine
                months ended**
              **September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****(in
                thousands, except per share data)**Numerator:Net
                income available to common stockholders
            
            $
            2,207
            
            $
            405
            
            $
            (2,090),
            
            $
            (21
            )Denominator:Denominator
                for basic net income per share—weighted average shares
            
            
            96,971,108
            
            
            94,295,715
            
            
            95,409,963
            
            
            94,295,715Dilutive
                potential employee common stock options
            
            
            378,374
            
            
            (—
            )
            
            (—
            )
            
            (—
            )Denominator
                for diluted net income per share—adjusted weighted average
                shares
            
            
            97,349,482
            
            
            94,295,715
            
            
            95,409,963
            
            
            94,295,715Basic
                net income per share
            
            $
            0.02
            
            $
            —
            
            $
            (0.02
            )
            $
            (—
            )Diluted
                net income per share
            
            $
            0.02
            
            $
            —
            
            $
            (0.02
            )
            $
            (—
            )




For
      the
      three and nine months ended September 30, 2006 and 2005, certain potential
      shares of common stock have been excluded from diluted loss per share because
      the exercise price was greater than the average market price of our common
      stock, and therefore, the effect on diluted loss per share would have been
      anti-dilutive. Other convertible securities were excluded because their
      inclusion was anti-dillutive.  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:


**Three
                    Months Ended**
                  **September
                    30,**
                
                **Nine
                    Months Ended**
                  **September
                    30,****2006**
                
                **2005**
                
                **2006**
                
                **2005**Warrants
                    to purchase common shares
                
                
                4,020,000
                
                
                —
                
                
                4,020,000
                
                
                —Convertible
                    debentures
                
                
                11,948,017
                
                
                —
                
                
                11,948,017
                
                
                —15,968,017
                
                
                —
                
                
                15,968,017
                
                
                —




F-11





**NOTE
      7 - LINES OF CREDIT**





On
      April
      1, 2006 TXP renewed its revolving line of credit for $500,000. The line of
      credit has a one-year term with a variable interest rate of prime plus 2%.
      The
      line of credit is secured by all assets of the Company. The majority shareholder
      and Chief Executive Officer of the Company, Michael Shores, has provided his
      personal guarantee on this loan (See NOTE 4). Interest payments are due monthly
      beginning April 1, 2006 and the principal is due when the one-year term expires.
      The line of credit has provisions that the maximum TXP may have outstanding
      is
      $500,000 or 70% of the borrowing base, whichever is less. The borrowing base
      is
      defined as the value of accounts receivable less than 90 days past their invoice
      date. TXP was in compliance with these provisions as of September 30, 2006
      and
      December 31, 2005. The revolving line credit also has financial and
      non-financial covenants. A summary of the significant covenants are as
      follows:





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





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





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




At
      September 30, 2006, the Company was in default due to failure to maintain a
      Debt
      Coverage ratio as provided for in the loan agreement. However, the lending
      institution and TXP entered into forbearance agreement on August 3, 2006 which
      waived non-compliance of this covenant so long as the company maintained the
      Debt-to-net-worth ratio and Current Ratio as provided for in the loan agreement.
      As of September 30, 2006, the Debt-to-net-worth and Current Ratio were in
      compliance with the loan agreement. The balance outstanding on the note at
      September 30, 2006 and December 31, 2005 was $400,000 and $250,000
      respectively.





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. The loan pays interest at the
      prime rate, and all principal, and accrued and unpaid interest, is due on August
      3, 2008. The loan is secured by a pledge of an aggregate of $1,507,000 in
      free-trading shares of Fossil Incorporated by an investor on behalf of the
      Company. In addition, the loan is further guaranteed personally and through
      the
      pledge of an aggregate of 4,520,000 shares of common stock beneficially owned
      by
      Michael Shores, the Company’s Chief Executive Officer. As
      of September 30, 2006, the Company had not drawn down on the line of
      credit.





**NOTE
      8 - 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 Shores, has provided his personal guarantee
      on
      this loan (See NOTE 4). Monthly payments of $1,400 began May 15, 2004. The
      balance outstanding on the note at September 30, 2006 was $9,000.





TXP
      entered into a financing agreement to purchase an automobile at the end of
      fiscal year 2003 for $10,000 with interest rate of 6%. The note is secured
      by
      the vehicle. The majority shareholder and Chief Executive Officer of the
      Company, Michael Shores, has provided his personal guarantee on this loan (See
      NOTE 4). The term of the financing agreement is 36 months, expiring in fiscal
      year 2006. The note was repaid in full in Q2 2006.





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 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 balance outstanding on the note at
      September 30, 2006 was $42,000.


F-12





In
      May of
      2006, TXP entered into a loan agreement with the majority shareholder and Chief
      Executive Officer of the Company, Michael 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 due at maturity. The Company repaid $30,000 of principal in
      Q3
      2006. The balance outstanding on this note at September 30, 2006 was
      $120,000.





**NOTE
      9 - 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 Shores, has provided his personal guarantee
      on
      this lease (See NOTE 4). Monthly lease payments are $2,000 and began in June
      of
      2005. The balance outstanding at September 30, 2006 was $38,000. The lease
      has
      been accounted for as capitalized lease in accordance with generally accepted
      accounting policies.





In
      March
      of 2006, TXP entered into a standard lease agreement for $25,000 to lease
      certain computer equipment. The lease has a three-year term and is secured
      by
      the computer equipment. The majority shareholder and Chief Executive Officer
      of
      the Company, Michael 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, 2006 was $21,000. The lease has been
      accounted for as capitalized lease in accordance with generally accepted
      accounting policies.





In
      March
      of 2006, TXP entered into a standard lease agreement for $37,000 to lease
      certain software. The lease has a thirty-month term and is secured by the
      software. The majority shareholder and Chief Executive Officer of the Company,
      Michael 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, 2006 was $29,000. The lease has been accounted
      for
      as capitalized lease in accordance with generally accepted accounting
      policies.





The
      following is a schedule by years of future minimum lease payments under the
      capital lease together with the present value of the net minimum lease payments
      as of September 30, 2006:





Year
            
            Amount10/01/06
                - 12/31/06
            
            $
            13,00001/01/07
                - 12/31/07
            
            
            52,00001/01/08
                - 12/31/08
            
            
            32,00001/01/10
                - 12/31/10
            
            
            3,000Total
                Minimum Lease Payments
            
            
            100,000Less
                Amounts Representing Interest
            
            
            12,000Present
                Value of Minimum Lease Payments
            
            $
            88,000




**NOTE
      10 - STANDBY EQUITY DISTRIBUTION AGREEMENT**





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





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





We
      are
      currently unable to register the shares of common stock issuable to Cornell
      under the Standby Equity Distribution Agreement because the terms of the
      agreement are not consistent with the SEC’s guidance regarding the terms of
      equity line financings that may be registered.





In
      conjunction with the Standby Equity Distribution Agreement, TXP issued a
      $400,000 compensation debenture to Cornell Capital. In June of 2006, the Company
      issued 1,700,000 shares of common stock in the exchange for full settlement
      of
      this $400,000 compensation debenture and another $240,000 convertible debenture.
      The combined carrying value of both debentures amounted to $685,000 which
      included the fair value of an embedded conversion option and accrued interest.
      The fair market value of the stock was $850,000 on the date of settlement.
      The
      Company realized a $165,000 loss on early extinguishment of debt as a result
      of
      the settlement. At the time of issuance, the $400,000 debenture was recorded
      as
      a liability and as a deferred offering cost on the balance sheet of the company.
      The deferred offering cost will be netted ratably with the proceeds from the
      issuance and sale of common stock under the Standby Equity Distribution
      Agreement. In the event TXP does not issue and sell the entire amount of
      $15,000,000 of common stock under the stock equity distribution by the end
      of
      the two-year term, the remaining deferred offering cost will be
      expensed.


F-13




**NOTE
      11 - CONVERTIBLE DEBENTURES**





***August
      2004 Secured Convertible Debt***





In
      August
      of 2004, Texas Prototypes, Inc. entered into Securities Purchase Agreements
      with
      Cornell and Mobilepro Corp. for the sale of a secured convertible debenture
      in
      the principal amount of $1,400,000 ($700,000 to each), bearing interest at
      five
      percent (5%). The
      terms
      of this debenture require the Company to obtain prior written consent from
      the
      holder, Cornell Capital,so
      long
      as any of the principal or interest on this debenture remains unpaid and
      unconverted before issuing or selling any Common Stock or Preferred Stock
      without consideration or for a consideration per share less than its lowest
      bid
      price determined immediately prior to its issuance, or issuing or selling any
      Preferred Stock, warrant, option, right, contract, call, or other security
      or
      instrument granting the holder thereof the right to acquire Common Stock without
      consideration or for a consideration per share less than such Common Stock’s
      fair market value determined immediately prior to its issuance, or file any
      registration statement on Form S-8 for more than 10,000,000 shares of Common
      Stock. The
      debentures are secured by a second priority security interest in all of our
      goods, inventory, contractual rights and general intangibles, receivables,
      documents, instruments, and chattel paper. These
      convertible debentures have a term of three years and are convertible at the
      holder's option. If the convertible debentures have not been converted on the
      third anniversary they will be automatically converted into common stock of
      TXP.
      At any time TXP may elect to redeem all or any portion of the convertible
      debentures at the price of one hundred twenty percent (120%) of the amount
      redeemed plus accrued interest. If TXP uses this option, it must then issue
      the
      holder of the debenture 50,000 warrants for every $100,000 redeemed. The
      warrants will have a two-year term and will be excisable at the fixed price
      of
      $.157 per share. The convertible debentures were assumed by TXP Corporation
      upon
      completion of the merger in April of 2006.




There
      are
      two ways this convertible debenture can be converted to common stock of TXP.
      First, the debentures are convertible at a fixed price of $0.157 per shares
      (“Fixed Price”). Second, the debentures are convertible at an amount equal to
      eighty percent (80%) of the volume weighted average price of TXP' common stock,
      as quoted by Bloomberg, LP, for the five days immediately preceding the
      conversion date (“Variable Price”). The conversion price elected will be the
      lower of fixed or variable price at the date of election to convert by the
      holder. The conversion term expires August 25, 2007.





In
      Q2 of
      2006, upon completion of the merger and assumption of all liabilities of Texas
      Prototypes, Inc., including the secured debentures, the contingencies related
      to
      the future event of TXP common stock being quoted and traded on either the
      over-the-counter bulletin board, NASDAQ small cap market or American Stock
      Exchange was resolved. Certain conversion options were then deemed to be
      financial derivatives under SFAS 133 and EITF 00-19. At the time of the merger,
      the derivatives were bifurcated and recorded at fair value and reflected on
      the
      Company's balance sheet. The derivatives are adjusted to fair value at each
      reporting period.





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





This
      convertible debentures were originally discounted by $200,000 which were fees
      paid to the lenders and further discounted by $1,200,000 upon bifurcation and
      recording at fair value certain financial derivative instruments embedded within
      the note in Q2 2006. The discount is being amortized over the life of the notes
      of three years. At September 30, the convertible debenture had balance of
      $460,000 net $795,000 of unamortized discount. As of September 30, 2006,
      approximately $144,000 of interest has been accrued. The
      effective interest rate on the debenture is 10.6% compared to the stated
      interest of 5% which takes into account the debt discount and issue costs
      related to the debenture.





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





On
      June
      5, 2006, the Company consummated a securities purchase agreement dated June
      5,
      2006 with Cornell providing for the sale by the company to Cornell of its 10%
      secured convertible debentures in the aggregate principal amount of $1,127,000.
      The
      terms of this debenture require the Company to obtain prior written consent
      from
      the holder, Cornell Capital,so
      long
      as any of the principal or interest on this debenture remains unpaid and
      unconverted before issuing or selling any Common Stock or Preferred Stock
      without consideration or for a consideration per share less than its lowest
      bid
      price determined immediately prior to its issuance, or issuing or selling any
      Preferred Stock, warrant, option, right, contract, call, or other security
      or
      instrument granting the holder thereof the right to acquire Common Stock without
      consideration or for a consideration per share less than such Common Stock’s
      fair market value determined immediately prior to its issuance, or file any
      registration statement on Form S-8 for more than 10,000,000 shares of Common
      Stock. Additionally, the terms of this debenture provide holder, Cornell
      Capital, with a right of first refusal on capital raises by the Company.
      Specifically,for
      a
      period if eighteen (18) months after the Closing Date, if theCompany
      intends to raise additional capital by the issuance or sale of capital stock
      of
      the Company, including without limitation shares of any class of Common Stock,
      any class of preferred stock, options, warrants or any other securities
      convertible or exercisable into shares of Common Stock (whether the offering
      is
      conducted by the Company, underwriter, placement agent or any third party)
      the
      Company shall be obligated to offer to the Holder such issuance or sale of
      capital stock, by providing in writing the principal amount of capital it
      intends to raise and outline of the material terms of such capital raise, prior
      to the offering such issuance or sale of capital stock  to any third
      parties including, but not limited to, current or former officers or directors,
      current or former shareholders and/or investors of the obligor, underwriters,
      brokers, agents or other third parties.  The Holder shall have ten (10)
      business days from receipt of such notice of the sale or issuance of capital
      stock to accept or reject all or a portion of such capital raising offer. The
      debenture is secured by a second priority security interest in all of our goods,
      inventory, contractual rights and general intangibles, receivables, documents,
      instruments, and chattel paper The
      Company also issued to Cornell warrants to purchase 1,850,000 and 1,850,000
      shares of common stock at a price equal to $0.60 and $0.75 per share,
      respectively. The warrants expire five years from the date of issuance. Cornell
      may exercise the warrants on a cashless basis if the shares of common stock
      underlying the warrants are not then registered pursuant to an effective
      registration statement. In the event Cornell exercises the warrants on a
      cashless basis, then we will not receive any proceeds. In addition, the exercise
      price of the warrants will be adjusted in the event we issue common stock at
      a
      price below market, with the exception of any securities issued as of the date
      of the warrants or issued in connection with the secured convertible notes
      issued pursuant to the Securities Purchase Agreement. There can be no assurance
      to how many, if any, of these warrants will be exercised.




The
      exercise price of the warrants may be adjusted in certain circumstances such
      as
      if we pay a stock dividend, subdivide or combine outstanding shares of common
      stock into a greater or lesser number of shares, or take such other actions
      as
      would otherwise result in dilution of the selling stockholders'
      position.




The
      first
      debenture amounting to $550,000 matures on the third anniversary of the date
      of
      issuance and the company is not required to make any payments until the maturity
      Date. The debentures are convertible at any time into shares of common stock
      of
      the company at a conversion price per share equal to the lesser of (i) $0.50,
      or
      (ii) 95% of the lowest daily volume weighted average price of the Common Stock,
      as quoted by Bloomberg, LP, for the 30 trading days immediately preceding the
      date of conversion (“Variable Market Price”). Unless waived by the company, the
      holders may not, together with their affiliates, convert more than an aggregate
      of $150,000 in any 30-day period of principal amount of the debentures at the
      Variable Market Price. The Company has the right to redeem a portion or all
      amounts outstanding under the Debentures prior to the Maturity Date at a 20%
      redemption premium provided that the closing bid price of the Common Stock
      is
      less than $0.50. The
      convertible debentures are secured by substantially all the company's
      assets. At
      September 30, the convertible debenture had balance of $61,000 net $489,000
      of
      unamortized discount. As of September 30, 2006, approximately $18,000 of
      interest has been accrued. The effective interest rate on the debenture
      is 13.2% compared to the stated interest of 10% which takes into account
      the debt discount and issue costs related to the debenture.





In
      addition, on June 5, 2006 the Company issued to Cornell an amended and restated
      convertible debenture, on the same terms and conditions as set forth above
      which
      consolidates all outstanding amounts of the convertible debenture issued by
      Texas Prototypes, Inc. to Cornell on June 15, 2005 in the amount of $550,000,
      plus accrued and unpaid interest in the amount of $27,000 through June 5, 2006,
      for the principal sum of $577,000. The company reviewed EITF 05-07 “Accounting
      for Modifications to Conversion Options Embedded in Debt Instruments and Related
      Issues” and EIFT 96-19 “Debtor's Accounting for a Modification or Exchange of
      Debt Instruments” and deemed that the modifications and amendments were
      substantial and determined that debt extinguishment had occurred as the cash
      flow effect (including the changes in fair value of the embedded conversion
      option) on a present value basis exceeded 10%. The company recorded a gain
      on extinguishment debt of $630,000 in the consolidated statements of operations
      as a result of the modification. At September 30, the amended and restated
      convertible debenture had balance of $16,000 net $513,000 of unamortized
      discount. As of September 30, 2006, approximately $18,000 of interest has been
      accrued. The effective interest rate on the debenture is 13.2% compared to
      the stated interest of 10% which takes into account the debt discount and issue
      costs related to the debenture.


F-14




***July
      2006 Warrants***





On
      July
      28, 2006, TXP Corporation entered into an Agreement (the "Agreement") with
      an
      accredited investor (the "Investor") pursuant to which the Company issued to
      the
      Investor five-year warrants to purchase an aggregate of 320,000 shares of common
      stock (the "Warrants") as consideration for the Investor agreeing to pledge
      an
      aggregate of $2,000,000 in free-trading shares of common stock of Adobe Systems
      Incorporated (NASDAQ:ADBE), Fossil Incorporated (NASDAQ:FOSL) or such other
      shares of free-trading common stock having a value of $2,000,000 in the
      aggregate beneficially owned by the Investor as may be agreed upon between
      the
      parties (the “Collateral”). The Collateral is to be pledged on behalf of the
      Company in favor of First Bank of Canyon Creek, or such other lending or
      financing institution as may be agreed upon between the parties (a “Lender”), as
      Collateral for a loan to be obtained by the Company from a Lender in an amount
      up to $2,000,000 with a term of up to 2 years (the “Term”), which will be
      further guaranteed personally and through the pledge of common stock
      beneficially owned by the Company's Chief Executive Officer. The warrants are
      exercisable into shares of the Company's common stock at a price equal to $0.50
      per share. The investor may exercise the warrants on a cashless basis if at
      his
      option. In the event the investor exercises the warrants on a cashless
      basis, then we will not receive any proceeds. The exercise price of the warrants
      may be adjusted in certain circumstances such as if we pay a stock dividend,
      subdivide or combine outstanding shares of common stock into a greater or lesser
      number of shares, or take such other actions as would otherwise result in
      dilution of the selling stockholders' position. In addition, the company shall
      prepare and file with the SEC a separate Registration Statement on Form SB-2
      covering the resale of all of the Warrant Shares with no later than forty-five
      (45) days from closing. The Company shall use its best efforts to have the
      Registration Statement declared effective by the SEC as soon as practicable,
      but
      in no event later than one hundred twenty (120) days after the initial filing.
      There are no liquidating damages clauses related to the warrant or agreement
      with the investor. As additional consideration of the Investor's agreement
      to
      pledge the Collateral to a Lender, the Company agreed to pay to the Investor
      a
      one-time commitment fee, during the Term, of $40,000 (the “Commitment Fee”) no
      later than 90 days after the Collateral is deposited into the account of a
      Lender; provided, however, that the Company shall pay an additional Commitment
      Fee within 90 days after the renewal of the Loan by a Lender. TXP consummated
      the loan facility with the First Bank of Canyon Creek in early Q3
      2006.





The
      Company accounted for the embedded conversion features within the debentures
      and
      freestanding warrants discussed above 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.”





Presented
      below is summary of all secured convertible debt and warrants:





Description
            
            Principal
                balance
            
            Unamortized
                discount
            
            Fair
                value of embedded derivative
            
            Accrued
                interestAugust
                2005 secured convertible debt
            
            $
            1,255,000
            
            $
            795,000
            
            $
            1,751,000
            
            $
            144,000June
                2006 secured convertible debt 1
            
            
            550,000
            
            
            489,000
            
            
            461,000
            
            
            18,000June
                2006 secured convertible debt 2
            
            
            577,000
            
            
            513,000
            
            
            483,000
            
            
            18,000June
                2006 warrants: 1,850,000 @ $.60
            
            
            —
            
            
            —
            
            
            468,000
            
            
            —June
                2006 warrants: 1,850,000 @ $.75
            
            
            —
            
            
            —
            
            
            451,000
            
            
            —July
                2006 warrants: 320,000 @ $.50
            
            
            —
            
            
            —
            
            
            84,000
            
            
            —Total
            
            $
            2,382,000
            
            $
            1,797,000
            
            $
            3,698,000
            
            $
            180,000





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




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




Expected
                volatility
            
            
            115
            %Expected
                term (years)
            
            
            variousRisk-free
                interest rate
            
            
            4.56
            %Expected
                dividend yield
            
            
            0
            %




F-15





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





***Registration
      Rights Agreement***





In
      connection with the all of the above secured convertible debenture and warrants,
      the Company entered into registration rights agreements providing for the filing
      of a registration statement with the Securities and Exchange Commission
      registering the Common Stock issuable upon conversion of the Debentures and
      exercise of the Warrants. The Company is obligated to file the Registration
      Statement no later than 45 days from the date of closing and to use its best
      efforts to cause the Registration Statement to be declared effective no later
      than 120 days after filing and to insure that the registration statement remains
      in effect until all of the shares of common stock issuable upon conversion
      of
      the Debentures and exercise of the Warrants have been sold. In the event of
      a
      default of its obligations under the Registration Rights Agreements, including
      its agreement to file the Registration Statement with the Securities and
      Exchange Commission no later than 45 days from the date of closing, or if the
      Registration Statement is not declared effective within 120 days of filing,
      it
      is required that we pay to Cornell, as liquidated damages, for each month that
      the registration statement has not been filed or declared effective, as the
      case
      may be, either a cash amount or shares of our common stock equal to 2% of the
      liquidated value of the Debentures .  The
      Company and Cornell Capital amended the registration rights agreement to extend
      the date by which we have to file the Registration Statement to December 15,
      2006, and to extend the date by which we have to cause the Securities and
      Exchange Commission to declare the Registration Statement effective to March
      14,
      2007.





**NOTE
      12 - COMMON STOCK**





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





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





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





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





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





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





**NOTE
      13 - 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 lease required a deposit in
      the
      amount of $13,000. The annual rent payments increase each year as outlined
      below:





Year
            
            Amount10/01/06
                - 12/31/06
            
            $
            50,00001/01/07
                - 12/31/07
            
            
            202,00001/01/08
                - 12/31/08
            
            
            207,00001/01/09
                - 12/31/09
            
            
            211,00001/01/10
                - 12/31/10
            
            
            43,000Total
            
            $
            713,000




F-16





Rent
      expense for the nine months ending September 30, 2006 amounted to
      $148,000.





**NOTE
      14 - MAJOR CUSTOMERS**





During
      the nine months ended September 30, 2006 and 2005, TXP's 5 largest customers
      accounted for 57% and 83% of net sales, respectively.





**NOTE
      15 - 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,
      officers, directors and consultants to TXP. As of September 30,
      2006, 1,543,334 stock options and 149,000 shares of common stock have been
      issued to employees, directors or consultants under this plan of which the
      company recognized $8,000 and $61,000, respectively of stock compensation
      expense in SG&A in the statement of operations for three and nine months
      ended September 30, 2006.





**NOTE
      16 - SUBSEQUENT EVENTS - APPOINTMENT OF DIRECTOR, ENTRY INTO MATERIAL AGREEMENTS
      AND OTHER**





On
      September 27, 2006, our Board of Directors appointed Eric Miscoll as a director.
      There are no understandings or arrangements between Mr. Miscoll and any other
      person pursuant to which Mr. Miscoll was selected as a director of our company.
      Mr. Miscoll presently does not serve on any committee of our Board of Directors.
      Mr. Miscoll may be appointed to serve as a member of a committee although there
      are no current plans to appoint him to a committee as of the date
      hereof. Mr. Miscoll does not have any family relationship with any
      director, executive officer or person nominated or chosen by us to become a
      director or executive officer.





Mr.
      Miscoll has a comprehensive understanding of outsourced electronics
      manufacturing based on 8 years of experience with the industry. From 2000
      to 2006, Mr. Miscoll was Chief Operating Officer of Technology Forecasters,
      Inc.
      a strategic consulting firm focused solely on the outsourced electronics
      manufacturing industry. Previous experience includes operations management
      with
      Bank of America from 1983 to 1987, organizational development with NASA from
      1994 to 1996, and psychological services with the U.S. Department of Justice
      from 1990 to 1993. He received a B.A. in English from St. Mary’s College in
      1983, an MA in Counseling Psychology from Santa Clara University in 1990, and
      a
      PhD in Organizational Psychology from the California School of Professional
      Psychology in 1997.




On
      September 29, 2006, we executed a non-binding letter of intent with Siemens
      AG
      (“Siemens”) to acquire the assets and intellectual property for its Optical
      Network Terminal (ONT) technology, supporting both Broadband Passive Optical
      Network (BPON) and Gigabit Passive Optical Network (GPON) standards. The letter
      of intent is non-binding and is subject to the completion of customary due
      diligence and the execution of definitive agreements.





In
      addition, effective October 2, 2006 we hired Siemens' former ONT development
      team. As a result, we have added 35 full-time employees to our staff.





On
      October 10, 2006, the Company withdrew its Form SB-2 registration statement
      filed on August 28, 2006. No securities were offered or sold pursuant to this
      registration statement.





On
      October 11, 2006, TXP Corporation (the "Company") entered into a Securities
      Purchase Agreement (the “Purchase Agreement”) with an qualified institutional
      buyer pursuant to which the Company sold an aggregate of $1,500,000 in shares
      (the “Shares”) of the Company’s common stock, par value $.001 per share, at a
      per share purchase price of $.32, together with five year warrants to purchase
      2,343,750 shares of common stock at an exercise price equal to $0.50 per share
      and five year warrants to purchase 2,343,750 shares of common stock at an
      exercise price equal to $1.00 per share (collectively, the “Warrants”). The
      entire purchase price of the Shares and the Warrants was used by the Company
      to
      redeem its principal amount $550,000 and $577,000 10% secured convertible
      debentures issued to Cornell Capital Partners, L.P. in June 2005 and June 2006,
      respectively, each at a 20% premium, for a total redemption price of
      approximately $1,500,000.





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





Further,
      the Purchase Agreement provides for the filing of a registration statement
      by
      the Company with the Securities and Exchange Commission registering the Shares
      and the share common stock issuable upon exercise of the Warrants. The Company
      is obligated to file the registration statement no later than December 15,
      2006
      and to use its best efforts to cause the registration statement to be declared
      effective no later than 90 days after filing. If the Company does not meet
      the
      aforementioned filing and effectiveness deadlines, it shall pay to the investor
      an amount equal to 1% of the purchase price for the first 60 days or part
      thereof of the pendency of such non-registration event and 2% for each 30 days
      or part thereof thereafter, of the purchase price of the Shares and the
      Warrants; provided, however, that the aforementioned liquidated damages shall
      only accrue, if at all, for 12 months after the closing date.


F-17




On
      October 12, 2006, the Company entered into an Agreement (the "Agreement") with
      an accredited investor (the "Investor") pursuant to which the Company issued
      to
      the Investor five-year warrants to purchase an aggregate of 640,000 shares
      of
      common stock (the "Warrants") as consideration for the Investor agreeing to
      pledge an aggregate of $2,000,000 in free-trading shares of common stock of
      Adobe Systems Incorporated (NASDAQ:ADBE), Fossil Incorporated (NASDAQ:FOSL)
      or
      such other shares of free-trading common stock having a value of $2,000,000
      in
      the aggregate beneficially owned by the Investor as may be agreed upon between
      the parties (the “Collateral”). The Collateral is to be pledged on behalf of the
      Company in favor of First Bank of Canyon Creek, or such other lending or
      financing institution as may be agreed upon between the parties (a “Lender”), as
      Collateral for a loan to be obtained 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 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. As additional consideration of the Investor's agreement to pledge
      the
      Collateral to a Lender, the Company agreed to pay to the Investor a one-time
      commitment fee during the Term of 125,000 shares of the Company’s common stock
      (the “Commitment Fee”) no later than 90 days after the Collateral is deposited
      into the account of a Lender; provided, however, that the Company shall pay
      an
      additional Commitment Fee within 90 days after the renewal of the Loan by a
      Lender.





In
      addition, the Agreement provides for the filing of a registration statement
      (the
“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.





The
      Company claims an exemption from the registration requirements of the Act for
      the private placement of these securities pursuant to Section 4(2) of the Act
      and/or Regulation D promulgated thereunder since, among other things, the
      transaction did not involve a public offering, the Investor is an accredited
      investor, the Investor had access to information about the Company and his
      investment, the Investor took the securities for investment and not resale,
      and
      the Company took appropriate measures to restrict the transfer of the
      securities.




F-18





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





***Special
      Note on Forward-Looking Statements.*** *Certain statements in “Management's Discussion and Analysis or Plan of
      Operation” below, and elsewhere in this quarterly report, are not related to
      historical results, and are forward-looking statements. Forward-looking
      statements present our expectations or forecasts of future events. You can
      identify these statements by the fact that they do not relate strictly to
      historical or current facts. These statements involve known and unknown risks,
      uncertainties and other factors that may cause our actual results, levels of
      activity, performance or achievements to be materially different from any future
      results, levels of activity, performance or achievements expressed or implied
      by
      such forward-looking statements. Forward-looking statements frequently are
      accompanied by such words such as “may,” “will,” “should,” “could,” “expects,”
“plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,”
“potential” or “continue,” or the negative of such terms or other words and
      terms of similar meaning. Although we believe that the expectations reflected
      in
      the forward-looking statements are reasonable, we cannot guarantee future
      results, levels of activity, performance, achievements, or timeliness of such
      results. Moreover, neither we nor any other person assumes responsibility for
      the accuracy and completeness of such forward-looking statements. We are under
      no duty to update any of the forward-looking statements after the date of this
      quarterly report. Subsequent written and oral forward looking statements
      attributable to us or to persons acting in our behalf are expressly qualified
      in
      their entirety by the cautionary statements and risk factors set forth below
      and
      elsewhere in this quarterly report, and in other reports filed by us with the
      SEC* .




**TXP**





**Overview**





TXP
      specializes in quick-turn complex circuit card assemblies and optoelectronic
      prototyping, new product introduction, and pilot production of electronic
      assemblies for Technology Innovators and Original Equipment Manufacturers (OEM)
      and Contract Manufacturers (CM) in the United States of America. The company
      is
      located in a 31,000 square-foot high-tech facility, located in Richardson,
      Texas.





The
      Company was originally formed in Nevada in June of 1994 under the name Cyber
      Synergy, Inc. to develop stock market related software applications. The
      corporate name has changed several times to date including in November 1999
      to
“Jesse Livemore.com” and in December 2001 to “Stock Market Solutions, Inc.” and
      in April of 2006 to “YTXP Corporation”. On April 28, 2006, the merger between
      YTXP and its wholly owned subsidiary was consummated with Texas Prototypes,
      Inc
      - a private company. The transaction was treated as a recapitalization of Texas
      Prototypes, Inc with Texas Prototypes, Inc treated as the accounting acquirer
      and continuing reporting entity. A change of control was deemed to have occurred
      as a result of the transaction. In June of 2006, the articles of incorporation
      were amended and the Company's name was changed to TXP Corporation (See NOTE
      3
      Merger and Recapitalization).





**Critical
      Accounting Policies**





TXP's
      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. TXP evaluates its estimates and assumptions
      on an ongoing basis. TXP actual results may differ from these estimates under
      different assumptions or conditions.





TXP's
      significant accounting policies are described in Note 1 of the notes to our
      consolidated financial statements located in this 10QSB filing. The following
      accounting policies involve a greater degree of judgment and complexity.
      Accordingly, these are the policies TXP believes are the most critical to aid
      in
      fully understanding and evaluating our consolidated financial condition and
      results of operations.





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





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





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


1





We
      have
      penalty provisions in the registration rights agreements of our debentures
      and
      warrants that require us to file the Registration Statement no later than 45
      days from the date of closing and to use its best efforts to cause the
      Registration Statement to be declared effective no later than 120 days after
      filing and to insure that the registration statement remains in effect until
      all
      of the shares of common stock issuable upon conversion of the Debentures and
      exercise of the Warrants have been sold. In the event of a default of its
      obligations under the Registration Rights Agreements, including its agreement
      to
      file the Registration Statement with the Securities and Exchange Commission
      no
      later than 45 days from the date of closing, or if the Registration Statement
      is
      not declared effective within 120 days of filing, it is required that we pay
      to
      Cornell, as liquidated damages, for each month that the registration statement
      has not been filed or declared effective, as the case may be, either a cash
      amount or shares of our common stock equal to 2% of the liquidated value of
      the
      debentures. The
      Company and Cornell Capital amended the registration rights agreement to extend
      the date by which we have to file the Registration Statement to December 15,
      2006, and to extend the date by which we have to cause the Securities and
      Exchange Commission to declare the Registration Statement effective to March
      14,
      2007.





EITF
      05-04, which has not been adopted, “The Effect of a Liquidated Damages Clause on
      a Freestanding Financial Instrument Subject to Issue No. 00-19”, “Accounting for
      Derivative Financial Instruments Indexed to, and Potentially Settled in, a
      Company's Own Stock” is pending the FASB reaching a conclusion as to whether a
      registration rights agreement meets the definition of a derivative
      instrument. In March 2006, the FASB staff reported that the EITF postponed
      further deliberations on Issue No. 05-04 until future meetings. We currently
      record any registration delay payments as expenses in the period when they
      are
      incurred. If the FASB were to adopt an alternative view, we could be required
      to
      account for the registration delay payments as a separate derivative.
      Accordingly, we would need to record the fair value of the estimated payments,
      although no authoritative methodology currently exists for evaluating such
      computation.





***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.





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





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


2




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





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





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





***Allowance
      for Doubtful Accounts***





TXP's
      allowance for doubtful accounts relates to trade accounts receivable. The
      allowance for doubtful accounts is an estimate prepared by management based
      on
      identification of the collectibility of specific accounts and the overall
      condition of the receivable portfolios. The company specifically analyzes
      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
      the company's customers were to deteriorate, resulting in an impairment of
      their
      ability to make payments, additional allowances may be required. Likewise,
      should the company determine that it 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.


3


**RESULTS
        OF OPERATIONS**
  **COMPARISON
        OF THE 3 MONTHS ENDED SEPTEMBER 30, 2006 ("2006") TO THE 3 MONTHS ENDED
        SEPTEMBER 30, 2005 ("2005")**
 
 ***Revenues***
 
 TXP
        currently derives almost all of our revenue from our prototyping and assembly
        and material supply chain management services. Prototyping and assembly services
        are priced based on the complexity, time-to turn and volume of the customer
        project. TXP's material supply chain management services are generally priced
        at
        the cost of the material plus 5% to 25%. Revenues decreased 73% from $5,946,000
        in 2005 to $1,659,000 in 2006 or by $4,287,000. Material supply chain management
        services increased 49% from $286,000 in 2005 to $427,000 in 2006. Prototyping
        and assembly services decreased 78% from $5,660,000 in 2005 to $1,232,000
        in
        2006. In 2005, TXP had revenues of $5,200,000 from a single customer, Foxconn,
        a
        large tier 1 contract manufacturer, related to photonics prototyping project
        which did not recur in 2006. Excluding the Foxconn project, prototyping and
        assembly revenues increased $772,000 compared to 2005. In 2006, TXP had sales
        of
        $237,000 to several new customers related to build-to-order tele-communications
        product assemblies. The remaining increase in revenues is attributed to an
        increase is attributed to an increasing customer base and continued demand
        from
        existing customers. TXP expanded its customer base from 67 in 2005 to 103
        in
        2006 and had current active customers for the quarter of 26 and 38 for 2005
        and
        2006, respectively. TXP's top five customers accounted for 95% of revenue
        in
        2005 and 50% of revenue in 2006.
  ***Cost
        of Sales and Gross Profit***
  Cost
        of
        sales consists of direct material, manufacturing overhead, labor costs,
        depreciation expense on machinery and equipment, equipment lease, and set-up
        and
        tooling charges associated with performing our services. Cost of sales decreased
        from $4,613,000 in 2005 to $984,000 in 2006 or $3,629,000. Direct costs of
        $4,133,000 related to the photonics prototyping project completed in Q3 2005
        did
        not recur in 2006. Other direct material costs related to supply chain
        management and assembly services increased from $258,000 in 2005 to $536,000
        in
        2006 or $278,000. Manufacturing overhead and labor cost increased from $132,000
        in 2005 to $324,000 in 2006 due to increased headcount and higher manufacturing
        overhead allocations due to expanded operations. Contract labor directly
        attributable to prototyping and assembly increased by $34,000 compared to
        2005.
 
 Gross
        profit is dependent on the scope and the nature of the customer project and
        thus
        can vary significantly. Customer projects requiring a turnkey solution which
        includes both prototyping and material supply chain management services
        typically results in a lower margin than prototyping services only. Margins
        on
        prototyping services can range from 30% to 85% while margins on material
        supply
        chain management services can range from 5% to 25%.
 
 Gross
        profit decreased from $1,133,000 in 2005 to $675,000 in 2006. Revenues decreased
        by $4,287,000 compared to 2005. During the same period the gross margin
        percentage increased from 22% in 2005 to 41% in 2006 due to a positive change
        in
        revenue mix compared to 2005 - most significantly the 2005 $5,200,000 photonics
        prototyping project which did not recur in 2006 on which the company realized
        gross margins of approximately 20%.
 
 ***Selling,
        General and Administrative Expenses***
 
 Selling
        general & administrative expense (“SG&A”) 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. SG&A expenses increased by $224,000 from
        $642,000 in 2005 to $866,000 in 2006. In 2006, Personnel costs increased
        from
        $465,000 in 2005 to $639,000 in 2006 or by $174,000. Included in this increase
        was approximately $70,000 of stock compensation expense incurred as result
        of
        employee stock and stock option awards in 2006. TXP
        created several new positions including several vice president positions,
        Chief
        Technology Officer and an administrative clerical position that were filled
        late
        in Q3 2005 or subsequent to period. In additions, certain personnel received
        raises since 2005. Rent
        and
        utilities decreased $40,000 as result of increased allocations to manufacturing
        overhead as operations expanded. Sales and marketing increased $37,000 due
        to
        efforts to increase our product and service awareness. Travel and expenses
        related sales calls to customers increased $13,000 from 2005. Professional
        fees
        increased by $43,000 from 2005 as legal, accounting and transfer agent fees
        increased due to the Company becoming publicly traded in April of 2005.
  4
 
 ***Depreciation
        Expense***
 
 Depreciation
        expense, net amounts included as a component of cost of sales, increased
        from
        $15,000 in 2005 to $24,000 in 2006. The increase was in-line with capital
        expenditures and depreciable asset base.
 
 ***Net
        Interest Expense***
 
 Net
        interest expense increased from $271,000 in 2005 to $ 388,000
        in 2006 or by $106,000. Approximately $311,000 of the increase relates to
        additional amortization of note discounts on our secured convertible debentures
        issued to Cornell Capital which was partially offset by a decrease of $215,000
        related to interest to finance the purchase of materials related to our
        photonics prototyping project in 2005 Additionally, TXP had additional interest
        expense of $21,000 in 2006 on the $550,000 convertible debenture issued to
        Cornell in June of 2005 which was subsequently amended in June of 2006 and
        a
        $577,000 convertible note issued to Cornell in June of 2006. The remaining
        increase in interest expense relates to increases on the outstanding balances
        of
        our line credit and capital lease obligations from 2005 to 2006.
 
 ***Change
        in Fair Value of Derivative Financial Instruments***
  Change
        in
        fair value of derivative financial instruments **** increased
        from $0 in 2005 to $2,660,000 in 2006. The Company accounts 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. The Company had no derivative instrument liabilities in
        2005. 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, the Company's financial statements may fluctuate from
        quarter-to-quarter based on factors, such as the price of the Company's stock
        at
        the balance sheet date, the amount of shares converted by note holders and/or
        exercised by warrant holders. Consequently, our financial position and results
        of operations may vary from quarter-to-quarter based on conditions other
        than
        our operating revenues and expenses.
 
 ***Other
        income (loss)***
 
 On
        July
        28, 2006 the Company entered into an Asset Purchase Agreement with Mr. Richard
        Smitten, the former Chief Executive Officer and sole director of our predecessor
        corporation, Stock Market Solutions, Inc., pursuant to which the Company
        sold
        the assets (the Assets”) of the Company’s 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 that the Company owed to Mr. Smitten
        in
        the aggregate amount of $329,272, of which $179,272 was forgiven by Mr. Smitten
        immediately prior to the merger on April 28, 2006 pursuant to that certain
        Agreement and Plan of Merger dated as of June 15, 2005 and $150,000 was forgiven
        by Mr. Smitten pursuant to the Agreement. The company realized a $150,000
        gain
        on extinguishment of debt as a result of the sale.
  5
 
 **COMPARISON
        OF THE 9 MONTHS ENDED SEPTEMBER 30, 2006 ("2006") TO THE 9 MONTHS ENDED
        SEPTEMBER 30, 2005 ("2005")**
 
 ***Revenues***
  TXP
        currently derives almost all 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.
        TXP's
        material supply chain management services are priced at the cost of the material
        plus 5% to 25%. Total revenues decreased 40% from $8,503,000 in 2005 to
        $5,101,000 in 2006 or by $3,402,000. Material supply chain management services
        increased 5% from $1,535,000 in 2005 to $1,614,000 in 2006. Prototyping and
        assembly services decreased 50% from $6,968,000 in 2005 to $3,487,000 in
        2006 or
        $3,481,000. In 2005, TXP had revenues of $5,200,000 from a single customer,
        Foxconn, a multi-billion tier 1 contract manufacturer, related to photonics
        prototyping project which did not recur in 2006. Excluding the Foxconn project,
        prototyping and assembly revenues increased $1,719,000 compared to 2005.
        In
        2006, TXP had sales of $909,000 to several new customers related to
        build-to-order tele-communications product assemblies. The remaining increase
        in
        revenues is attributed to an increasing customer base and continued demand
        from
        existing customers. TXP expanded its customer base from 67 in 2005 to 103
        in
        2006 and had current active customers for the nine months of 38 and 58 for
        2005
        and 2006, respectively. TXP's top five customers accounted for 83% of revenue
        in
        2005 and 57% of revenue in 2006.
 
 ***Cost
        of Sales and Gross Profit***
  Cost
        of
        sales consists of direct material, manufacturing overhead, labor costs,
        depreciation expense on machinery and equipment, equipment lease, and set-up
        and
        tooling charges associated with performing our services. Cost of sales decreased
        from $6,320,000 in 2005 to $3,199,000 in 2006 or $3,121,000. Direct costs
        of
        $4,133,000 related to the photonics prototyping project completed in Q3 2005
        did
        not recur in 2006. Other direct material costs and production supplies increased
        from $1,485,000 in 2005 to $1,968,000 in 2006 or $483,000. Manufacturing
        overhead and labor cost increased from $397,000 in 2005 to $858,000 or $461,000
        in 2006 due to increased headcount and higher manufacturing overhead allocations
        due to expanded operations. Contract labor directly attributable to prototyping
        and assembly increased by $110,000 compared to 2005.
 
 Gross
        profit is dependent on the scope and the nature of the customer project and
        thus
        can vary significantly. Customer projects requiring a turnkey solution which
        includes both prototyping and material supply chain management services
        typically results in a lower margin than prototyping services only. Margins
        on
        prototyping services can range from 30% to 85% while margins on material
        supply
        chain management services can range from 5% to 25%.
 
 Gross
        profit decreased from $2,183,000 in 2005 to $1,902,000 in 2006 or $281,000.
        Revenues decreased for the same period by $3,402,000. During the same period
        the
        gross margin increased from 26% in 2005 to 37% in 2006 due to a positive
        change
        in revenue mix compared to 2005 - most significantly the 2005 $5,200,000
        photonics prototyping project which did not recur in 2006 on which the company
        realized gross margins of approximately 20%.
 
 
 ***Selling,
        General and Administrative Expenses***
 
 Selling
        general & administrative expense (“SG&A”) consists of personnel costs
        including taxes and benefits, rent and utilities, contract labor, insurance,
        professional fees, marketing, telecommunication, internet costs, and other
        administrative expenses. SG&A expenses increased by $373,000 from $1,810,000
        in 2005 to $2,182,000 in 2006. In 2006, the TXP incurred approximately $52,000
        in legal, accounting and other professional fees related to the merger between
        YTXP and its wholly owned subsidiary and Texas Prototypes, Inc. Personnel
        costs
        increased as costs increased from $1,188,000 in 2005 to $1,610,000 in 2006
        or by
        $422,000. Included in this increase was approximately $70,000 of stock
        compensation expense incurred as result of employee stock and stock option
        awards in 2006. TXP created and filled several new positions including three
        Vice Presidents, Chief Technology Officer and an administrative clerical
        position subsequent to June 2005 and certain personnel have received raises
        from
        the prior year. Rent and utilities decreased $85,000 as result of increased
        allocations to manufacturing overhead as operations expanded. Sales and
        Marketing decreased $45,000 due to cost incurred in 2005 related to a trade
        show
        that the Company did not participate in 2006. Professional
        Fees increased by $49,000 as legal, accounting and transfer agent fees increased
        due to the company becoming public in April of 2006.
 
 ***Depreciation
        Expense***
 
 Depreciation
        expense, net amounts included as a component of cost of sales, increased
        from
        $41,000 in 2005 to $66,000 in 2006. The increase was in-line with capital
        expenditures and depreciable asset base.
  6
 
 ***Net
        Interest Expense***
 
 Net
        interest expense increased from $354,000 in 2005 to $714,000 in 2006 or by
        $360,000. Approximately $511,000 of the increase relates to additional
        amortization of note discounts on our secured convertible debentures issued
        to
        Cornell Capital which was partially offset by a decrease of $215,000 related
        to
        interest to finance the purchase of materials related to our photonics
        prototyping project in Q3 2005. Additionally, TXP had additional interest
        expense of $38,000 in 2006 on the $550,000 convertible debenture issued to
        Cornell in June of 2005 which was subsequently amended in June of 2006 and
        a
        $577,000 convertible note issued to Cornell in June of 2006. The remaining
        increase in interest expense relates to increases on the outstanding balances
        of
        our line credit and capital lease obligations from 2005 to 2006.
 
 ***Change
        in Fair Value of Derivative Financial Instruments***
 
 Change
        in
        fair value of derivative financial instruments **** increased
        from $0 in 2005 to $1,663,000 in 2006. The Company accounts 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. The Company had no derivative instrument liabilities
        in 2005. 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, the Company's financial statements may fluctuate from
        quarter-to-quarter based on factors, such as the price of the Company's stock
        at
        the balance sheet date, the amount of shares converted by note holders and/or
        exercised by warrant holders. Consequently, our financial position and results
        of operations may vary from quarter-to-quarter based on conditions other
        than
        our operating revenues and expenses.
 
 ***Net
        Gain on Early Extinguishment of Debt***
 
 Net
        gain on early extinguishment of debt **** increased
        from $0 in 2005 to $465,000 in 2006. In June of 2006, the company issued
        1,700,000 shares of common stock in the exchange for full settlement this
        $400,000 compensation debenture and another $240,000 convertible debenture assumed
        by TXP upon the completion of the merger in April 2006 .
        The
        combined carrying value of both debentures amounted to $685,000 which included
        the fair value of an embedded conversion option and accrued interest. The
        fair
        market value the stock was $850,000 on the date of settlement. The company
        realized a $165,000 loss on early extinguishment of debt as a result of the
        settlement.
 
 In
        addition, on June 5, 2006 the Company issued to Cornell an amended and restated
        convertible debenture that consolidated all outstanding amounts of the
        convertible debenture issued by Texas Prototypes, Inc. to Cornell on June
        15,
        2005 in the amount of $550,000, plus accrued and unpaid interest in the amount
        of $27,000 through June 5, 2006, for the principal sum of $577,000. The company
        reviewed EITF 05-07 “Accounting for Modifications to Conversion Options Embedded
        in Debt Instruments and Related Issues” and EIFT 96-19 “Debtor's Accounting for
        a Modification or Exchange of Debt Instruments” and deemed that the
        modifications and amendments were substantial and determined that debt
        extinguishment had occurred as the cash flow effect (including the changes
        in
        fair value of the embedded conversion option) on a present value basis exceeded
        10%. The company recorded a gain on extinguishment debt of $630,000 in the
        consolidated statements of operations as a result of the
        modification.
 
 ***Other
        income (loss)***
 
 On
        July
        28, 2006 the Company entered into an Asset Purchase Agreement with Mr. Richard
        Smitten, the former Chief Executive Officer and sole director of our predecessor
        corporation, Stock Market Solutions, Inc., pursuant to which the Company
        sold
        the assets (the Assets”) of the Company’s 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 that the Company owed to Mr. Smitten
        in
        the aggregate amount of $329,272, of which $179,272 was forgiven by Mr. Smitten
        immediately prior to the merger on April 28, 2006 pursuant to that certain
        Agreement and Plan of Merger dated as of June 15, 2005 and $150,000 was forgiven
        by Mr. Smitten pursuant to the Agreement. The company realized a $150,000
        gain
        on extinguishment of debt as a result of the sale.
  7
 
 ***Liquidity
        and Capital Resources***
 
 TXP's
        principal potential sources of liquidity are cash on hand, cash generated
        from
        current revenues and cash provided from financing activities. As of September
        30, 2006, TXP had cash and cash equivalents of $107,000.
 
 During
        2006, TXP used $697,000 in operating activities compared to using $846,000
        during 2005. Cash used in operating activities during 2006 reflects $2,090,000
        in net loss, $187,000 in depreciation, $557,000 in debt discount amortization,
        $465,000 in gain on extinguishment of debt, $18,000 in gain on sale of
        fixed assets, $69,000 in stock compensation, and $1,663,000 in change in
        fair
        value of derivative financial instruments. Accounts receivable, inventory,
        and
        other current assets, increased by $317,000, $183,000, $103,000, respectively
        decreasing working capital. The Company obtained net cash for working capital
        changes consisting of decreases in other assets and increases in accounts
        payable of $12,000 and $15,000, respectively, partially offset by decreases
        in
        accounts payable of $24,000.
  Cash
        used
        in operating activities during 2005 reflects $22,000 in net loss, $161,000
        of
        depreciation and amortization, $45,000 in stock compensation, and amortization
        of debt discount of $57,000. Accounts receivable and accounts payable increased
        by $1,982,000 and $697,000, respectively, decreasing working capital by
        $1,285,000. The increases in both accounts payables and accounts receivable
        were
        directly related to the $5,200,000 photonics prototyping project subcontracted
        to TXP from Foxconn, a large tier 1 contract manufacturer. Foxconn and TXP
        are
        not affiliated and this is the first project TXP has performed for Foxconn.
        The
        Company obtained net cash of $198,000 from working capital changes as inventory
        and other assets decreased by $12,000 and $99,000, respectively as well as
        increases to deferred revenue and accrued expenses of $24,000 and $63,000,
        respectively.
 
 During
        2006, TXP used $146,000 in investing activities reflecting capital expenditures
        for plant, property and equipment and software of $206,000 net of $60,000
        in
        proceeds received from the sale of fixed assets.
 
 During
        2005, TXP used $325,000 in investing activities reflecting capital expenditures
        for plant, property and equipment and software.
 
 During
        2006, financing activities provided net cash of $608,000 as the result of
        issuances of $550,000 in convertible debentures to Cornell Capital partially
        offset by fees paid of $70,000 to secure the transaction as well as proceeds
        from an unsecured note payable from the majority shareholder, CEO Michael
        Shores, for $150,000 and a draw down on our line of credit for $150,000.
        Total
        repayments on debt amounted to $163,000 and an increase in deferred offering
        costs of $9,000.
 
 During
        2005, financing activities provided net cash of $619,000 as the result of
        issuing a $550,000 convertible debenture to Cornell Capital net discounts
        of
        $65,000. The company also received proceeds from a short-term notes payable
        to
        an investor in the amount $250,000 and a draw down on our line of credit
        for
        $80,000. TXP had total repayments on its notes payables and capital lease
        obligations of $117,000 and an increase of deferred offering costs of $79,000.
  In
        August
        2004, TXP entered into a Standby Equity Distribution Agreement. Under this
        agreement, TXP may issue and sell Common Stock to Cornell Capital Partners
        ("Cornell") for a total purchase price of up to $15.0 million. Subject to
        certain conditions, TXP will be entitled to commence drawing down on the
        Standby
        Equity Distribution Agreement when the sale of Common Stock under the Standby
        Equity Distribution Agreement is registered with the SEC and the authorization
        for quotation on the National Association of Securities Dealers OTC Bulletin
        Board is obtained and TXP is within the commitment period as defined under
        the
        terms of the agreement. The commitment period shall mean the period commencing
        on the earlier to occur of the effective date  (which
        shall mean the date on which the SEC first declares effective a registration
        statement registering the resale of the common stock under the Standby
        Equity Distribution Agreement),
        or such earlier date as
        TXP and the Investor may mutually agree in writing, and expiring on the earliest
        to occur of the date on which the Investor shall have made payment of Advances
        pursuant to this agreement in the aggregate amount of Fifteen Million Dollars
        ($15,000,000), or the date occurring twenty-four (24) months after the Effective
        Date.
  8
 
 The
        purchase price for the shares will be equal to 100% of the market price,
        which
        is defined as the lowest closing bid price of the Common Stock during the
        five
        trading days following the notice date. A cash fee equal to five percent
        (5%) of
        the cash proceeds of the draw down is also payable at the time of funding.
        To
        date, TXP has not drawn down on the Standby Equity Distribution
        Agreement.
 
 We
        are
        currently unable to register the shares of common stock issuable to Cornell
        under the Standby Equity Distribution Agreement because the terms of the
        agreement are not consistent with the SEC’s guidance regarding the terms of
        equity line financings that may be registered.
 
 In
        conjunction with the Standby Equity Distribution Agreement, TXP issued a
        $400,000 compensation debenture to Cornell Capital. In June of 2006, the
        company
        issued 1,700,000 shares of common stock in the exchange for full settlement
        of
        this $400,000 compensation debenture and
        another $240,000 convertible debenture assumed by TXP upon the completion
        of the
        merger in April 2006. The combined
        carrying value of both debentures amounted to $685,000 which included the
        fair
        value of an embedded conversion option and accrued interest. The fair market
        value of the stock was $850,000 on the date of settlement. The company realized
        a $165,000 loss on early extinguishment of debt as a result of the settlement.
        At the time of issuance, the $400,000 debenture was recorded as a liability
        and
        as a deferred offering cost on the balance sheet of the company. The deferred
        offering cost will be netted ratably with the proceeds from the issuance
        and
        sale of common stock under the Standby Equity Distribution Agreement. In
        the
        event TXP does not issue and sell the entire amount of $15,000,000 of common
        stock under the stock equity distribution by the end of the two-year term
        the
        remaining deferred offering cost will be expensed.
 
 ***August
            2004 Secured Convertible Debt***
 
 In
            August
            of 2004, Texas Prototypes, Inc. entered into Securities Purchase Agreements
            with
            Cornell and Mobilepro Corp. for the sale of a secured convertible debenture
            in
            the principal amount of $1,400,000 ($700,000 to each), bearing interest
            at five
            percent (5%). The
            terms
            of this debenture require the Company to obtain prior written consent
            from the
            holder, Cornell Capital,so
            long
            as any of the principal or interest on this debenture remains unpaid
            and
            unconverted before issuing or selling any Common Stock or Preferred Stock
            without consideration or for a consideration per share less than its
            lowest bid
            price determined immediately prior to its issuance, or issuing or selling
            any
            Preferred Stock, warrant, option, right, contract, call, or other security
            or
            instrument granting the holder thereof the right to acquire Common Stock
            without
            consideration or for a consideration per share less than such Common
            Stock’s
            fair market value determined immediately prior to its issuance, or file
            any
            registration statement on Form S-8 for more than 10,000,000 shares of
            Common
            Stock. The
            debentures are secured by a second priority security interest in all
            of our
            goods, inventory, contractual rights and general intangibles, receivables,
            documents, instruments, and chattel paper. These
            convertible debentures have a term of three years and are convertible
            at the
            holder's option. If the convertible debentures have not been converted
            on the
            third anniversary they will be automatically converted into common stock
            of TXP.
            At any time TXP may elect to redeem all or any portion of the convertible
            debentures at the price of one hundred twenty percent (120%) of the amount
            redeemed plus accrued interest. If TXP uses this option, it must then
            issue the
            holder of the debenture 50,000 warrants for every $100,000 redeemed.
            The
            warrants will have a two-year term and will be excisable at the fixed
            price of
            $.157 per share. The convertible debentures were assumed by TXP Corporation
            upon
            completion of the merger in April of 2006.
  There
            are
            two ways this convertible debenture can be converted to common stock
            of TXP.
            First, the debentures are convertible at a fixed price of $0.157 per
            shares
            (“Fixed Price”). Second, the debentures are convertible at an amount equal to
            eighty percent (80%) of the volume weighted average price of TXP' common
            stock,
            as quoted by Bloomberg, LP, for the five days immediately preceding the
            conversion date (“Variable Price”). The conversion price elected will be the
            lower of fixed or variable price at the date of election to convert by
            the
            holder. The conversion term expires August 25, 2007.
 
 In
            Q2 of
            2006, upon completion of the merger and assumption of all liabilities
            of Texas
            Prototypes, Inc., including the secured debentures, the contingencies
            related to
            the future event of TXP common stock being quoted and traded on either
            the
            over-the-counter bulletin board, NASDAQ small cap market or American
            Stock
            Exchange was resolved. Certain conversion options were then deemed to
            be
            financial derivatives under SFAS 133 and EITF 00-19. At the time of the
            merger,
            the derivatives were bifurcated and recorded at fair value and reflected
            on the
            Company's balance sheet. The derivatives are adjusted to fair value at
            each
            reporting period.
 9
 
 In
          June
          of 2006, the Company issued 923,657 shares of common stock to Cornell Capital
          in
          conversion of $145,000 of this convertible debenture. The conversion price
          was
          equal to $0.157 per share in accordance with the debenture
          agreement.
 
 This
          convertible debentures were originally discounted by $200,000 which were
          fees
          paid to the lenders and further discounted by $1,200,000 upon bifurcation
          and
          recording at fair value certain financial derivative instruments embedded
          within
          the note in Q2 2006. The discount is being amortized over the life of the
          notes
          of three years. At September 30, the convertible debenture had balance
          of
          $460,000 net $795,000 of unamortized discount. As of September 30, 2006,
          approximately $144,000 of interest has been accrued. The
          effective interest rate on the debenture is 10.6% compared to the stated
          interest of 5% which takes into account the debt discount and issue costs
          related to the debenture.
 ***June
            5, 2006 Secured Convertible Debentures and
            Warrants***
 
 On
            June
            5, 2006, the Company consummated a securities purchase agreement dated
            June 5,
            2006 with Cornell providing for the sale by the company to Cornell of
            its 10%
            secured convertible debentures in the aggregate principal amount of $1,127,000.
            The
            terms of this debenture require the Company to obtain prior written consent
            from
            the holder, Cornell Capital,so
            long
            as any of the principal or interest on this debenture remains unpaid
            and
            unconverted before issuing or selling any Common Stock or Preferred Stock
            without consideration or for a consideration per share less than its
            lowest bid
            price determined immediately prior to its issuance, or issuing or selling
            any
            Preferred Stock, warrant, option, right, contract, call, or other security
            or
            instrument granting the holder thereof the right to acquire Common Stock
            without
            consideration or for a consideration per share less than such Common
            Stock’s
            fair market value determined immediately prior to its issuance, or file
            any
            registration statement on Form S-8 for more than 10,000,000 shares of
            Common
            Stock. Additionally, the terms of this debenture provide holder, Cornell
            Capital, with a right of first refusal on capital raises by the Company.
            Specifically,for
            a
            period if eighteen (18) months after the Closing Date, if theCompany
            intends to raise additional capital by the issuance or sale of capital
            stock of
            the Company, including without limitation shares of any class of Common
            Stock,
            any class of preferred stock, options, warrants or any other securities
            convertible or exercisable into shares of Common Stock (whether the offering
            is
            conducted by the Company, underwriter, placement agent or any third party)
            the
            Company shall be obligated to offer to the Holder such issuance or sale
            of
            capital stock, by providing in writing the principal amount of capital
            it
            intends to raise and outline of the material terms of such capital raise,
            prior
            to the offering such issuance or sale of capital stock  to any third
            parties including, but not limited to, current or former officers or
            directors,
            current or former shareholders and/or investors of the obligor, underwriters,
            brokers, agents or other third parties.  The Holder shall have ten (10)
            business days from receipt of such notice of the sale or issuance of
            capital
            stock to accept or reject all or a portion of such capital raising offer. The
            debenture is secured by a second priority security interest in all of
            our goods,
            inventory, contractual rights and general intangibles, receivables, documents,
            instruments, and chattel paper The
            Company also issued to Cornell warrants to purchase 1,850,000 and 1,850,000
            shares of common stock at a price equal to $0.60 and $0.75 per share,
            respectively. The warrants expire five years from the date of issuance.
Cornell
            may exercise the warrants on a cashless basis if the shares of common
            stock
            underlying the warrants are not then registered pursuant to an effective
            registration statement. In the event Cornell exercises the warrants on a
            cashless basis, then we will not receive any proceeds. In addition, the
            exercise
            price of the warrants will be adjusted in the event we issue common stock
            at a
            price below market, with the exception of any securities issued as of
            the date
            of the warrants or issued in connection with the secured convertible
            notes
            issued pursuant to the Securities Purchase Agreement. There can be no
            assurance
            to how many, if any, of these warrants will be exercised.
  The
            exercise price of the warrants may be adjusted in certain circumstances
            such as
            if we pay a stock dividend, subdivide or combine outstanding shares of
            common
            stock into a greater or lesser number of shares, or take such other actions
            as
            would otherwise result in dilution of the selling stockholders'
            position.
  The
            first
            debenture amounting to $550,000 matures on the third anniversary of the
            date of
            issuance and the company is not required to make any payments until the
            maturity
            Date. The debentures are convertible at any time into shares of common
            stock of
            the company at a conversion price per share equal to the lesser of (i)
            $0.50, or
            (ii) 95% of the lowest daily volume weighted average price of the Common
            Stock,
            as quoted by Bloomberg, LP, for the 30 trading days immediately preceding
            the
            date of conversion (“Variable Market Price”). Unless waived by the company, the
            holders may not, together with their affiliates, convert more than an
            aggregate
            of $150,000 in any 30-day period of principal amount of the debentures
            at the
            Variable Market Price. The Company has the right to redeem a portion
            or all
            amounts outstanding under the Debentures prior to the Maturity Date at
            a 20%
            redemption premium provided that the closing bid price of the Common
            Stock is
            less than $0.50. The
            convertible debentures are secured by substantially all the company's
            assets. At
            September 30, the convertible debenture had balance of $61,000 net $489,000
            of
            unamortized discount. As of September 30, 2006, approximately $18,000
            of
            interest has been accrued. The effective interest rate on the debenture
            is 13.2% compared to the stated interest of 10% which takes into account
            the debt discount and issue costs related to the debenture.
 
 In
            addition, on June 5, 2006 the Company issued to Cornell an amended and
            restated
            convertible debenture, on the same terms and conditions as set forth
            above which
            consolidates all outstanding amounts of the convertible debenture issued
            by
            Texas Prototypes, Inc. to Cornell on June 15, 2005 in the amount of $550,000,
            plus accrued and unpaid interest in the amount of $27,000 through June
            5, 2006,
            for the principal sum of $577,000. The company reviewed EITF 05-07 “Accounting
            for Modifications to Conversion Options Embedded in Debt Instruments
            and Related
            Issues” and EIFT 96-19 “Debtor's Accounting for a Modification or Exchange of
            Debt Instruments” and deemed that the modifications and amendments were
            substantial and determined that debt extinguishment had occurred as the
            cash
            flow effect (including the changes in fair value of the embedded conversion
            option) on a present value basis exceeded 10%. The company recorded a gain
            on extinguishment debt of $630,000 in the consolidated statements of
            operations
            as a result of the modification. At September 30, the amended and restated
            convertible debenture had balance of $16,000 net $513,000 of unamortized
            discount. As of September 30, 2006, approximately $18,000 of interest
            has been
            accrued. The effective interest rate on the debenture is 13.2% compared to
            the stated interest of 10% which takes into account the debt discount
            and issue
            costs related to the debenture.
  ***July
              2006 Warrants***
 
 On
              July
              28, 2006, TXP Corporation entered into an Agreement (the "Agreement")
              with an
              accredited investor (the "Investor") pursuant to which the Company
              issued to the
              Investor five-year warrants to purchase an aggregate of 320,000 shares
              of common
              stock (the "Warrants") as consideration for the Investor agreeing to
              pledge an
              aggregate of $2,000,000 in free-trading shares of common stock of Adobe
              Systems
              Incorporated (NASDAQ:ADBE), Fossil Incorporated (NASDAQ:FOSL) or such
              other
              shares of free-trading common stock having a value of $2,000,000 in
              the
              aggregate beneficially owned by the Investor as may be agreed upon
              between the
              parties (the “Collateral”). The Collateral is to be pledged on behalf of the
              Company in favor of First Bank of Canyon Creek, or such other lending
              or
              financing institution as may be agreed upon between the parties (a
“Lender”), as
              Collateral for a loan to be obtained by the Company from a Lender in
              an amount
              up to $2,000,000 with a term of up to 2 years (the “Term”), which will be
              further guaranteed personally and through the pledge of common stock
              beneficially owned by the Company's Chief Executive Officer. The warrants
              are
              exercisable into shares of the Company's common stock at a price equal
              to $0.50
              per share. The investor may exercise the warrants on a cashless basis
              if at his
              option. In the event the investor exercises the warrants on a cashless
              basis, then we will not receive any proceeds. The exercise price of
              the warrants
              may be adjusted in certain circumstances such as if we pay a stock
              dividend,
              subdivide or combine outstanding shares of common stock into a greater
              or lesser
              number of shares, or take such other actions as would otherwise result
              in
              dilution of the selling stockholders' position. In addition, the company
              shall
              prepare and file with the SEC a separate Registration Statement on
              Form SB-2
              covering the resale of all of the Warrant Shares with no later than
              forty-five
              (45) days from closing. The Company shall use its best efforts to have
              the
              Registration Statement declared effective by the SEC as soon as practicable,
              but
              in no event later than one hundred twenty (120) days after the initial
              filing.
              There are no liquidating damages clauses related to the warrant or
              agreement
              with the investor. As additional consideration of the Investor's agreement
              to
              pledge the Collateral to a Lender, the Company agreed to pay to the
              Investor a
              one-time commitment fee, during the Term, of $40,000 (the “Commitment Fee”) no
              later than 90 days after the Collateral is deposited into the account
              of a
              Lender; provided, however, that the Company shall pay an additional
              Commitment
              Fee within 90 days after the renewal of the Loan by a Lender. TXP consummated
              the loan facility with the First Bank of Canyon Creek in early Q3
              2006.
 10
  Th e
        company
        accounted for the embedded conversion features within the debentures and
        freestanding warrants discussed above 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.”
 
 ***Registration
        Rights Agreement***
 
 In
        connection with the all of the above secured convertible debenture and warrants,
        the Company entered into registration rights agreements providing for the
        filing
        of a registration statement with the Securities and Exchange Commission
        registering the Common Stock issuable upon conversion of the Debentures and
        exercise of the Warrants. The Company is obligated to file the Registration
        Statement no later than 45 days from the date of closing and to use its best
        efforts to cause the Registration Statement to be declared effective no later
        than 120 days after filing and to insure that the registration statement
        remains
        in effect until all of the shares of common stock issuable upon conversion
        of
        the Debentures and exercise of the Warrants have been sold. In the event
        of a
        default of its obligations under the Registration Rights Agreements, including
        its agreement to file the Registration Statement with the Securities and
        Exchange Commission no later than 45 days from the date of closing, or if
        the
        Registration Statement is not declared effective within 120 days of filing,
        it
        is required that we pay to Cornell, as liquidated damages, for each month
        that
        the registration statement has not been filed or declared effective, as the
        case
        may be, either a cash amount or shares of our common stock equal to 2% of
        the
        liquidated value of the Debentures. The
        Company and Cornell Capital amended the registration rights agreement to
        extend the date by which we have to file the Registration Statement to December
        15, 2006, and to extend the date by which we have to cause the Securities
        and
        Exchange Commission to declare the Registration Statement effective to March
        14,
        2007.
 
 On
        April
        1, 2006 TXP renewed its revolving line of credit for $500,000. The line of
        credit has a one-year term with a variable interest rate of prime plus 2%.
        The
        line of credit is secured by all assets of the company. The majority
        shareholder, Michael Shores, has provided his personal guarantee on this
        loan
        (See NOTE 4). Interest payments are due monthly beginning April 1, 2006 and
        the
        principal is due when the one-year term expires. The line of credit has
        provisions that the maximum TXP may have outstanding is $500,000 or 70% of
        the
        borrowing base whichever is less. The borrowing base is defined as the value
        of
        accounts receivable less than 90 days past their invoice date. TXP was in
        compliance with these provisions as of September 30, 2006 and December 31,
        2005.
        The revolving line credit also has financial and non-financial covenants. A
        summary
        of the significant covenants are as follows:
 ·
                Maintain
                    a Debt-to-Net Worth Ratio of not greater than 2:1. This ratio
                    is
                    calculated by dividing Total Liabilities by Net Worth (total
                    stockholders’
                    equity) Net worth is to include the subordinated debt in the
                    form of debt
                    owed Cornell Capital and likewise is to be excluded from total
                    liabilities.
 
 ·
                Maintain
                    a Current Ratio of not less than 1:1:1. This ratio is to be calculated
                    by
                    dividing Total Current Assets by Total Current
                    Liabilities.
 
 ·
                Maintain
                    a Debt Coverage Ratio of not less than 1.25:1. This ratio is
                    to be
                    calculated by dividing Earnings before Interest, Depreciation,
                    and Taxes
                    by all principal and interest payments for the
                    period.
  At
          September 30, 2006, the Company was in default due to failure to maintain
          a Debt
          Coverage ratio as provided for in the loan agreement. However, the lending
          institution and TXP entered into forbearance agreement on August 3, 2006
          which
          waived non-compliance of this covenant so long as the company maintained
          the
          Debt-to-net-worth ratio and Current Ratio as provided for in the loan agreement.
          As of September 30, 2006, the Debt-to-net-worth and Current Ratio were in
          compliance with the loan agreement. The balance outstanding on the note
          at
          September 30, 2006 and December 31, 2005 was $400,000 and $250,000
          respectively.
 11
 
 On
        July
        28, 2006, TXP Corporation entered into an Agreement (the "Agreement") with
        an
        accredited investor (the "Investor") pursuant to which the Company issued
        to the
        Investor five-year warrants to purchase an aggregate of 320,000 shares of
        common
        stock (the "Warrants") as consideration for the Investor agreeing to pledge
        an
        aggregate of $2,000,000 in free-trading shares of common stock of Adobe Systems
        Incorporated (NASDAQ:ADBE), Fossil Incorporated (NASDAQ:FOSL) or such other
        shares of free-trading common stock having a value of $2,000,000 in the
        aggregate beneficially owned by the Investor as may be agreed upon between
        the
        parties (the “Collateral”). The Collateral is to be pledged on behalf of the
        Company in favor of First Bank of Canyon Creek, or such other lending or
        financing institution as may be agreed upon between the parties (a “Lender”), as
        Collateral for a loan to be obtained by the Company from a Lender in an amount
        up to $2,000,000 with a term of up to 2 years (the “Term”), which will be
        further guaranteed personally and through the pledge of common stock
        beneficially owned by the Company's Chief Executive Officer. The warrants
        are
        exercisable into shares of the Company's common stock at a price equal to
        $0.50
        per share. As additional consideration of the Investor's agreement to pledge
        the
        Collateral to a Lender, the Company agreed to pay to the Investor a one-time
        commitment fee, during the Term, of $40,000 (the “Commitment Fee”) no later than
        90 days after the Collateral is deposited into the account of a Lender;
        provided, however, that the Company shall pay an additional Commitment Fee
        within 90 days after the renewal of the Loan by a Lender. TXP consummated
        the
        loan facility with the First Bank of Canyon Creek in early Q3 2006.
 
 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. The loan pays interest at
        the
        prime rate, and all principal, and accrued and unpaid interest, is due on
        August
        3, 2008. The loan is secured by a pledge of an aggregate of $1,507,000 in
        free-trading shares of Fossil Incorporated by the investor on behalf of the
        Company. In addition, the loan is further guaranteed personally and through
        the
        pledge of an aggregate of 4,520,000 shares of common stock beneficially owned
        by
        Michael Shores, the Company’s Chief Executive Officer. As
        of September 30, 2006, the Company had not drawn down on the line of
        credit.
 
 On
        October 12, 2006, the Company entered into an Agreement (the "Agreement")
        with
        an accredited investor (the "Investor") pursuant to which the Company issued
        to
        the Investor five-year warrants to purchase an aggregate of 640,000 shares
        of
        common stock (the "Warrants") as consideration for the Investor agreeing
        to
        pledge an aggregate of $2,000,000 in free-trading shares of common stock
        of
        Adobe Systems Incorporated (NASDAQ:ADBE), Fossil Incorporated (NASDAQ:FOSL)
        or
        such other shares of free-trading common stock having a value of $2,000,000
        in
        the aggregate beneficially owned by the Investor as may be agreed upon between
        the parties (the “Collateral”). The Collateral is to be pledged on behalf of the
        Company in favor of First Bank of Canyon Creek, or such other lending or
        financing institution as may be agreed upon between the parties (a “Lender”), as
        Collateral for a loan to be obtained 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 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. As additional consideration of the Investor's agreement to pledge
        the
        Collateral to a Lender, the Company agreed to pay to the Investor a one-time
        commitment fee during the Term of 125,000 shares of the Company’s common stock
        (the “Commitment Fee”) no later than 90 days after the Collateral is deposited
        into the account of a Lender; provided, however, that the Company shall pay
        an
        additional Commitment Fee within 90 days after the renewal of the Loan by
        a
        Lender. TXP expects to amend its current loan facility and increase its
        line of credit from $1,000,000 to approximately $3,000,000 with the
        First Bank of Canyon Creek in Q4 2006.
  12
  In
          Q4
          2006, the Company signed a Letter of Intent with Siemens AG to acquire
          the
          assets and intellectual property for its Optical Network Terminal (ONT)
          technology, supporting both Broadband Passive Optical Network (BPON) and
          Gigabit
          Passive Optical Network (GPON) standards. The Letter of Intent is non-binding
          and is subject to the completion of customary due diligence and the execution
          of
          definitive agreements. The transaction is expected to close in the fourth
          quarter of 2006. Upon completion of the proposed acquisition, TXP will
          be
          responsible for overseeing all manufacturing of the technology and will
          have
          rights to market the ONT technology. Siemens’ ONT portfolio contains BPON ONTs
          for Single Family Units (SFUs), Multi Dwelling Units (MDU4), Small Business
          Units (SBU); and GPON ONTs for SFUs, Ethernet-only SFUs (ESFUs) and SBUs.
          Under
          the terms of the LOI, Siemens will retain an undisclosed licensing fee
          and
          rights to market the technology internationally. The Company does not expect
          to
          pay cash, issue stock or incur financial liabilities to acquire the ONT
          assets
          and intellectual property.
  Separately,
          the Company hired Siemens’ former ONT development team effective at the
          beginning of Q4 2006. As a result, TXP has added 35 full-time employees
          and
          expects to amend its lease in November of 2006 and expand the operating
          facility
          by 16,000 square feet. Incremental personnel cost and lease payments are
          expected to average approximately $290,000 and $7,000, respectively, per
          month.
          The Company is operating to drive revenues and margins to offset these
          expenses
          but until the transaction with Siemens to acquire the assets and ONT
          intellectual property is consummated no revenue will be generated. The
          transaction is fully expected to close prior to December 31, 2006.
 Except
        for the financing agreements with Cornell Capital discussed above, existing
        financing arrangements, borrowing capacity created by the investor agreeing
        to
        pledge collateral, and revenue generated through its operations, TXP has
        no
        other significant sources of working capital or cash commitments. The
        Company is currently in negotiations with Cornell Capital to amend the
        registration rights agreement to extend the date by which we have to file
        the
        Registration Statement to December 15, 2006, and to extend the date by which
        we
        have to cause the Securities and Exchange Commission to declare the Registration
        Statement effective to March 14, 2007. Accordingly ,
        TXP
        cannot currently rely upon access to the $15,000,000 standby equity distribution
        agreement. See "Risk Factors." Further no assurance can be given that TXP will
        raise sufficient funds from such financing arrangements, or that TXP will
        ever
        produce sufficient revenues to expand its operations to a desirable level,
        or
        that a market will develop for its common stock upon which a significant
        amount
        of TXP's financing is dependent.
 
 Management
        believes that the financing arrangements in place or those that will be in
        place
        are sufficient to satisfy TXP's cash requirements for the next twelve months.
        Management is not depending upon the Standby Equity Distribution Agreement
        to
        meet its cash requirements for the next twelve months. If TXP is unable to
        recognize sufficient proceeds from these arrangements, management believes
        that
        TXP can limit its operations, defer payments to management and maintain its
        business at nominal levels until it can identify alternative sources of
        capital.
 
 **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.


13




**Risk
      Factors**





In evaluating our
      business, prospective investors and shareholders should
      carefully consider the risks factors, any of which could have a material adverse
      impact on our business, operating results and financial condition and
      result in a complete loss of your investment.





***TXP
      IS SUBJECT TO VARIOUS RISKS THAT MAY MATERIALLY HARM ITS BUSINESS, FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS. IF ANY OF THESE RISKS OR UNCERTAINTIES
      ACTUALLY OCCURS, ITS BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS COULD
      BE
      MATERIALLY HARMED.***





***TXP
      IS AN EARLY-STAGE COMPANY WITH A SHORT OPERATING HISTORY, WHICH MAKES IT
      DIFFICULT TO EVALUATE ITS CURRENT BUSINESS AND FUTURE
      PROSPECTS.***





TXP
      has
      only a limited operating history upon which to base an evaluation of its current
      business and future prospects. It was founded in March 2002 and began selling
      its services that same month. TXP's limited operating history makes an
      evaluation of TXP's business and prospects very difficult. These risks and
      difficulties include, but are not limited to, the following:




·
            TXP's
                new business and technology models;




·
            a
                limited number of service offerings and risks associated with developing
                new service offerings;




·
            the
                difficulties TXP faces in managing rapid growth in personnel and
                operations;




·
            the
                negative impact on TXP's brand, reputation or trustworthiness caused
                by
                any significant unavailability of its
                service;




·
            the
                failure to perform TXP's service at its customers expectations including
                quick turnaround and product
                quality;




·
            the
                timing and success of new service introductions and new technologies
                by
                TXP's competitors; and




·
            TXP's
                ability to build brand awareness in a highly fragmented
                market





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





***BECAUSE
      A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR A SUBSTANTIAL PORTION OF TXP'S NET
      SALES, ITS NET SALES COULD DECLINE SIGNIFICANTLY IF IT LOSES A MAJOR CUSTOMER
      OR
      IF A MAJOR CUSTOMER ORDERS FEWER OF TXP'S SERVICES OR CANCELS OR DELAYS
      ORDERS.***





Historically,
      TXP has derived a significant portion of its net sales from a limited number
      of
      customers. Its top five customers, which may vary from year to year, represented
      80% and 73% of TXP's net sales in fiscal 2004 and 2005, respectively and 57%
      for
      the nine months ending September 30, 2006. It expects to continue to depend
      upon
      a small number of customers for a significant portion of its net sales for
      the
      foreseeable future. The loss of, or decline in, orders from one or more major
      customers could reduce its net sales.




***BECAUSE
      TXP GENERALLY DOES NOT HAVE LONG-TERM CONTRACTS WITH ITS CUSTOMERS, IT IS
      SUBJECT TO UNCERTAINTIES AND VARIABILITY IN DEMAND BY TXP'S CUSTOMERS, WHICH
      COULD DECREASE NET SALES AND NEGATIVELY AFFECT ITS OPERATING
      RESULTS.***





As
      is
      common in TXP's industry, it generally does not have long-term contracts with
      its customers, and, consequently, TXP's net sales are subject to short-term
      variability in demand by its customers. Customers have no obligation to order
      from TXP 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 its 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.




14





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





***BECAUSE
      TXP HAS ONLY ONE FACILITY, IT COULD BE HARMED BY ADVERSE WEATHER OR OPERATING
      CONDITIONS.***





TXP's
      only facility is located in Richardson, Texas. Its 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 it from supplying
      products to its customers, and could harm its business, results of operations
      and financial condition.





***PRODUCTS
      TXP ASSEMBLES MAY CONTAIN DEFECTS, WHICH COULD RESULT IN REDUCED DEMAND FOR
      ITS
      SERVICES AND LIABILITY CLAIMS AGAINST IT.***





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





***TXP
      IS EXPOSED TO THE CREDIT RISK OF SOME OF ITS CUSTOMERS AND AS A RESULT OF A
      CONCENTRATION OF ITS CUSTOMER BASE.***





Most
      of
      TXP's sales are on an "open credit" basis, with standard industry payment terms.
      It monitors individual customer payment capability in granting open credit
      arrangements, seeks to limit open credit to amounts management believes the
      customers can pay, and maintains reserves it believes are adequate to cover
      exposure for doubtful accounts. During periods of economic downturn in the
      global economy and the electronics industry, TXP's exposure to credit risks
      from
      its customers increases. Although it has programs in place to monitor and
      mitigate the associated risk, those programs may not be effective in reducing
      TXP's credit risks.





Five
      companies represented approximately 52% of TXP's net trade accounts receivable
      at September 30, 2006, with individual percentages for those companies ranging
      from 6% to 18%. Its OEM customers direct their sales to a relatively limited
      number of EMS providers. TXP's management expects to continue to be subject
      to
      the credit risk of a limited number of customers. This concentration of
      customers exposes TXP to increased credit risks. If one or more of TXP's
      significant customers were to become insolvent or were otherwise unable to
      pay
      it, its results of operations would be harmed.





***TXP
      DEPENDS ON INDUSTRIES THAT CONTINUALLY PRODUCE TECHNOLOGICALLY ADVANCED PRODUCTS
      WITH SHORT LIFE CYCLES.***




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




·
            slower
                changes in technology, which result in longer product life
                cycles;





·
            lack
                of competitive pressure on its customers to develop new
                products;




·
            the
                inability of its 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 its customers or market periods
                characterized by a lack of disruptions in the enabling
                technology.





***IF
      TXP CANNOT DELIVER THE CUSTOMIZED COMPLEX PRODUCTS IN THE TIME DEMANDED BY
      ITS
      CUSTOMERS, IT WILL BE UNABLE TO ATTRACT NEW
      CUSTOMERS.***





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




***IN
      THE PAST, TXP'S 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, TXP must provide increasingly
      rapid product turnaround for its customers. It generally does not obtain firm,
      long-term purchase commitments from its customers, and TXP often experiences
      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 TXP's customers delaying prototyping of products that
      it
      is to assemble in a period, causing a delay in repayment of its expenditures
      for
      inventory in preparation for customer orders and lower asset utilization,
      resulting in lower gross margins.


15




In
      addition, 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 TXP's
      customers' commitments and rapid changes in demand for their products reduces
      TXP's ability to estimate accurately future customer requirements. This makes
      it
      difficult to schedule prototyping production and maximize utilization of its
      operating capacity. It may be forced to increase staffing, increase capacity
      and
      incur other expenses to meet the anticipated demand of TXP's customers, which
      may cause reductions in its 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 its customers' products. On occasion,
      customers may require increases in production development services, which strain
      TXP's resources and reduce its margins. Although it has increased its capacity,
      and may plan further increases, TXP may not have significant capacity at any
      given time to meet its customers' demands. In addition, because many of TXP's
      cost and operating expenses are relatively fixed, a reduction in customer demand
      harms its gross profit and operating income.





***TXP'S
      OPERATING RESULTS MAY VARY SIGNIFICANTLY FROM PERIOD TO
      PERIOD.***





TXP
      experiences significant fluctuations in its results of operations. Some of
      the
      principal factors that contribute to these fluctuations are:




·
            changes
                in demand for TXP's services;





·
            TXP's
                effectiveness in managing manufacturing processes and costs in order
                to
                decrease manufacturing expenses;




·
            changes
                in TXP's 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 TXP's margins
                and
                its ability to meet delivery
                schedules;




·
            the
                degree to which TXP is able to utilize its available manufacturing
                capacity;




·
            TXP's
                ability to manage the timing of its 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 TXP's production volumes, such
                as
                labor conditions, political instability and local holidays;
                and




·
            changes
                in demand in TXP's customers' end
                markets.




***INTELLECTUAL
      PROPERTY INFRINGEMENT CLAIMS AGAINST TXP'S CUSTOMERS COULD HARM ITS
      BUSINESS.***





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





***TXP
      DEPENDS ON THE CONTINUING TREND OF OUTSOURCING BY
      OEMS.***





Future
      growth in TXP's revenue depends on new outsourcing opportunities in which it
      assumes 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, its future growth would be limited.





***TXP'S
      INDUSTRY IS EXTREMELY COMPETITIVE.***





The
      prototyping and quick turn sector of the electronics manufacturing services
      industry is extremely competitive and highly fragmented. TXP principally
      competes 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. Management believes that
      competition in the market segment it serves 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, it
      competes primarily on the basis of quick turnaround, product quality and
      customer service.




***TXP'S
      CUSTOMERS MAY BE ADVERSELY AFFECTED BY RAPID TECHNOLOGICAL CHANGE, WHICH MAY
      DECREASE ITS REVENUES.***





TXP's
      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. TXP's success will depend largely on the success
      achieved by its customers in continually developing and marketing new products.
      If the technologies or product development activity supported by TXP's customers
      matures, its business could be adversely affected. TXP's Limited Operating
      History May Impede Acceptance Of Its Service By Medium-Sized And Large Customers
      And Reduce Its Revenues.




16





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





***AS
      MORE OF TXP'S SALES EFFORTS ARE TARGETED AT LARGER CUSTOMERS, ITS SALES CYCLE
      MAY BECOME MORE TIME-CONSUMING AND EXPENSIVE, POTENTIALLY DIVERTING RESOURCES
      AND REDUCING ITS REVENUES.***





As
      TXP
      targets more of its sales efforts at larger customers, it will face greater
      costs, longer sales cycles and less predictability in completing some of its
      sales. In this market segment, the customer's decision to use TXP's service
      may
      be an enterprise-wide decision and, if so, these types of sales would require
      TXP to provide greater levels of education to prospective customers regarding
      the use and benefits of its service. In addition, larger customers may demand
      more customization, services and features. As a result of these factors, these
      sales opportunities may require it 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
      TXP FAILS TO DEVELOP ITS BRAND COST-EFFECTIVELY, ITS REVENUES MAY
      DECLINE.***





TXP's
      management believes that developing and maintaining awareness of TXP's brand
      in
      a cost-effective manner is critical to achieving widespread acceptance of its
      existing and future services and is an important element in attracting new
      customers. Furthermore, management believes that the importance of brand
      recognition will increase as competition in TXP's market develops. Successful
      promotion of its brand will depend largely on the effectiveness of TXP's
      marketing efforts and on its ability to provide reliable and useful services
      at
      competitive prices. In the past, its efforts to build TXP's 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 it
      incurred in building its brand. If TXP fails to successfully promote and
      maintain its brand, or incurs substantial expenses in an unsuccessful attempt
      to
      promote and maintain its brand, TXP may fail to attract enough new customers
      or
      retain its existing customers to the extent necessary to realize a sufficient
      return on its brand-building efforts, and TXP's business could
      suffer.





***TXP
      IS SUBJECT TO ENVIRONMENTAL COMPLIANCE RISKS.***





TXP
      is
      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 its manufacturing process.
      Further, environmental matters may arise in the future at sites where no problem
      is currently known or at sites that it may acquire in the future. Currently
      unexpected costs that it may incur with respect to environmental matters may
      result in loss contingencies, the quantification of which cannot be determined
      at this time.





***THERE
      ARE A LARGE NUMBER OF SHARES UNDERLYING OUR CONVERTIBLE NOTES AND WARRANTS
      AND
      THE SALE OF THESE SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON
      STOCK.***




As
      of
      September 30, 2006, we had 97,068,282 shares of common stock issued and
      outstanding. In connection with the financing arrangements that we entered
      into
      in 2005 and 2006, we also have outstanding secured convertible debentures or
      an
      obligation to issue callable secured convertible notes that may be converted
      into an estimated 11,948,000 shares of common stock at current market prices,
      and outstanding warrants or an obligation to issue warrants to purchase
      4,020,000 shares of common stock.





The
      debentures issued in 2005 and 2006 are at a conversion price per share equal
      to
      the lesser of (i) $0.50, or (ii) 95% of the lowest daily volume weighted average
      price of the common stock, as quoted by Bloomberg, LP, for the 30 trading days
      immediately preceding the date of conversion. Unless waived by us, Cornell
      may
      not, together with its affiliates, convert more than an aggregate of $150,000
      in
      any 30-day period of principal amount of the debentures at the conversion price
      with respect to the debentures issued in June 2006. Nevertheless, the number
      of
      shares of common stock issuable upon conversion of the outstanding secured
      convertible debentures issued may increase if the market price of our stock
      declines. Upon effectiveness of a 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.





The
      variable price feature of our convertible debentures issued could require us
      to
      issue a substantially greater number of shares, which will cause dilution to
      our
      existing stockholders. The number of shares we will be required to issue upon
      conversion of the debentures will increase if the market price of our stock
      decreases. This will cause dilution to our existing
      stockholders.


17





***THE
      LOWER OUR STOCK PRICE, THE GREATER NUMBER OF SHARES ARE ISSUABLE UNDER THE
      CONVERTIBLE DEBENTURES.***





The
      number of shares issuable upon conversion of the debentures is determined by
      the
      market price of our common stock prevailing at the time of each conversion.
      The
      debentures issued limit the principal amount to be converted at the floating
      conversion price during any 30-day period to $150,000 with respect to the
      debentures issued in June 2006. Nevertheless, the lower the market price, the
      greater the number of shares issuable under the debentures. Upon issuance of
      the
      shares, to the extent that holders of those shares will attempt to sell the
      shares into the market, these sales may further reduce the market price of
      our
      common stock. This in turn will increase the number of shares issuable under
      the
      debentures. This may lead to an escalation of lower market prices and an
      increasing number of shares to be issued. A larger number of shares issuable
      at
      a discount to a continuously declining stock price will expose our shareholders
      to greater dilution and a reduction of the value of their
      investment.





***A
      LOWER STOCK PRICE WILL PROVIDE AN INCENTIVE TO CORNELL TO SELL ADDITIONAL SHARES
      INTO THE MARKET.*** ****





The
      number of shares that Cornell will receive under the convertible debentures
      is
      determined by the market price of our common stock prevailing at the time of
      each conversion. The lower the market price, the greater the number of shares
      issuable under the debentures. As a result, Cornell will have an incentive
      to
      sell as large a number of shares as possible to obtain a lower conversion price.
      This will lead to greater dilution of exiting shareholders and a reduction
      of
      the value of their investment





***THE
      ISSUANCE OF OUR STOCK UPON THE CONVERSION OF THE DEBENTURES COULD ENCOURAGE
      SHORT SALES BY THIRD PARTIES, WHICH COULD CONTRIBUTE TO THE FUTURE DECLINE
      OF
      OUR STOCK PRICE AND MATERIALLY DILUTE THE EXISTING STOCKHOLDER'S EQUITY AND
      VOTING RIGHTS.*** .





The
      debentures 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. If this occurs, the number
      of shares of our common stock that is issuable upon conversion of the debentures
      will increase, which will materially dilute existing stockholders' equity and
      voting rights.





***IF
      WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING CONVERTIBLE DEBENTURES,
      WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE, OR RAISE
      ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE CONVERTIBLE DEBENTURES, IF REQUIRED,
      COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE OF
      SUBSTANTIAL ASSETS*** .




These
      debentures are due and payable, with interest, three years from their respective
      dates of issuance, unless sooner converted into shares of our common stock.
      Any
      event of default such as our failure to repay the principal or interest when
      due, our failure to issue shares of common stock upon conversion by the holder,
      or our failure to timely file a registration statement or have such registration
      statement declared effective, could require the early repayment of the
      convertible debentures. We anticipate that the full amount of the convertible
      debentures will be converted into shares of our common stock, in accordance
      with
      the terms of these debentures. If we were required to repay the convertible
      debentures, we would be required to use our limited working capital and raise
      additional funds. If we were unable to repay the debentures when required,
      the
      holders could commence legal action against us and foreclose on all of our
      assets to recover the amounts due. Any such action would require us to curtail
      or cease operations.





***IF
      AN EVENT OF DEFAULT OCCURS UNDER THE SECURITIES PURCHASE AGREEMENT, SECURED
      CONVERTIBLE DEBENTURES, WARRANTS, OR SECURITY AGREEMENT OR INTELLECTUAL PROPERTY
      SECURITY AGREEMENT, CORNELL COULD TAKE POSSESSION OF ALL OUR GOODS, INVENTORY,
      CONTRACTUAL RIGHTS AND GENERAL INTANGIBLES, RECEIVABLES, DOCUMENTS, INSTRUMENTS,
      AND CHATTEL PAPER, AND INTELLECTUAL PROPERTY.***





In
      connection with the Securities Purchase Agreements we entered into in 2005
      and
      2006, we executed a Security Agreement in favor of the investors granting them
      a
      second priority security interest in all of our goods, inventory, contractual
      rights and general intangibles, receivables, documents, instruments, and chattel
      paper. The Security Agreement states that if an event of default occurs under
      the Securities Purchase Agreements, Convertible Debentures, Warrants, or
      Security Agreement, Cornell has the right to take possession of the collateral,
      to operate our business using the collateral, and have the right to assign,
      sell, lease or otherwise dispose of and deliver all or any part of the
      collateral, at public or private sale or otherwise to satisfy our obligations
      under these agreements.


18





***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;


·
            our
                ability to execute our business plan;


·
            operating
                results below expectations;


·
            loss
                of any strategic relationship;


·
            industry
                developments;


·
            economic
                and other external factors; and


·
            period-to-period
                fluctuations in our financial
                results.





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





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





***WE
      HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY DIVIDENDS IN THE
      FUTURE. ANY RETURNS ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR COMMON
      STOCK.***





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





***OUR
      COMMON STOCK IS DEEMED TO BE “PENNY STOCK” WITH A LIMITED TRADING
      MARKET.*** ****





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




**Item
      3. Controls and Procedures**





a) ***Evaluation of Disclosure Controls and Procedures*** .
      As of
      the end of the period covered by this report, we conducted an evaluation, under
      the supervision and with the participation of our chief executive officer and
      chief financial officer of our disclosure controls and procedures (as defined
      in
      Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this
      evaluation, our chief executive officer and chief financial officer concluded
      that our disclosure controls and procedures are effective to ensure that
      information required to be disclosed by us in the reports that we file or submit
      under the Exchange Act is recorded, processed, summarized and reported, within
      the time periods specified in the Commission's rules and forms and
      is
      accumulated and communicated to the Company’s management, including its Chief
      Executive Officer and Chief Financial Officer, as appropriate, to allow timely
      decisions regarding required disclosure .





b) ***Changes in internal controls*** .
      There
      was no change in our internal controls or in other factors that could affect
      these controls during our last fiscal quarter that has materially affected,
      or
      is reasonably likely to materially affect, our internal control over financial
      reporting.




19





**PART
      II**





**Item
      1. Legal Proceedings.**




None.




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




None.





**Item
      3. Default Upon Senior Securities.**




None.




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





On
      July
      10, 2006, we amended our Articles of Incorporation to: (i) change the name
      of
      our company from YTXP Corporation to TXP Corporation, (ii) increase the number
      of authorized shares of common stock, par value $.001 per share, of the Company
      from 100,000,000 shares to 300,000,000 shares, and (iii) adopt our 2006 Stock
      Incentive Plan, each pursuant to a written consent of a majority of stockholders
      dated June 8, 2006, in lieu of a special meeting of the stockholders. Out of
      a
      total of 95,995,713 possible votes on the aforementioned matters submitted
      to
      the stockholders, the majority of stockholders voting in favor of the amendment
      by written consent of a majority of stockholders held in aggregate 81,640,295
      votes.




**ITEM
      5. Other Information.**





None.


20





**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.




21





**Signatures**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934,as amended, the Registrant has duly caused this report to be signed on
      its
      behalf by the undersigned, thereunto duly authorized, on this 14 th day of
      November 2006.




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


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




22