**U.
      S. SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




****Form 10-KSB/A****


**(Amendment
        No. 1)**





x
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                OF 1934****For
                the fiscal year ended December 31, 2007**o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                OF 1934****For
                the transition period from __________ to
                __________**





**Commission
      File Number:** **000-49743**





TXP
      CORPORATION


*(Name
      of small business issuer as specified in its charter)*





**Nevada**
            **88-0443110***(State
                or other jurisdiction of*
            *(I.R.S.
                Employer**incorporation
                or organization)*
            *Identification
                No.)*





**1299
      Commerce Drive** **,** **Richardson,
      Texas 75081**


*(Address
      of principal executive offices, including zip code)*





Issuer’s
      telephone number, including area code:


**(214)
      575-9300**





Securities
      registered pursuant to Section 12(b) of the Act:


**None**





Securities
      registered pursuant to Section 12(g) of the Act:


**Common
      Stock, par value $.001 per share.**


________________




Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act.  ̈





Check
      whether the issuer (1) filed all reports required to be filed by
      Section 13 or 15(d) of the Exchange Act of 1934 during the past
      12 months (or for such shorter period that the registrant was required to
      file such reports), and (2) has been subject to such filing requirements
      for the past 90 days.  Yes x No £





Check
      if
      disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
      is not contained in this form, and no disclosure will be contained, to the
      best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. £





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





The
      issuer’s revenues for the most recent fiscal year were $10,986,000.





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates of the issuer was approximately $11.9 million as of March 24,
      2008.





As
      of
      March 31, 2008, 116,584,428 shares of the issuer’s common stock, par value
      $.001 per share, were issued and outstanding.





Documents
      Incorporated by Reference: **None** .





Transitional
      Small Business Disclosure Format: **No** .












**EXPLANATORY
        NOTE**
 
 This
        Form
        10-KSB/A for the fiscal year ended December 31, 2007 is being filed in order
        to
        include the date on the Report of Independent Registered Public Accounting
        Firm
        which was inadvertently omitted from page 43 of the 10-KSB. In addition,
        we have
        revised the line item description for “Convertible Debentures” for the amount
        related to the unamortized discount as set forth in our Consolidated Balance
        Sheets on page F-1.
 
 For
        the
        convenience of the reader, this Form 10-KSB/A sets forth the original Form
        10-KSB in its entirety. However, this Form 10-KSB/A only makes the amendments
        set forth above. No other information in the original Form 10-KSB is amended
        hereby. In addition, pursuant to the rules of the SEC, Item 13 of Part III
        to
        the filing has been amended to contain currently dated certifications from
        our
        Principal Executive Officer and Principal Financial Officer, as required
        by
        Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications
        of
        our Principal Executive Officer and Principal Financial Officer are attached
        to
        this Form 10-KSB/A as Exhibits 31.1, 31.2, 32.1 and 32.2,
        respectively.









**TXP
      CORPORATION**





**2007
      FORM 10-KSB ANNUAL REPORT**





**TABLE
      OF CONTENTS**





**Page****PART
                I**
            
            3Item 1.
            Description
                of Business and Risk Factors
            3Item 2.
            Description
                of Property
            21Item 3.
            Legal
                Proceedings
            21Item 4.
            Submission
                of Matters to a Vote of Security Holders.
            21**PART II**
            
            21Item 5.
            Market
                for Common Equity and Related Stockholder Matters and Small Business
                Issuer Purchases of Equity Securities.
            21Item 6.
            Management’s
                Discussion and Analysis or Plan of Operation.
            23Item 7.
            Financial
                Statements. (See F-1 - F-32)
            43Item 8.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure.
            44Item 8A.
            Controls
                and Procedures.
            44Item
                8B.
            Other
                Information.
            45**PART III**
            
            46Item 9.
            Directors,
                Executive Officers, Promoters, Control Persons and Corporate Governance;
                Compliance with Section 16(a) of the Exchange
                Act
            46Item 10.
            Executive
                Compensation
            49Item 11.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            52Item 12.
            Certain
                Relationships and Related Transactions, and Director
                Independence
            54Item 13.
            Exhibits
            56Item 14.
            Principal
                Accountant Fees and Services.
            59










**PART I**





**Cautionary
      Statement Concerning Forward-Looking Statements**





This
      Form 10KSB Annual Report and the documents we incorporate by reference in
      this Annual Report contain forward-looking statements, within the meaning of
      Section 21E of the Securities Exchange Act of 1934, as amended, and
      Section 27A of the Securities Act of 1933, as amended. Any statement that
      is not a statement of historical fact may be deemed a forward-looking statement.
      For example, statements containing the words “believes,” “anticipates,”
“estimates,” “plans,” “expects,” “intends,” “may,” “projects,” “will,” “would”
and similar expressions may be forward-looking statements. We may not actually
      achieve the plans, intentions or expectations disclosed in our forward-looking
      statements and you should not place undue reliance on our forward-looking
      statements. There are a number of important factors that could cause our actual
      results to differ materially from those indicated by these forward-looking
      statements, including the factors referred to above under the caption “Risk
      Factors.” These important factors include the factors that we identify in the
      documents we incorporate by reference in this Form 10KSB Annual Report. You
      should read these factors and the other cautionary statements made in this
      Form 10KSB Annual Report and in the documents we incorporate by reference
      as being applicable to all related forward-looking statements wherever they
      appear in this Form 10KSB Annual Report and in the documents incorporated
      by reference. We do not assume any obligation to update any forward-looking
      statements made by us.





**Item 1.** ***Description
      of Business***





**Introduction**





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





In
      December of 2006, we created a new business unit, iPhotonics, which will focus
      primarily on the development and sale of optical network terminals (ONTs) and
      related accessories and to a lesser extent related design and development
      services. The iPhotonics business unit operates as an original design
      manufacturer (ODM) which means we will manufacture products that are ultimately
      branded by another organization for sale. A primary attribute of this business
      model is that the ODM owns and/or designs in-house the products that are branded
      by the buying firm. ONTs are the customer premise located devices used by a
      carrier to serve residential and business customers over a PON-based (passive
      optical networking) system. PON is a maturing point-to-multipoint technology
      which is being adopted by telephone companies globally because of its cost
      effectiveness in extending fiber-based service delivery all the way to the
      customer premise (fiber-to-the-home [FTTH] or fiber-to-the-premise [FTTP]).
      Our
      ONTs will sit at each customer premise and will be connected over fiber to
      an
      optical line terminal (OLT) generally located in the carrier's central office.
      A
      single OLT can deliver services to thousands of ONTs.





**Company
      History**




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





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





3




On
      June
      13, 2005, we and our wholly-owned subsidiary of SMS entered into an agreement
      and plan of merger with Texas Prototypes, Inc. (TXP) whereby SMS, following
      the
      effectuation of a 1 for 10 reverse stock split, issued shares of its common
      stock to TXP on May 4, 2006 equal to 94.7% of its total outstanding shares
      of
      common stock, or 89,298,042 shares, within ten days after completion of the
      closing conditions under the agreement and plan of merger, the principal
      requirement being the completion of the reverse stock split. On March 31, 2006,
      SMS obtained the majority vote of its shareholders necessary to effectuate
      the 1
      for 10 reverse stock split. In exchange, TXP issued 100% of the outstanding
      shares of common stock, or 221,051,400 shares, to SMS. TXP merged into a wholly
      owned subsidiary of SMS and the separate corporate existence of such subsidiary
      ceased. TXP continued as the surviving corporation.




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





On
      April
      26, 2006, the certificate of merger between TXP and a wholly owned subsidiary
      of
      SMS was filed with the Secretary of State of the State of Texas. The directors
      and officers of TXP were appointed directors and officers of the surviving
      corporation pursuant to which Michael C. Shores and Robert Bruce, the president
      and former chief financial officer of TXP, respectively, were appointed as
      directors and officers of SMS, and Richard Smitten resigned as the chief
      executive officer and sole director of SMS. The parties completed the merger
      and
      satisfied all closing conditions as set forth in the agreement and plan of
      merger on April 28, 2006.




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





In
      the
      fourth quarter of 2006, we hired Siemens' former ONT development team and
      created a new business unit, iPhotonics, which will focus primarily on the
      development and sale of optical network terminals and related accessories and
      to
      a lesser extent related design and development services. The iPhotonics business
      unit operates as an original design manufacturer which means we will
      manufacture products that are ultimately branded by another organization for
      sale.





**Description
      of Our Business**





We
      are a
      global provider of pre-manufacturing services for the electronics industry.
      We
      support original equipment manufacturers, original design manufacturers,
      contract manufacturers and new technology innovators. We focus in design and
      supply chain solutions services for new product development which include
      printed circuit board layout, signal integrity analysis, prototyping and
      quick-turn electronic assembly, new product introduction, pilot production,
      material supply chain development as well as the transfer of product build
      data
      into production.





Our
      core
      technology focus is on complex printed circuit board assemblies for high speed,
      digital, analog, and radio frequency (RF) technologies and other industries
      that
      require complementary service requirements. By working closely with our
      customers' engineering groups and being highly responsive to their requirements
      throughout the design processes, we believe that we can be an integral part
      of
      its customers' operations, accelerate their time-to-market and time-to-volume
      productions and reduce their overall product costs.




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




4




In
      December of 2006, we created a new business unit, iPhotonics, which will focus
      primarily on the development and sale of optical network terminals (ONTs) and
      related accessories and to a lesser extent related design and development
      services. The iPhotonics business unit operates as an original design
      manufacturer (ODM) which means we will manufacture products that are ultimately
      branded by another organization for sale. A primary attribute of this business
      model is that the ODM owns and/or designs in-house the products that are branded
      by the buying firm. ONTs are the customer premise located devices used by a
      carrier to serve residential and business customers over a PON-based (passive
      optical networking) system. PON is a maturing point-to-multipoint technology
      which is being adopted by telephone companies globally because of its cost
      effectiveness in extending fiber-based service delivery all the way to the
      customer premise (fiber-to-the-home [FTTH] or fiber-to-the-premise [FTTP]).
      Our
      ONTs will sit at each customer premise and will be connected over fiber to
      an
      optical line terminal (OLT) generally located in the carrier's central office.
      A
      single OLT can deliver services to thousands of ONTs.





*Our
      Pre-Manufacturing Services*





Many
      within the electronics industry, including original equipment manufacturers,
      original design manufacturers, and contract manufacturers, frequently spend
      unnecessary money and time, bringing new products from prototype to mass
      production. We believe that outsourcing these pre-manufacturing services to
      us
      can rapidly and cost-effectively bridge the gap between engineering design
      and
      production by first validating the functionality of the product, and improving
      the product's manufacturability. This in turn accelerates our clients'
      time-to-market and may significantly reduce production costs.




Although
      our core business focus is the technology sector of the communications equipment
      industry, our customer base is growing and now spans a broad range of industry
      segments which include automotive, communications, computing (including desktop
      and notebook computers, peripherals, and storage) consumer, handheld devices,
      information technology infrastructure, instrumentation, medical, military,
      and
      networking/datacom.




We
      believe that we have become an integral bridge between the engineering and
      manufacturing divisions of our customers. We offer customers supply-chain
      solutions and services that require the outsourcing of new product development,
      including prototyping and quick-turn electronic assembly, new product
      introduction, pilot production, material and supply chain management as well
      as
      the transfer of customers' product programs into production. By working closely
      with our customers and being highly responsive to their requirements throughout
      the design processes, our management believes that we can be an integral part
      of
      their operations, accelerate their time-to-market and time-to-volume production,
      and reduce their product costs.




Due
      to
      the intensely competitive nature of the electronics industry, the increasing
      complexity and sophistication of electronics products and the pressure on
      original equipment manufacturers (OEMs) and contract manufacturers (CMs) to
      reduce product costs, increasingly shorter product lifecycles, increased
      time-to-market needs, and the demand for the type of supply chain services,
      an
      increasing number of OEMs in the electronics industry utilize advanced
      electronics manufacturing services (EMS) providers, such as us, to assist with
      their business, product development and manufacturing strategies. This allows
      OEMs to take advantage of the global design, manufacturing and supply chain
      management expertise of EMS providers, in addition to EMS economies of scale,
      enabling OEMs to concentrate on intellectual property, product research and
      development, marketing and sales. Our management believes that by developing
      strategic relationships with the OEMs and CM providers, it can enhance their
      competitive position by:




·
            Reducing
                design, engineering and product development
                costs;





·
            Accelerating
                time-to-market and time-to-volume
                production;





·
            Reducing
                capital investment requirements and fixed
                costs;





·
            Improving
                inventory management and purchasing
                power;





·
            Reducing
                the cost of new product introduction to production;
                and





·
            Providing
                worldwide access and transfer of manufacturing and
                logistics.





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





5





We
      believe, along with many of the CMs, that the market for EMS will continue
      to
      grow, driven largely by the need of OEMs for increased flexibility to respond
      to
      the rapid changes in markets and technologies and to reduce manufacturing costs.
      We further believe OEMs need advanced outsourced design, engineering and
      manufacturing capabilities to meet the increased complexity and shorter life
      cycles of today's electronic products.




Over
      the
      past two years, we have focused on enhancing our business by developing our
      services. We began as a quick-turn prototyping business in 2002, and then in
      the
      fourth quarter of 2004, we added a PCB design group to expand our offering.
      This
      allowed us to assist customers in designing of how the parts and connections
      on
      a printed circuit board will be configured and operate; also taking into account
      was increasing the efficiency in which the product would be mass produced.
      In
      the second quarter of 2005, we added a photonics group as we began to pursue
      business in this industry sector. In the third quarter of 2005, we added a
      mechanical engineering services to our offerings. Our management believes that
      we are now well positioned to help our customers with their entire product
      development and introduction processes, from prototyping through complete
      program transfer to volume production.





Our
      complete capabilities include:





·
            *Electronic
                technology manufacturing road mapping:*creation of a plan for increasingly improving the electronics
                manufacturing process for a product based on most appropriate and
                technologically advanced assembly
                technologies.





·
            *New
                product development:*the complete process of bringing a new product or service to market.
                There
                are two parallel paths involved in the new product development process:
                one involves the idea generation, product design, and detail engineering;
                the other involves market research and marketing analysis. Companies
                typically see new product development as the first stage in generating
                and
                commercializing new products within the overall strategic process
                of
                product life cycle management used to maintain or grow their market
                share.





·
            *Printed
                circuit board layout:*the design of how the parts and connections on a printed circuit
                board
                will be configured and operate.





·
            *Simulation:*testing in simulated environments to predict expected
                results.





·
            *Test
                development:*creating the procedures and protocol for testing the proper functioning
                of
                the assembled printed circuit
                boards.





·
            *Quick-turn
                prototyping assembly:*the process of quickly configuring a working model (a prototype)
                in order
                to test various aspects of a design, illustrate ideas or features
                and
                gather early user feedback.





·
            *Surface
                mount technology:*robotic machines that place electronic parts onto printed circuit
                boards.





·
            *Backplanes:*a
                circuit board (usually a printed circuit board) that connects several
                connectors in parallel to each other, so that each pin of each connector
                is linked to the same relative pin of all the other connectors, forming
                a
                computer bus. It is used as a backbone to connect several printed
                circuit
                board cards together to make up a complete computer
                system.





·
            *Optoelectronics:*the study and application of electronic devices that interact with
                light,
                and thus are usually considered a sub-field of
                photonics.





·
            *Photonics:*the science and technology of generating, controlling, and detecting
                photons, particularly in the visible light and near
                infra-red spectrum.





·
            *Process
                development:*assisting engineers to develop manufacturing build processes so that
                they
                can be effectively transferred
                overseas.





·
            *Complex
                spot-builds:*****high-density
                prototyping on a one-time basis.





6





·
            *Pilot
                production:*the manufacture of a limited quantity of printed circuit boards after
                initial prototypes to effectively confirm the manufacturing
                process.





·
            *New
                product introduction:*the process for transferring manufacturing process into a production
                environment.





·
            *Mechanical
                engineering and thermal analysis:*the application for engineering principles to design tangible objects
                such
                as machinery and equipment. Thermal analysis is the analysis of material
                properties as they change with
                temperature.





·
            *System
                assembly & integration:*the process of putting together a final product by assembling all
                related
                parts.





·
            *Production
                transfer:*shifting the manufacturing process and all related documentation
                and data
                from one manufacturing facility to
                another.





·
            *Global
                program transfer:*moving the manufacturing process and all related documentation and
                data to
                a manufacturing facility located in a different geographic region,
                usually
                low-cost.





·
            *Material
                and supply chain development:*developing processes and procedures for establishing the supply and
                purchase of materials and goods from raw materials to final
                product.




The
      foundation of our business strategy is to provide customers with the ability
      to
      focus on their core competencies of intellectual property, product development,
      marketing and branding, while utilizing global outsourcing supply chain partners
      to reduce product costs.




Our
      pre-manufacturing services strategy addresses the outsourcing supply chain
      model
      in the prototyping and quick turn market segments. The pre-manufacturing
      services that we provide in this market segment include engineering, product
      development, printed circuit board layout, prototyping, design for ease of
      manufacturing, material supply chain development, and functional test
      development.




We
      are
      planning to expand our design and prototyping manufacturing resources, as well
      as providing additional technology prototyping services in advanced component
      packaging and photonics assembly services.




*Prototyping*




Our
      prototyping services are performed at our design facility in Richardson,
      Texas.




*Prototyping-Surface
      Mount Technology (SMT).* The
      components, subassemblies and finished products produced by our company
      incorporate advanced interconnect, miniaturization and packaging technologies,
      such as surface mount technology, multi-chip modules, ball grid array and micro
      ball grid array as well as chip scale packaging. We offer customers looking
      for
      prototype expertise in manufacturing a broad array of products, ranging from
      high-volume personal computer motherboards to advanced communication and
      networking cards. We have combined advanced assembly processes, innovative
      techniques, along with highly skilled personnel resources, to extend in the
      development of advanced assembly technology.




*Prototyping
      -Photonics/Optoelectronics* .
      We
      offer prototyping services of optical subsystems, with an emerging optical
      assembly integrator with engineering and assembly services for design,
      manufacturing and testing. Our capabilities include fiber splicing, connections
      and fiber routing for optoelectronic modules.




Our
      engineering staff works with our customers' engineers to develop a technology
      fit for the customer's specific needs, actively assisting customers with initial
      product design to facilitate manufacturing of the product.




Our
      management believes our pilot production assembly expertise allows our customers
      to achieve long term significant improvement in cycle time, asset utilization,
      reliability, flexibility and responsiveness.





7





*Materials
      Management*




Our
      company has expertise in materials management. Our staff of engineers can
      qualify components and audit vendors. Materials and customer kits are
      inventoried and kept in controlled access and secured storage areas. We work
      with both customers and vendors to ensure that the best price is negotiated
      on
      materials and that they arrive on schedule. We also support dual vendor sourcing
      on critical components to relieve manufacturing constraints.




Our
      company's expanded material supply chain services include, but are not limited
      to, the following:





·
            *Intuitive
                MRP (manufacturing resource planning) system:*our third party MRP system used to plan and manage manufacturing
                operations.





·
            *Dedicated
                engineering procurement team:*we
                have a dedicated team experienced in procuring materials for engineering
                manufacturing which generally includes locating and procuring at
                lesser
                material volumes than production. Frequently we use specialized brokers
                or
                obtain samples to reduce costs for our
                customers.





·
            *On-site
                kitting materials support:*we
                have a dedicated team that supports preparing the materials either
                procured by us or provided by our customers for customer assembly
                projects.





·
            *Seamless,
                secure connectivity options:*we
                provide various means for our customers to provide engineering data
                via
                the internet including secure file transfer
                protocol.





·
            *Global
                supply chain sourcing:*assisting our customers with the process of identifying, conducting
                negotiations with, and forming supply agreements with vendors of
                goods and
                services.




Competition





We
      are,
      and will continue to be, subject to intense competition as the electronics
      industry continues to grow. Large companies with greater financial and
      managerial resources than ours, and greater name recognition, are offering
      pre-manufacturing services solutions. While certain market overlaps exist
      between our product and other solutions, we believe that our pre-manufacturing
      services are designed to provide unique competitive advantages. As the market
      for electronics continues to mature, new players may enter the market competing
      directly or indirectly with us.





However,
      our management believes that competition in the market segment we serve is
      less
      driven by price because customers are willing to pay a premium for a responsive,
      broad-reaching capability to produce customized complex products in a very
      short
      time, and therefore we compete primarily on the basis of quick turnaround,
      product quality and customer service.





**Retrofit
      Solutions**





Our
      retrofit solutions enable telecommunication service providers to leverage their
      existing outside plant (OSP) cabinet investments by utilizing kits that enable
      the installation of new systems into existing OSP cabinets and avoiding the
      costly replacement of existing cabinets.





We
      will
      work with any systems vendor’s equipment, which management believes helps to
      ensure that our solutions are unbiased towards any given system. We allow our
      customers to choose the products that best provide its network upgrade path,
      and
      we then tailor our retrofit kits with a customer’s existing outside plant
      cabinets. Management believes that the benefits to using our retrofits kits
      include, but are not limited to:





·
            choose
                any system vendor’s solution and not be tied to a specific
                provider;





·
            mix
                and match network components as
                required;





·
            design
                out discontinued or unsupported equipment without a wholesale
                replacement;





·
            receive
                a tested and certified mixed vendor solution, which we believe is
                difficult to source from a single systems
                vendor;





8





·
            upgrade
                power or increase space in existing cabinets to support new
                equipment;





·
            complete
                documentation for the entire kit in one
                package;





·
            installation
                training and support including detailed method of procedures;
                and





·
            a
                3-year warranty covering the entire
                installation.





Our fully
        integrated solutions include all cabling, power, circuit protection, alarms
        and
        circuit schematics.





**Our
      iPhotonics Products and Services**





In
      December of 2006, we created a new business unit, iPhotonics, which will focus
      primarily on the development and sale of optical network terminals (ONTs) and
      related accessories and to a lesser extent related design and development
      services. The iPhotonics business unit operates as an original design
      manufacturer (ODM) which means we will manufacture products that are ultimately
      branded by another organization for sale. A primary attribute of this business
      model is that the ODM owns and/or designs in-house the products that are branded
      by the buying firm. ONTs are the customer premise located devices used by a
      carrier to serve residential and business customers over a PON-based (passive
      optical networking) system. PON is a maturing point-to-multipoint technology
      which is being adopted by telephone companies globally because of its cost
      effectiveness in extending fiber-based service delivery all the way to the
      customer premise (fiber-to-the-home [FTTH] or fiber-to-the-premise [FTTP]).
      Our
      ONTs will sit at each customer premise and will be connected over fiber to
      an
      optical line terminal (OLT) generally located in the carrier's central office.
      A
      single OLT can deliver services to thousands of ONTs.





*Products
      Portfolio*





Broadband
      Passive Optical Network (BPON) Family of Optical Network
      Terminals:





·
            *Single
                family unit:*for triple play (date, voice and video) high speed access for resident
                end
                customers of wire-line carriers.





·
            *Multi-dwelling
                unit:*for triple play (date, voice and video) high speed access for residents
                and business end customers of wire-line
                carriers.





·
            *Small
                business units:*for triple play (date, voice and video) high speed access for business
                end
                customers of wire-line carriers.





Gigabit
      Passive Optical Network (GPON) **** Family
      including data Ethernet of Optical Network Terminals:





·
            *Ethernet-single
                family unit:*for triple play (date, voice and video) high speed access for resident
                end
                customers of wire-line carriers.





·
            *Single
                family unit:*******for
                triple play (date, voice and video) high speed access for residents
                and
                business end customers of wire-line
                carriers.





·
            *Small
                business units:*for triple play (date, voice and video) high speed access for business
                end
                customers of wire-line carriers.




Our
      development capabilities and technical competencies include:





·
            *System
                architecture*-
                new system design layout focusing on appropriate hardware and software
                functions and product cost issues.





·
            *GPON
                Fixed Programmable Gate Array (FPGA) technology*-
                hardware chip design source code for physical layer GPON physical
                interface control.





9





·
            *GPON
                Software stacks*-
                message interface communications protocol for
                PON.





·
            *Interoperability*-
                experience with working against multiple vendors' central office
                equipment.





·
            *Standards
                representation*-
                participation in International standards bodies governing PON, Digital
                Subscriber Loop (DSL) and Voice over Internet Protocol (VoIP) technical
                requirements.





·
            *Protocols
                - Asynchronous Transfer Mode - Internet Protocol (ATM-IP)
                routing/switching/security*-
                data switching and control
                mechanisms.





·
            *Time
                Division Multiplexing (TDM) voice, Session Initiation Protocol (SIP),
                Gateway Control Protocol or Megaco/H.248, Asynchronous Transfer Mode
                (ATM)
                Abstraction layer 1 (AAL1, and AAL2) -*voice switching control mechanisms.





·
            *Field
                Programmable Gate Array architecture and implementation*-
                programmable gate arrays.





·
            *Design
                to cost evolution*-
                reducing and refining design cost, while maintaining adherence to
                requirements.





·
            *Development
                environment infrastructure*-
                International Standards Organization (ISO) compliant, strict analysis
                and
                design methodology and tooling for developing hardware, software
                and
                mechanical designs.





·
            *Simulation
                and automation*-
                use of offline tools to validate design
                quality.





·
            *Analog/power
                supply design -*integrated circuit designs to deliver power at proper voltages to
                Printed
                Circuit Boards (PCB) components.





·
            *Analog
                design, optics, RF video, and emissions*-
                delivery of cable TV signals, integrated optical design blocks for
                PON
                interface and designs that meet strict emissions requirements of
                the
                Federal Communications Commission and other standards
                bodies.





·
            *Network
                Equipment-Building System (NEBS) quality mechanical design and
                packaging*-
                strict set of design guidelines and requirements dictated by Telcordia
                for
                use on North American carrier product
                deployments.





Our
      ONT
      development team has been working specifically in the area of passive optical
      networks since 2003. The team has worked together for an average of 18 years
      in
      multiple disciplines of telecommunications. The team’s heritage is in Class 5
      central office development, and continued through the migration of the TDM
      networks with an emphasis on remote distributed architecture. The team has
      also
      been responsible for various developments within the ATM broadband multimedia
      access products and gateways.





**Competition
      within the ONT Market**





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





·
            reduce
                demand for our products if customers shift their purchasing to
                competitors; or





·
            cause
                us to reduce prices on our existing or future products and thereby
                adversely affect our gross margins.





The
      rapid
      technological developments within the ONT equipment industry may result in
      changes to our group of competitors. The principal competitive factors in our
      market include:





10





·
            industry
                relationships with network service providers and network equipment
                vendors;





·
            product
                reliability, performance and
                interoperability;





·
            product
                features;





·
            product
                availability;





·
            price;





·
            ability
                to distribute products;





·
            ease
                of installation and use;





·
            technical
                support and customer service; and





·
            brand
                recognition.





We
      believe we are addressing each of these competitive factors. Nonetheless, we
      expect to face increasing competitive pressures from both current and future
      competitors in the markets we serve.




**Government
      Regulation**





We
      are
      subject to various federal, state, and local laws affecting electronic and
      communication businesses. The Federal Trade Commission and equivalent state
      agencies regulate advertising and representations made by businesses in the
      sale
      of their products, which apply to us. We are also subject to government laws
      and
      regulations governing health, safety, working conditions, employee relations,
      wrongful termination, wages, taxes and other matters applicable to businesses
      in
      general.




**Compliance
      with Environmental Laws and Regulations**





Our
      operations are subject to local, state and federal laws and regulations
      governing environmental quality and pollution control. To date, we believe
      we
      are in compliance with such laws and regulations and our compliance with all
      these regulations has had no material effect on our operations, capital,
      earnings, or competitive position, and the cost of such compliance has not
      been
      material. We are unable to assess or predict at this time what effect additional
      regulations or legislation could have on our activities.




**Seasonality**





We
      do not
      anticipate that our business will be substantially affected by
      seasonality.





**Employees**





As
      of
      March 31, 2008, we had a total of 98 full-time employees of which 31 were
      devoted to our iPhotonic’s business. None of our employees are covered by the by
      collective bargaining agreements. We believe that our relations with our
      employees are good.





11





**RISK
      FACTORS**





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





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




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




For
      the
      year ended December 31, 2007 and 2006, we generated revenues of $10,986,000
      and
      $8,228,000, respectively. Our accumulated deficit was $14,117,000 at December
      31, 2007 and $5,190,000 at December 31, 2006. While we are building our sales
      and operating infrastructure, future losses are likely to occur, as we are
      dependent on spending money in excess of funds received from sales to pay for
      our operations. No assurances can be given that we will be successful in
      reaching or maintaining profitable operations. Accordingly, we may experience
      liquidity and cash flow problems. If our losses continue, our ability to operate
      may be severely impacted which may cause us to cease operations altogether.
      Management believes that we have adequate cash resources to fund our operations,
      including our iPhotonics business unit, into April of 2008 and in order to
      continue to operate under our current business model, of which our iPhotonics
      business unit is integral and material, we will need to raise additional funds
      no later than late April 2008.





Based
      on
      funds currently available to us, management believes that we have adequate
      cash
      resources to fund our operations, including our iPhotonics business unit into
      April of 2008. The cash required to operate our iPhotonics business unit which
      was formed in the fourth quarter of 2006 is significant. The formation of the
      iPhotonics business unit resulted in our adding 35 full-time employees and
      amending our lease in November of 2006 to expand the operating facility by
      16,000 square feet. Incremental personnel cost and lease payments are expected
      to average approximately $340,000 and $8,000, respectively, per month. Other
      research and development and operational costs are expected to average
      approximately $150,000 per month for the next twelve months. Revenues to date
      related to the iPhotonics' business unit have been insignificant relative to
      the
      related expenditures which coupled with lower than expected revenues from our
      other operating units continues to place significant strain our cash and
      liquidity position.





To
      continue to operate under our current business model, of which our iPhotonics
      business unit is integral and material, we have an urgent requirement to raise
      additional funds by late April 2008. To obtain funds to continue our
      iPhotonics activities, we may utilize any of several potential options,
      including the issuance of debt or equity securities, the exercise of
      warrants issued to investors in conjunction with previous private offerings,
      and
      other arrangements with strategic partners. Although we have engaged a venture
      capital investment bank to assist us in pursuing our financing alternatives,
      no
      assurance can be given that we will be able to obtain financing on
      favorable terms, if at all. If we are unable to obtain additional financing
      when
      needed, we could be required to modify our business plan, including selling
      the
      iPhotonics business unit assets or shutting down our operations, depending
      on the extent of available financing. Our ability to continue as a going
      concern depends upon our ability to raise substantial funds for use in our
      operating plan and activities, especially related to our iPhotonics business
      unit. If the company cannot secure additional funds, it will not be able to
      meet
      its obligations as they come due.


***Our
        independent registered public accounting firm has expressed doubt about our
        ability to continue as a going concern, which may hinder our ability to obtain
        future financing.***
  Our
        consolidated financial statements as of December 31, 2007 have been prepared
        under the assumption that we will continue as a going concern for the year
        ending December 31, 2008. Our independent registered public accounting firm
        has
        issued a report that included an explanatory paragraph expressing substantial
        doubt in our ability to continue as a going concern without additional capital
        becoming available. Our ability to continue as a going concern ultimately
        is
        dependent on our ability to generate a profit which is likely dependant
        upon our ability to obtain additional equity or debt financing, attain
        further operating efficiencies and, ultimately, to achieve profitable
        operations. The financial statements do not include any adjustments that
        might
        result from the outcome of this uncertainty.


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





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





·
            our
                new business and technology models;





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





·
            the
                difficulties we face in managing rapid growth in personnel and
                operations;





·
            the
                negative impact on our brand, reputation or trustworthiness caused
                by any
                significant unavailability of our
                service;





12





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





·
            the
                timing and success of new service introductions and new technologies
                by
                our competitors; and





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





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





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





Historically,
      we have derived a significant portion of our net sales from a limited number
      of
      customers. Our top five customers, which may vary from year to year and quarter
      to quarter, represented 56% of our net sales in fiscal 2007. Tellabs Inc. and
      AMX Corporation accounted for 28%, and 11%, respectively, of net sales in 2007,
      while no other customer accounted for more than 10% of net sales for 2007.
      We
      expect to continue to depend upon a small number of customers for a significant
      portion of our net sales for the foreseeable future. The loss of, or decline
      in,
      orders from one or more major customers could reduce our net sales and cause
      our
      operating results to suffer.





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





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





·
            fluctuation
                in demand for our customers'
                products;





·
            changes
                in customers' manufacturing strategies, such as a decision by a customer
                to either diversify or consolidate the number of prototyping contract
                manufacturers used;





·
            customers'
                inventory management; and





·
            changes
                in new product introductions.





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




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




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





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





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





13





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





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





Five
      companies represented approximately 74% of our net trade accounts receivable
      at
      December 31, 2007, with individual percentages for those companies ranging
      from
      5% to 30%. Our original equipment manufacturer customers direct their sales
      to a
      relatively limited number of electronics manufacturing services providers.
      Our
      management expects to continue to be subject to the credit risk of a limited
      number of customers. This concentration of customers exposes us to increased
      credit risks. If one or more of our significant customers were to become
      insolvent or were otherwise unable to pay us, our results of operations would
      be
      harmed.





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





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





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





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





·
            the
                inability of our customers to successfully develop new product
                innovations, and the failure of these innovations to gain widespread
                market acceptance for commercialization;
                and





·
            maturation
                of the technology markets served by our customers or market periods
                characterized by a lack of disruptions in the enabling
                technology.





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





Our
      future success depends upon our ability to respond quickly to the needs of
      our
      customers and to analyze and advise regarding the best design of complex
      products in a quick and cost efficient manner. If we are unable to accomplish
      the foregoing, we will be unable to attract new customers which will adversely
      affect our financial results.




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





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




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





14





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





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





·
            changes
                in demand for our services;





·
            our
                effectiveness in managing manufacturing processes and costs in order
                to
                decrease manufacturing expenses;





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





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





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





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





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





·
            changes
                in demand in our customers' end
                markets.





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





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





***We
      depend on the continuing trend of outsourcing by original equipment
      manufacturers (OEMs).***





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





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





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





15





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





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





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




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





***As
      more of our sales efforts are targeted at larger customers, our sales cycle
      may
      become more time consuming and expensive, potentially diverting resources and
      reducing our revenues.***





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





***If
      we fail to develop our brand cost-effectively, our revenues may
      decline.***





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





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





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





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





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





16





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





***We
      Will Need to Raise Additional Funds In Order Achieve ONT Business
      Objectives.***





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





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





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





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





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





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





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





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





·
            the
                competitive environment for ONT customer premises equipment and the
                rate
                at which the prices that we are able to command for our products
                may
                decline; and





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





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





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





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





17




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





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





·
            reduce
                demand for our products if customers shift their purchasing to
                competitors; or





·
            cause
                us to reduce prices on our existing or future products and thereby
                adversely affect our gross margins.




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





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





·
            identify
                and respond to emerging technological trends in the
                market;





·
            develop
                and maintain competitive products that meet changing customer
                demands;





·
            enhance
                our products by adding innovative features that differentiate our
                products
                from those of our competitors;






·
            bring
                products to market on a timely
                basis;





·
            introduce
                products that have competitive prices;
                and





·
            respond
                effectively to new technological changes or new product announcements
                by
                others.





**Risks
      Associated with** **Our
      Current Financing Arrangements**




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




As
      of
      March 31, 2008, we had 116,584,428 shares of common stock issued and
      outstanding. In connection with the financing arrangements that we entered
      into
      on March 30, 2007, September 6, 2007, December 13, 2007 and December 31, 2007,
      we also have outstanding secured convertible notes and accrued interest that
      may
      be converted into an estimated 12,751,000 shares of common stock at current
      market prices. In addition, we have outstanding warrants to purchase 18,478,000
      shares of common stock.





The
      shares underlying the convertible note and warrants have not been registered
      but
      the Company intends to register those shares under a Form S-1 in 2008. Upon
      effectiveness of the registration statement, all of the shares, including all
      of
      the shares issuable upon conversion of the notes and upon exercise of our
      warrants, may be sold without restriction. The sale of these shares may
      adversely affect the market price of our common stock.





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





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





18





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





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





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





Our
      convertible notes mature three years from the date of issuance, unless sooner
      converted into shares of our common stock. Beginning on April 1, 2008, we began
      to make monthly interest payments and beginning in month eighteen (September
      30,
      2008) we are required to make principal payments in the amount of $100,000.
      The principal and interest payments may be deferred but only at the option
      of YA
      Global. Any event of default such as our failure to repay the principal or
      interest when due, our failure to issue shares of common stock upon conversion
      by the holder, or our failure to timely file the registration statement or
      have
      the registration statement declared effective unless waived by YA Global, could
      render the entire convertible notes and accrued interest immediately due and
      payable. If we were required to repay the entire convertible notes, we would
      be
      required to use our limited working capital and raise additional funds. However,
      our ability to raise additional funds is hindered by the fact that we are
      required to obtain the consent of the holder in order to engage in any financing
      for the issuance of our securities or to engage in any secured financing. If
      we
      were unable to repay the convertible notes when required, the holders could
      commence legal action against us and foreclose on all of our assets to recover
      the amounts due. Any such action would require us to curtail or cease
      operations.





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





In
      connection with the Securities Purchase Agreement we entered into on March
      30,
      2007, we executed a Security Agreement in favor of YA Global Investments, L.P.
      granting them a security interest in all of our goods, inventory, contractual
      rights and general intangibles, receivables, documents, instruments, and chattel
      paper; provided, however, that YA Global's security interest is second in
      priority behind First Bank of Canyon Creek, which has provided us with a
      line of credit and their first priority security interest secures our
      obligations under such line of credit. The
      Security Agreement states that if an event of default occurs under the
      Securities Purchase Agreements, Convertible Note, Warrants, or Security
      Agreement, YA Global has the right to take possession of the collateral, to
      operate our business using the collateral, and have the right to assign, sell,
      lease or otherwise dispose of and deliver all or any part of the collateral,
      at
      public or private sale or otherwise to satisfy our obligations under these
      agreements.





**Risk
      Related to Our Common Stock**




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





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





19





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





Our
      common stock ownership is highly concentrated. Through his ownership of shares
      of our common stock, Michael Shores, our chief executive officer, beneficially
      owns 68.6% of our total outstanding common stock. As a result of the
      concentrated ownership of our stock, a relatively small number of shareholders,
      acting together, will be able to control all matters requiring shareholder
      approval, including the election of directors and approval of mergers and other
      significant corporate transactions. This concentration of ownership may have
      the
      effect of delaying, preventing or deterring a change in control of our company.
      It may affect the market price of our common stock.





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





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




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





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





20





**Item 2.** ***Description
      of Property.***





Our
      executive offices are located at 1299 Commerce Drive, Richardson, TX 75081.
      We
      lease our facilities and lease payments for fiscal 2007 and 2006 amounted to
      $317,000 and $198,000, respectively. Our facilities lease was executed in
      December 2004 and commenced in March of 2005 and terminates in March of 2010.
      Our lease was amended effective November 15, 2006 to include approximately
      16,500 additional square feet. The incremental monthly lease payment is
      approximately $8,000 per month for the term of the lease. Total annual lease
      payments are as follows: $327,000, $336,000, and $71,000 for the years ending
      December 31, 2008, 2009, and 2010, respectively. We believe that our facilities
      are adequate to meet our current needs. Our offices are in good condition and
      are sufficient to conduct our operations. We do not intend to renovate, improve,
      or develop properties. We are not subject to competitive conditions for property
      and currently have no property to insure. We have no policy with respect to
      investments in real estate or interests in real estate and no policy with
      respect to investments in real estate mortgages. Further, we have no policy
      with
      respect to investments in securities of or interests in persons primarily
      engaged in real estate activities.





**Item 3.** ***Legal
      Proceedings.***





There
      are
      no pending legal proceedings against us.





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





We
      have
      not submitted any matters to a vote of security holders in the fourth quarter
      of
      2007 or thereafter.





**PART II**





**Item 5.** ***Market
      for Common Equity and Related Stockholder Matters and***  ***Small
      Business Issuer Purchases of Equity Securities.***





Our
      common stock is quoted on the Over-the-Counter Bulletin Board under the symbol
      "TXPO." On July 14, 2006, we changed our name from YTXP Corporation to TXP
      Corporation and our symbol was changed from “YTXO” to “TXPO.” Prior to the
      completion of the merger with Texas Prototypes, Inc., our common stock traded
      on
      the Over-the-Counter Bulletin Board under the symbol “SMKT,” and later “SMSO.”
The following table shows the reported high and low closing bid quotations
      per
      share for our common stock based on information provided by the Over-the-Counter
      Bulletin Board. Particularly since our common stock is traded infrequently,
      such
      over-the-counter market quotations reflect inter-dealer prices, without markup,
      markdown or commissions and may not necessarily represent actual transactions
      or
      a liquid trading market.




**Year
                Ended December 31, 2007**
            
            
            **High**
            
            
            **Low**First
                Quarter ended March 31, 2007
            
            $
            0.45
            
            $
            0.20Second
                Quarter ended June 30, 2007
            
            $
            0.50
            
            $
            0.27Third
                Quarter ended September 30, 2007
            
            $
            0.45
            
            $
            0.25Fourth
                Quarter ended December 31, 2007
            
            $
            0.64
            
            $
            0.25**Year
                Ended December 31, 2006**
            
            
            **High**
            
            
            **Low**First
                Quarter ended March 31, 2006
            
            $
            0.68
            
            $
            0.22Second
                Quarter ended June 30, 2006
            
            $
            0.99
            
            $
            0.25Third
                Quarter ended September 30, 2006
            
            $
            0.70
            
            $
            0.27Fourth
                Quarter ended December 31, 2006
            
            $
            0.54
            
            $
            0.31**Year
                Ended December 31, 2005**
            
            
            **High**
            
            
            **Low**First
                Quarter ended March 31, 2005
            
            $
            0.60
            
            $
            0.08Second
                Quarter ended June 30, 2005
            
            $
            0.48
            
            $
            0.06Third
                Quarter ended September 30, 2005
            
            $
            0.65
            
            $
            0.18Fourth
                Quarter ended December 31, 2005
            
            $
            0.49
            
            $
            0.22


21





**Number
      of Shareholders**





As
      of
      December 31, 2007, there were 116,584,428 shares of our common stock issued
      and
      outstanding and 64 holders of record of our common stock. The transfer agent
      of
      our common stock is Worldwide
      Stock Transfer, LLC **,** 433
      Hackensack Avenue, Level - L, Hackensack, NJ 07601.





**Dividends**





We
      have
      never paid cash dividends or distributions to our equity owners. We do not
      expect to pay cash dividends on our common stock, but instead, intend to utilize
      available cash to support the development and expansion of our business. Any
      future determination relating to our dividend policy will be made at the
      discretion of our Board of Directors and will depend on a number of factors,
      including but not limited to, future operating results, capital requirements,
      financial condition and the terms of any credit facility or other financing
      arrangements we may obtain or enter into, future prospects and in other factors
      our Board of Directors may deem relevant at the time such payment is considered.
      There is no assurance that we will be able or will desire to pay dividends
      in
      the near future or, if dividends are paid, in what amount.





Shares
      eligible for future sale could depress the price of our common stock, thus
      lowering the value of a buyer’s investment. Sales of substantial amounts of
      common stock, or the perception that such sales could occur, could adversely
      affect prevailing market prices for shares of our common stock.





Our
      revenues and operating results may fluctuate significantly from quarter to
      quarter, which can lead to significant volatility in the price and volume of
      our
      stock. In addition, stock markets have experienced extreme price and volume
      volatility in recent years. This volatility has had a substantial effect on
      the
      market prices of securities of many smaller public companies for reasons
      unrelated or disproportionate to the operating performance of the specific
      companies. These broad market fluctuations may adversely affect the market
      price
      of our common stock.





**Equity
      Compensation Plan** **Information**





The
      following table presents information as of December 31, 2007 with respect to
      compensation plans under which equity securities were authorized for issuance,
      including the 2006 Stock Incentive Plan.





**Plan
                category**
            
            **Number of securities**
              **to be issued upon**
              **exercise of**
              **outstanding options,**
              **warrants and rights**
            
            **Weighted average**
              **exercise price of**
              **outstanding options,**
              **warrants and rights**
            
            **Number of securities**
              **remaining available for future**
              **issuance under equity**
              **compensation plans (excluding**
              **securities reflected in column**
              **(a)****(a)**
            
            **(b)**
            
            **(c)****Equity
                compensation plans approved by security holders**
            
            
            10,000,000
            
            $
            0.33
            
            
            2,879,654**Equity
                compensation plans not approved by security
                holders**
            
            
            -0-
            
            
            -0-
            
            
            -0-**Total**
            
            
            10,000,000
            
            $
            0.33
            
            
            2,879,654





Other
      than as set forth above, we do not have any stock option, bonus, profit sharing,
      pension or similar plan. However, we may adopt such a plan in the future to
      attract and retain members of management, directors or key
      employees.





**Unregistered
      Sales of Equity Securities and Use of Proceeds**





During
      the fourth quarter of 2007, we issued equity securities without registration
      under the Securities Act of 1933, as amended, as follows:





22





On
      December 13, 2007, we and YA Global Investments, L.P. entered into amendment
      number 1 to the securities purchase agreement dated March 30, 2007 pursuant
      to
      which the second closing of $1,000,000 was revised from the date on which we
      file the registration statement to December 13, 2007. Accordingly, on December
      13, 2007 we and YA Global completed the second closing in which we received
      gross proceeds in the amount of $1,000,000 and we issued to YA Global a
      convertible note in the principal amount of $1,000,000. In addition, we issued
      48,781 shares of common stock to YA Global as an original issue discount which
      represents a number of shares equal to 2% of the second closing proceeds of
      $1,000,000 at a per share price equal to $0.41, which represents the fixed
      conversion price of the notes.





On
      December 28, 2007, we entered into an agreement with James Von Ehr, II an
      accredited investor pursuant to which we will, within 90 days from the date
      the
      Collateral (as defined below) is deposited into the account of a Lender (the
      “Closing Date”), issue to the investor seven-year warrants to purchase an
      aggregate of 1,280,000 shares of common stock as consideration for the investor
      agreeing to pledge an aggregate of $2,000,000 in free-trading shares of common
      stock of Fossil Incorporated (NASDAQ:FOSL) or such other shares of free-trading
      common stock having a value of $2,000,000 in the aggregate beneficially owned
      by
      the investor as may be agreed upon between the parties (the “Collateral”). The
      Collateral is to be pledged on our behalf in favor of First Bank of Canyon
      Creek, or such other lending or financing institution as may be agreed upon
      between the parties, as Collateral for a loan to be obtained by us from a lender
      in an amount up to $2,000,000 with a maturity date of January 16, 2009, which
      will be further guaranteed personally and through the pledge of common stock
      beneficially owned by Michael Shores, our Chief Executive Officer, in an amount
      equal to the initial amount pledged by the investor at a per share price equal
      to $0.50. The warrants are exercisable into shares of the our common stock
      at a
      price equal to $0.40 per share.





As
      additional consideration of the investor’s agreement to pledge the Collateral to
      a lender, on or prior to the Closing Date we will pay to the investor a one-time
      commitment fee through the issuance of 100,000 restricted shares of our common
      stock.





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





**Item 6.** ***Management’s
      Discussion and Analysis or Plan of Operation.***





*WE
      URGE YOU TO READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH OUR
      CONSOLIDATED*  *FINANCIAL
      STATEMENTS AND THE NOTES THERETO BEGINNING ON PAGE F-1.
      THIS*  *DISCUSSION
      MAY CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS
      AND*  *UNCERTAINTIES.
      OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD DIFFER*  *MATERIALLY
      FROM THOSE EXPRESSED OR IMPLIED BY THE FORWARD-LOOKING STATEMENTS AS
      A*  *RESULT
      OF A NUMBER OF FACTORS, INCLUDING BUT NOT LIMITED TO THE RISKS
      AND*  *UNCERTAINTIES
      DISCUSSED UNDER THE HEADING “* *RISK
      FACTORS” IN THIS*  *FORM 10K-SB
      AND IN OUR OTHER FILINGS WITH THE SEC. SEE “CAUTIONARY*  *STATEMENT
      REGARDING FORWARD-LOOKING STATEMENTS* .”





**Overview**





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





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





23




On
      June
      13, 2005, we and a wholly-owned subsidiary of Stock Market Solutions, Inc.
      (SMS)
      entered into an agreement and plan of merger with Texas Prototypes, Inc. (TXP)
      whereby SMS, following the effectuation of a 1 for 10 reverse stock split,
      issued shares of its common stock to TXP on May 4, 2006 equal to 94.7% of its
      total outstanding shares of common stock, or 89,298,042 shares, within ten
      days
      after completion of the closing conditions under the agreement and plan of
      merger, the principal requirement being the completion of the reverse stock
      split. On March 31, 2006, SMS obtained the majority vote of its shareholders
      necessary to effect the 1-for-10 reverse stock split. In exchange, TXP issued
      100% of the outstanding shares of common stock, or 221,051,400 shares, to SMS.
      TXP merged into a wholly owned subsidiary of SMS and the separate corporate
      existence of such subsidiary ceased. TXP continued as the surviving
      corporation.





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





On
      April
      26, 2006, the certificate of merger between TXP and a wholly owned subsidiary
      of
      SMS was filed with the Secretary of State of the State of Texas. The directors
      and officers of TXP were appointed directors and officers of the surviving
      corporation pursuant to which Michael C. Shores and Robert Bruce, the president
      and former chief financial officer of TXP, respectively, were appointed as
      directors and officers of SMS, and Richard Smitten resigned as the chief
      executive officer and sole director of SMS. The parties completed the merger
      and
      satisfied all closing conditions as set forth in the agreement and plan of
      merger on April 28, 2006.




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





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





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





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





**Critical
      Accounting Policies**





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





24





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




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





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





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





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





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





25





On
      March
      30, 2007, we entered into a securities purchase agreement which provided for
      the
      filing of a registration statement with the Securities and Exchange Commission
      registering 100% of the shares of common stock issuable upon conversion of
      the
      notes and exercise of the warrants within 30 days of receipt of written demand
      of YA Global. We are obligated to use our best efforts to cause the registration
      statement to be declared effective no later than 90 days after filing and to
      insure that the registration statement remains in effect until all of the shares
      of common stock issuable upon conversion of the notes and exercise of the
      warrants have been sold. In the event of a default of our obligations under
      the registration rights agreements, including our agreement to file the
      registration statement with the Securities and Exchange Commission no later
      than
      30 days from receipt of a written demand from YA Global, or if the registration
      statement is not declared effective within 90 days of filing we are required
      pay
      to YA Global, as liquidated damages, for each month that the registration
      statement has not been filed or declared effective, as the case may be, a cash
      amount equal to 2% of the liquidated value of the notes. Notwithstanding the
      foregoing, we shall not be liable for liquidated damages with respect to any
      warrants or warrant shares and the maximum aggregate liquidated damages payable
      to YA Global by us, if any, shall be 15% of the aggregate purchase price paid
      by
      YA Global pursuant to the purchase agreement. On December 13, 2007, we and
      YA
      Global entered into Amendment No. 1 to the Registration Rights Agreement
      pursuant to which the scheduled filing date was revised to 180 calendar days
      from December 13, 2007.





On
      September 6, 2007, we entered into a securities purchase agreement with a
      strategic investor/qualified institutional buyer pursuant to which provides
      for
      the filing of a registration statement by us with the Securities and Exchange
      Commission registering the shares and the shares of common stock issuable upon
      exercise of the warrants. We are obligated to file the registration statement
      no
      later than December 15, 2007 and to use our best efforts to cause the
      registration statement to be declared effective by the Securities and Exchange
      Commission no later than 90 days after filing. If we do not meet the
      aforementioned filing and effectiveness deadlines, we shall pay to the investor
      an amount equal to 1% of the purchase price of the shares and warrants, in
      cash
      or, at the investor's election, in shares of common stock, for each 30 days
      or
      part thereof for the first 60 days after the occurrence of a non-registration
      event and 2% for each 30 days or part thereof thereafter; provided, however,
      that the aforementioned liquidated damages shall only accrue, if at all, for
      12
      months after the closing date. As of December 31, 2007, an aggregate of $5,161
      in liquidated damages has been accrued. As of March 31, 2008, an aggregate
      of
      $49,333 in liquidated damages has been accrued. ****





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





***Revenue
      Recognition***





Revenues
      are derived from the following sources:





·
            Prototyping
                and assembly services;





·
            Prototyping
                - photonics/optoelectronics
                services;





·
            Material
                supply chain management services;





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





·
            Telecom
                cabinet retrofit kits and design
                solutions;





·
            Optical
                network terminal product and accessory sales;
                and





·
            ONT
                design and development services.





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





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





26





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





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





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





Telecom
      cabinet retrofit revenue and design solutions typically consist of designing
      and
      assembling retrofit kits to enable incumbent local exchange carriers to upgrade
      their local access service delivery infrastructure. We recognize revenue when
      persuasive evidence of an arrangement exists, delivery has occurred, services
      have been performed, the sales price is fixed or determinable and collectability
      is probable. These criteria are generally met after an internal quality control
      review of the product and at the time product is shipped.





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





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





**Allowance
      for Doubtful Accounts**





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





27





**Property
      and Equipment**




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





**Results
      of Operations**





***Year
      ended December 31, 2007 as compared to the year ended December 31,
      2006***





*Revenues*




We
      currently derive the majority of our revenue from our prototyping and assembly
      and material supply chain management services. Prototyping services are priced
      based on the complexity, time-to turn and volume of the customer
      project. Our material supply chain management services are priced on a cost
      of the material plus basis. Prototyping and assembly and material supply chain
      services projects are typically purchase order driven rather than driven by
      long-term contracts and vary significantly from customer to customer. Thus,
      our
      revenues can be difficult to predict and may vary significantly from quarter
      to
      quarter.





Total
      revenues increased 34% from $8,228,000 for the year ended December 31, 2006
      to
      $10,986,000 for the year ended December 31, 2007, or by $2,758,000. Material
      supply chain management services increased 63% from $2,359,000 in 2006 to
      $3,847,000 in 2007. Prototyping and assembly services increased 22% from
      $3,842,000 for the year ended December 31, 2006 to $4,678,000 for the year
      ended
      December 31, 2007. Revenues from sales of retrofit kits increased by 35% from
      $1,029,000 in 2006 to $1,387,000 in 2007. In addition, we had revenues of
      $747,000 for the year ended December 31, 2007 related to royalties and design
      and development services performed by our iPhotonics group which was formed
      in
      the fourth quarter of 2006. $332,000 of the design and development services
      revenue is attributable to design and development work performed for Siemens
      related to completing certain optical network terminal (ONT) development
      hardware and software releases compared to $997,000 in 2006. The Siemens design
      and development project was consideration given by us in a non-monetary
      transaction whereby we received certain ONT assets from Siemens (see Note 18
      of
      the audited financial statements included herein for further discussion of
      the
      non-monetary transaction). We also had revenues of $327,000 related to GPON
      and
      BPON ONT product and accessory sales for the year ended December 31, 2007
      compared to $0 for the year ended December 31, 2006, as the iPhotonics group
      was
      not formed until late fourth quarter of 2006. The overall increase in revenues
      is attributed to an increasing customer base, continued demand from existing
      customers, and our new iPhotonics offerings including GPON and BPON development
      services and product and accessory sales. We expanded our customer base from
      110
      for the year ended December 31, 2006 to 139 for the year ended December 31,
      2007. Total active customers for the year ended December 31, 2007 and 2006
      were
      71 and 58, respectively. Our top five customers accounted for 56% of revenue
      in
      2007 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 increased
      from $5,523,000 for the year ended December 31, 2006
      to
      $7,332,000 for the year ended December 31, 2007,
      or
      by $1,809,000. Other direct material costs and production supplies increased
      from $3,715,000  in
      2006
      to $5,067,000  in
      2007,
      or by $1,352,000. Manufacturing overhead and labor cost increased from
      $1,808,000 for the year ended December 31, 2006
      to
      $2,265,000 for the year ended December 31, 2007,
      or
      by $457,000, primarily attributable to increased headcount due to expanded
      operations. Equipment lease decreased from $158,000  in
      2006
      to $0 in 2007 as we terminated an equipment lease in the fourth quarter of
      2006
      and purchased the equipment. This was offset by increases in indirect overhead,
      depreciation, and manufacturing supplies. Depreciation charged to cost of sales
      increased from $170,000 for the year ended December 31, 2006
      to
      $207,000 for the year ended December 31, 2007
      in-line with capital expenditures on equipment and other fixed assets used
      in
      the manufacturing process.




Gross
      profit is dependent on the scope and the nature of the customer project and
      thus
      can vary significantly. Customer projects requiring a turnkey solution which
      includes both prototyping and material supply chain management services
      typically results in a lower margin than prototyping services only. Gross profit
      increased from $2,705,000 for the year ended December 31, 2006
      to
      $3,654,000 for the year ended December 31, 2007,
      or
      by $ 949,000 .
      Revenues increased for the same period by $2,758,000. During the same period
      the
      gross margin increased slightly from just under 33% in 2006 to just over 33%
      in
      2007.





28





*Selling,
      General and Administrative Expenses*





Selling
      general administrative expense consists of personnel costs including taxes
      and
      benefits, rent and utilities, contract labor, insurance, professional fees,
      marketing, telecommunication, internet costs, and other administrative expenses.
      Selling general administrative expenses increased by $ 1,256,000 from
      $ 3,834,000
      for the year ended December 31, 2006
      to
      $ 5,090,000
      for the year ended December 31, 2007.
      During 2006, we had merger costs and aborted offering costs of $52,000 and
      $697,000, respectively that did not recur in 2007. Personnel costs increased
      as
      costs increased from $ 2,241,000
      for the year ended December 31, 2006
      to
      $ 3,294,000
      for the year ended December 31, 2007,
      or
      by $ 1,053,000 .
      Included in this personnel increase was a net increase of approximately
      $ 281,000 of
      stock
      compensation expense incurred as result of employee stock and stock option
      awards in 2007 compared to 2006. The remaining increase in personnel costs
      reflect salary increases for certain employees, addition of employees and
      increases in company paid benefits including medical and dental insurance from
      2006 to 2007. Contract labor increased $ 347,000 compared
      to the
      year ended December 31, 2006
      as
      we retained a business consultant and several sales consultants to support
      and
      assist management in the sales, strategy and operations of the newly formed
      iPhotonics business unit. Marketing and promotional expense increased
      $ 65,000 due
      to
      increased trade show participation and expanded efforts to promote us since
      becoming public in April of 2006. Professional fees increased by $ 174,000 as
      legal,
      accounting, printing, investor relations, and transfer agent fees increased
      due
      to our becoming public in April of 2006. Insurance cost increased $ 22,000 as we
      added several new policies including D&O and increased limits on other
      policies. Travel and entertainment costs increased from $ 116,000
      for the year ended December 31, 2006
      to
      $ 271,000
      for the year ended December 31, 2007
      because of increased international and domestic travel related to establishing
      and developing our iPhotonics business unit. Office and computer supplies
      increased $ 25,000 compared
      to 2006 due to headcount increases related to our iPhotonics business unit.
      Provision for bad debt increased from $0 in 2006 to $ 30,000 in
      2007.





*Research
      and Development*





Research
      and development consists of materials, wages, contract services and other
      reasonable allocation of indirect costs that have no future alternative use
      and
      which are consumed in the research and development of our Optical Network
      Terminals. Research and development increased from $52,000 for
      the year ended December 31, 2006
      to
      $4,578,000 for the year ended December 31, 2007
      as
      our iPhotonics' business unit was established in the fourth quarter of 2006
      which included the hiring of 35 full-time employees and prior to that no
      research and development was performed.





*Depreciation
      Expense*





Depreciation
      expense, net amounts included as a component of cost of sales, increased from
      $94,000 for the year ended December 31, 2006 to $160,000 for the year ended
      December 31, 2007. The increase was in-line with capital expenditures and
      depreciable asset base.




*Net
      Interest Expense*





Net
      interest expense increased from $ 943,000
      for the year ended December 31, 2006
      to
      $1,707,000 for the year ended December 31, 2007,
      or
      by $765,000. Approximately $ 530,000 of
      the
      increase relates to additional amortization of note discounts and accrued
      interest on our secured convertible debentures issued to YA Global. We amortized
      $ 118,000 of
      debt
      issue costs related to our line of credit to interest expense for
      the year ended December 31, 2007
      compared to $ 44,000
      for the year ended December 31, 2006.
      Interest expense on our lines of credit increased from $ 43,000
      for the year ended December 31, 2006
      to
      $ 162,000
      for the year ended December 31, 2007,
      or
      by $ 119,000 .
      The
      remaining increase in interest expense relates to increases on the outstanding
      balances of our loans and capital lease obligations from 2006 to
      2007.





*Change
      in Fair Value of Derivative Financial Instruments*





Expense
      from change in fair value of derivative financial instruments **** was
      $1,050,000 for the year ended December 31, 2007
      compared to $2,703,000  in
      expense for
      the year ended December 31, 2006.
      We
      account for all derivative financial instruments in accordance with SFAS No.
      133. Derivative financial instruments are initially recorded as liabilities
      in
      the consolidated balance sheet, at fair value. Derivative instrument liabilities
      are re-valued at the end of each reporting period, with changes in the fair
      value of the derivative liability recorded in our consolidated statement of
      operations as “Changes in Fair Value of Derivative Financial Instruments” in the
      period in which the changes occur. As a result, our financial statements may
      fluctuate from quarter-to-quarter based on factors, such as the price of our
      stock at the balance sheet date, the amount of shares converted by note holders
      and/or exercised by warrant holders. Consequently, our financial position and
      results of operations may vary from quarter-to-quarter based on conditions
      other
      than our operating revenues and expenses.





29





*Net
      Gain on Early Extinguishment of Debt*





Net
      gain on early extinguishment of debt **** decreased
      from $161,000 for the year ended December 31, 2006
      to
      $0 for
      the year ended December 31, 2007.
      In
      June of 2006, we 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 us 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. We
      realized a $165,000 loss on early extinguishment of debt as a result of the
      settlement.





In
      addition, on June 5, 2006 we issued to YA Global an amended and restated
      convertible debenture that consolidated all outstanding amounts of the
      convertible debenture issued by Texas Prototypes, Inc. to YA Global on June
      15,
      2005 in the amount of $550,000, plus accrued and unpaid interest in the amount
      of $27,000 through June 5, 2006, for the principal sum of $577,000. We 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%. We 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, we entered into an asset purchase agreement with Mr. Richard Smitten,
      the former chief executive officer and sole director of our predecessor
      corporation, Stock Market Solutions, Inc., pursuant to which we sold the assets
      of our predecessor business, including the business and related software, as
      well as the book-rights to three Livermore related books relating to a teaching
      and a computer training program designed to provide educational/instructional
      assistance and aid to those stock market traders who wish to learn how to trade
      in the stock market using a system previously developed by an early 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
      we
      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. We realized
      a $150,000 gain on extinguishment of debt as a result of the
      sale.





**Liquidity
      and Capital Resources**





Our
      principal potential sources of liquidity are cash on hand, cash generated from
      current revenues and cash provided from financing activities. As of December
      31,
      2007, we had cash and cash equivalents of $ 210,000 .





As
      of
      December 31, 2007, we used $ 6,880,000 in
      operating activities compared to using $ 1,482,000 as
      of
      December 31, 2006. Cash used in operating activities as of December 31, 2007
      reflects $ 8,927,000 in
      net
      loss, $ 513,000 in
      depreciation, $ 30,000 in
      provision for bad debt, $ 4,000 in
      gain
      on sale of fixed assets, $ 1,123,000 in
      debt
      discount amortization, $ 635,000 in
      stock
      compensation, $ 1,050,000 in
      change
      in fair value of derivative financial instruments and $ 315,000 in
      deferred revenue. Accounts receivable and inventory increased by $ 762,000 and
      $ 1,100,000 ,
      respectively along with a decrease in other current assets of $ 134,000 to
      decrease working capital by $ 1,728,000 .
      We
      obtained cash from working capital changes of $ 845,000 consisting
      of increases in accounts payable and accrued expenses of $ 326,000 and
      $ 519,000, respectively.





As
      of
      December 31, 2006, we used $ 1,482,000 in
      operating activities. Cash used in operating activities during 2006 reflects
      $ 4,592,000 in
      net
      loss, $ 264,000 in
      depreciation, $ 716,000 in
      debt
      discount amortization, $ 161,000 in gain
      on extinguishment of debt, $ 18,000 in
      gain
      on sale of fixed assets, $ 355,000 in
      stock
      compensation, $ 697,000 in
      aborted offering costs, and $ 2,703,000 in
      change
      in fair value of derivative financial instruments and $997,000 in deferred
      revenue. Accounts receivable, inventory, and other current assets, increased
      by
      $ 281,000 ,
      $ 555,000 $ 167,000 ,
      respectively decreasing working capital. We obtained net cash for working
      capital changes consisting of decreases in other assets and increases in
      accounts payable and accrued liabilities of $ 13,000,
      $436,000 and
      $ 105,000 ,
      respectively.





As
      of
      December 31, 2007, we used $ 207,000 in
      investing activities reflecting capital expenditures for plant, property and
      equipment and software of $ 227,000 net
      of
      $ 20,000 in
      proceeds received from the sale of fixed assets.





As
      of
      December 31, 2006, we used $ 308,000 in
      investing activities reflecting capital expenditures for plant, property and
      equipment and software of $ 368,000 net
      of
      $ 60,000 in
      proceeds received from the sale of fixed assets.





30





As
      of
      December 31, 2007, financing activities provided net cash of $ 7,071,000 as
      the
      result of issuances of $5,000,000 in convertible debentures to YA Global,
      partially offset by fees and offering costs incurred of $465,000 to secure
      the
      transaction and proceeds from common stock of $1,000,000. We received net
      proceeds from draw downs on our lines of credit of $ 1,900,000 .
      Total
      repayments on loans and capital lease obligations amounted to $ 364,000 .





As
      of
      December 31, 2006, financing activities provided net cash of $ 1,676,000 as
      the
      result of issuances of $ 550,000 in
      convertible debentures to YA Global partially offset by fees paid of
      $ 70,000 to
      secure
      the transaction. Additionally,
      we received net proceeds of $1,485,000 as a result of issuing 4,687,500 shares
      of common stock in a private placement. We received proceeds from an unsecured
      note payable from the majority shareholder, CEO Michael Shores, for $150,000
      and
      draw downs on our lines of credit for $1,150,000. Total repayments on loans
      and
      capital lease obligations amounted to $228,000 and total net redemptions
      amounted to $1,352,000 including a $225,000 redemption premium on redemptions
      of
      convertible debt issued to YA
      Global .




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





Based
      on
      funds currently available to us, management believes that we have adequate
      cash
      resources to fund our operations including our iPhotonics business unit into
      April of 2008. The cash required to operate our iPhotonics business unit which
      was formed in the fourth quarter of 2006 is significant. The formation of the
      iPhotonics business unit resulted in TXP adding 35 full-time employees and
      amending its lease in November of 2006 to expand the operating facility by
      16,000 square feet. Incremental personnel cost and lease payments are expected
      to average approximately $340,000 and $8,000, respectively, per month. Other
      research and development and operational costs are expected to average just
      under $150,000 per month for the next twelve months. Revenues to date related
      to
      the iPhotonics' business unit have been insignificant relative to the related
      expenditures which, coupled with lower than expected revenues from our other
      operating units, continues to place significant strain on our cash and
      liquidity position.





To
      continue to operate under our current business model of which our iPhotonics
      business unit is integral and material, we will need to raise additional funds
      by late April 2008. To obtain funds to continue our iPhotonics activities,
      we may utilize any of several potential options, including the issuance of
      debt
      or equity securities, the exercise of warrants issued to investors in
      conjunction with previous private offerings, and other arrangements with
      strategic partners. Although
      we have engaged a venture capital investment bank to assist us in pursuing
      our
      financing alternatives, noassurance can be given that we will be able to
      obtain financing on favorable terms, if at all. If we are unable to obtain
      additional financing when needed, we could be required to modify our business
      plan including selling the iPhotonics business unit assets or shutting down
      its operations, or cease our operations altogether, depending on the extent
      of
      available financing. Our ability to continue as a going concern depends upon
      our
      ability to raise substantial funds for use in our operating plan and activities
      especially related to our iPhotonics business unit. If the company cannot secure
      additional funds, it will not be able to meet its obligations as they come
      due.
      The accompanying consolidated financial statements do not include any
      adjustments that might result from the outcome of this uncertainty.





**Financing
      Transactions**





*Standby
      Equity Distribution Agreement*





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





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





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





31





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





*August
      2004 Secured Convertible Debt*





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





There
      are
      two ways this convertible debenture can be converted into our common
      stock.  First, the debentures are convertible at a fixed price of $0.157
      per shares as provided for under the secured debenture agreement. Specifically,
      the fixed price was calculated at 110% of a post-money market capitalization
      of
      $15 million (which shall be calculated by dividing the product of 110% times
      15,000,000 by our total outstanding capital stock on a fully-diluted basis
      as of
      the date our common stock is first quoted on the principal market). Second,
      the
      debentures are convertible at an amount equal to 80% of the volume weighted
      average price of our common stock, as quoted by Bloomberg, LP, for the five
      days
      immediately preceding the conversion date. 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 expired August 25, 2007.




In
      the
      second quarter 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 our common stock being quoted
      and
      traded on either the over-the-counter bulletin board, NASDAQ small cap market
      or
      American Stock Exchange was resolved. The conversion option, the option to
      convert at an amount equal to 80% of the volume weighted average price of our
      common stock, as quoted by Bloomberg, LP, for the five days immediately
      preceding the conversion date, was then deemed to be financial derivatives
      under
      SFAS 133 and EITF 00-19. Specifically, the variable conversion pricing aspects
      of the convertible debenture as discussed above were analyzed under paragraph
      12
      SFAS 133 and determined to be an embedded derivative that should be separated
      from the host contract since all of the following criteria were
      met:





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





32


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





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





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





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




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





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





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





*June
      5, 2006 Secured Convertible Debentures and Warrants*





On
      June
      5, 2006, we consummated a securities purchase agreement dated June 5, 2006
      with
      YA Global providing for the sale by us to YA Global of our 10% secured
      convertible debentures in the aggregate principal amount of $1,127,000 with
      principal and interest due on or before June 5, 2009. The terms of this
      debenture require us to obtain prior written consent from the holder, YA Global,
      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, YA Global,
      with
      a right of first refusal on capital raises by us. Specifically, for a period
      if
      18 months after the closing date, if we intend to raise additional capital
      by
      the issuance or sale of our capital stock, 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 us, an underwriter, placement agent or
      any
      third party) we shall be obligated to offer to YA Global such issuance or sale
      of capital stock, by providing in writing the principal amount of capital we
      intend to raise and outline of the material terms of such capital raise, prior
      to the offering such issuance or sale of capital stock  to any third
      parties including, but not limited to, current or former officers or directors,
      current or former shareholders and/or investors of the obligor, underwriters,
      brokers, agents or other third parties.  YA Global shall have 10 business
      days from receipt of such notice of the sale or issuance of capital stock to
      accept or reject all or a portion of such capital raising offer. The debenture
      is secured by a second priority security interest in all of our goods,
      inventory, contractual rights and general intangibles, receivables, documents,
      instruments, and chattel paper. In the event of default, YA Global may cause
      the
      obligation to become immediately due and payable. In addition, upon the
      occurrence of an event of default, YA Global shall: (i) be entitled to
      receive all distributions with respect to the pledged property, (ii) to
      cause the pledged property to be transferred into its name or its nominee,
      (iii) to dispose of the pledged property, and (iv) to realize upon any
      and all rights in the pledged property then held by YA Global; provided however,
      that YA Global security interest is second in priority behind First Bank of
      Canyon Creek.





33




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





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





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





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





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





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





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




In
      addition, on June 5, 2006 we issued to YA Global an amended and restated
      convertible debenture, on the same terms and conditions as set forth above
      which
      consolidates all outstanding amounts of the convertible debenture issued by
      Texas Prototypes, Inc. to YA Global on June 15, 2005 in the amount of $550,000,
      plus accrued and unpaid interest in the amount of $27,000 through June 5, 2006,
      for the principal sum of $577,000. We 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%. We recorded a gain on
      extinguishment of debt of $630,000 in the consolidated statements of operations
      as a result of the modification.





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





34





*YA
      Global Registration Rights Agreement*





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




*July
      2006 Warrants*





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





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





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





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





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





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





35





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





*October
      2006 Warrants*





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





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




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





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





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




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





36





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





*October
      2006 Securities Purchase Agreement*





On
      October 11, 2006, we entered into a securities purchase agreement with a
      qualified institutional buyer pursuant to which we sold an aggregate of
      $1,500,000 in shares of our common stock, par value $.001 per share, at a per
      share purchase price of $.32, together with five year warrants to purchase
      2,343,750 shares of common stock at an exercise price equal to $0.50 per share
      and five year warrants to purchase 2,343,750 shares of common stock at an
      exercise price equal to $1.00 per share. The entire purchase price of the shares
      and the warrants was used by us to redeem our principal amount $550,000 and
      $577,000 10% secured convertible debentures issued to YA Global Investments,
      L.P. in June 2005 and June 2006, respectively, each at a 20% premium, for a
      total redemption price of approximately $1,392,000.





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





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





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





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





37





*March
      2007 Securities Purchase Agreement*





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




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





In
      addition, the notes are convertible at any time into shares of our common stock
      at a conversion price per share equal to $0.41; provided however, that in the
      event that we have not raised at least $1,000,000 in additional equity capital
      between the closing date and the date that is 120 days after the closing date,
      the conversion price shall automatically become $0.25 per share. We have the
      right to redeem a portion or all amounts outstanding under the notes prior
      to
      the maturity date at a 20% redemption premium provided that the closing bid
      price of the common stock is less than the conversion price, the registration
      statement is effective, and no event of default has occurred or is continuing.
      Our obligations under the purchase agreement and the notes are secured by
      substantially all of our assets; provided however, such security interest is
      second in priority to certain liens granted by us in favor of First Bank of
      Canyon Creek.





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





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





The
      securities purchase agreement provides YA Global with rights of first refusal.
      From the date of the first closing until 24 months thereafter, if we intend
      to
      raise additional capital by the issuance or sale of our capital stock, 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 us, any
      underwriter, placement agent or any third party) we shall be obligated to offer
      to the buyers such issuance or sale of capital stock, by providing in writing
      the principal amount of capital we intend to raise and outline of the
      material terms of such capital raise, prior to the offering such issuance or
      sale of capital stock  to any third parties including, but not limited to,
      current or former officers or directors, current or former shareholders and/or
      investors of the obligor, underwriters, brokers, agents or other third
      parties.  YA Global shall have 10 business days from receipt of such notice
      of the sale or issuance of capital stock to accept or reject all or a portion
      of
      such capital raising offer.





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





38





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





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





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





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





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




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





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





This
      convertible note was originally discounted by $3,826,000. The discount included
      $350,000 in fees paid to the lender and 195,122 shares of common stock issued
      valued at $76,000 based on the closing price of common stock on the date of
      issuance. Additionally, the note was further discounted by $2,603,000 upon
      bifurcation and recording at fair value the embedded conversion option, and
      by
      $797,000 representing the fair value of the warrants issued in conjunction
      the
      note. The discount is being amortized over the life of the notes for three
      years. At December 31, 2007, the convertible debenture had balance of $1,131,000
      net of $2,869,000 of unamortized discount. The effective interest rate on the
      debenture is 11.8% compared to the stated interest of 8% which takes
      into account the debt discount and issue costs related to the
      debenture.





39





On
      December 13, 2007, we and YA Global entered into amendment number 1 to the
      securities purchase agreement pursuant to which the second closing of $1,000,000
      was revised from the date on which we file the registration statement to
      December 13, 2007. Accordingly, on December 13, 2007 we and YA Global completed
      the second closing in which we received gross proceeds in the amount of
      $1,000,000 and we issued to YA Global a note in the principal amount of
      $1,000,000. In addition, we issued 48,781 shares of common stock to YA Global
      as
      an original issue discount which represents a number of shares equal to 2%
      of
      the second closing proceeds of $1,000,000 at a per share price equal to $0.41,
      which represents the fixed conversion price of the notes. At
      December 31, 2007, the note had balance of $499,000 net of $501,000 of
      unamortized discount. The effective interest rate on the
      debenture is 11.2% compared to the stated interest of 8% which takes
      into account the debt discount and issue costs related to the
      debenture.





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





*September
      2007 Securities Purchase Agreement*





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





The
      exercise prices of the warrants are subject to adjustment in certain events,
      including, without limitation, upon the our consolidation, merger or sale of
      all
      of substantially all of our assets, a reclassification of our common stock,
      or
      any stock splits, combinations or dividends with respect to our common
      stock.





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





We
      did
      not file the registration statement by December 15, 2007 and are currently
      in
      default of this obligation. As of December 31, 2007, an aggregate of $5,161
      in
      liquidated damages has accrued and been recorded as an expense. As of March
      28,
      2007, an aggregate of $49,333 in liquidated damages has accrued. ****





*December
      2007 Warrants*





On
      December 28, 2007, we entered into an agreement with James Von Ehr, II, an
      accredited investor, pursuant to which we will, within 90 days from the date
      the
      Collateral (as defined below) is deposited into the account of a Lender (the
      “Closing Date”), issue to the investor seven-year warrants to purchase an
      aggregate of 1,280,000 shares of common stock as consideration for the investor
      agreeing to pledge an aggregate of $2,000,000 in free-trading shares of common
      stock of Fossil Incorporated (NASDAQ:FOSL) or such other shares of free-trading
      common stock having a value of $2,000,000 in the aggregate beneficially owned
      by
      the investor as may be agreed upon between the parties (the “Collateral”). The
      Collateral is to be pledged on our behalf in favor of First Bank of Canyon
      Creek, or such other lending or financing institution as may be agreed upon
      between the parties, as Collateral for a loan to be obtained by us from a lender
      in an amount up to $2,000,000 with a maturity date of January 16, 2009, which
      will be further guaranteed personally and through the pledge of common stock
      beneficially owned by Michael Shores, our Chief Executive Officer, in an amount
      equal to the initial amount pledged by the investor at a per share price equal
      to $0.50. The warrants are exercisable into shares of the our common stock
      at a
      price equal to $0.40 per share.





40





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





Moreover,
      the agreement provides for piggy-back registration rights in which we are
      required to file a registration statement with the Securities and Exchange
      Commission registering the common stock issuable upon exercise of the warrants
      on the next registration statement filed by us after the filing of the
      registration statement pursuant to the March 2007 registration rights agreement
      between us and YA Global Investments, L. P. We are obligated 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.





On
      February 25, 2008, we consummated a fourth Loan Agreement dated as of February
      14, 2008 with First Bank of Canyon Creek which renews and supersedes the prior
      Loan Agreement dated as of August 14, 2007 and increased our line of credit
      from
      $3,500,000 to $5,100,000 (the “ Loan ”)
      to be
      used by us for working capital and general corporate purposes. The entire Loan
      bears interest at a rate of 8.00% per annum and all principal, and accrued
      and
      unpaid interest, is due on January 16, 2009. Our obligations under the Loan
      Agreement are secured by a pledge of an aggregate of $6,375,000 in Collateral
      by
      the investor, James Von Ehr, II. In addition, our obligations under the Loan
      Agreement are further guaranteed personally and through the pledge of an
      aggregate of 4,000,000 shares of common stock beneficially owned by Michael
      Shores, our Chief Executive Officer.





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





We
      hired
      Siemens' former ONT development team effective at the beginning of the fourth
      quarter of 2006. As a result, we added 35 full-time employees and amended our
      lease in November of 2006 and expanded the operating facility by 16,000 square
      feet. Incremental personnel cost and lease payments are expected to average
      approximately $340,000 and $8,000, respectively, per month.





In
      the
      fourth quarter of 2006, we executed a transfer and license agreement with
      Siemens AG in which we acquired certain assets including fixed assets and
      component inventory and were granted non-exclusive, non-transferable, and
      non-sub licensable rights and license to use, copy and otherwise deploy software
      and code and know-how related to its optical network terminal (ONT) technology,
      supporting both broadband passive optical network (BPON) and gigabit passive
      optical network (GPON) standards. We were also granted non-exclusive,
      non-transferable, and non-sub licensable rights and license to use under the
      pertinent patents related to BPON and GPON ONT to manufacture, market and
      further develop the BPON and GPON ONT products. Further, any intellectual
      property created or made on our behalf related to BPON or GPON ONTs would become
      vested to us.





We
      did
      not pay cash, issue stock or incur financial obligations to acquire the ONT
      assets or use of intellectual property. However, the transfer and license
      agreement did provide that we complete development of a release of certain
      GPON
      ONT products by January 31, 2007 and provide Siemens with all pertinent
      documentation, data, software code and files which will enable Siemens to
      manufacture, distribute and further develop or have manufactured, developed
      and
      distributed these releases (See **** Note
      18
      to the unaudited financial statements included herein for full details of
      accounting for this transaction). Further that we grant Siemens a non-exclusive,
      non-transferable, non-sub licensable right and license under any copyrights
      and
      intellectual property to manufacture, distribute and further develop or have
      manufactured, developed and distributed these particular releases.





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





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





41





**Cash
      Requirements and Liquidity**





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





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





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


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





Based
      on
      funds currently available to us, management believes that we have adequate
      cash
      resources to fund our operations including our iPhotonics business unit into
      April of 2008. The cash required to operate our iPhotonics business unit which
      was formed in the fourth quarter of 2006 is significant. The formation of the
      iPhotonics business unit resulted in our adding 35 full-time employees and
      amending our lease in November of 2006 to expand the operating facility by
      16,000 square feet. Incremental personnel cost and lease payments are expected
      to average approximately $340,000 and $8,000, respectively, per month. Other
      research and development and operational costs are expected to average
      approximately $150,000 per month for the next twelve months. Revenues to date
      related to the iPhotonics' business unit have been insignificant relative to
      the
      related expenditures which coupled with lower than expected revenues from our
      other operating units continues to place significant strain our cash and
      liquidity position.





To
      continue to operate under our current business model of which our iPhotonics
      business unit is integral and material, we have an urgent requirement to raise
      additional funds by late April 2008. To obtain funds to continue our
      iPhotonics activities, we may utilize any of several potential options,
      including the issuance of debt or equity securities, the exercise of
      warrants issued to investors in conjunction with previous private offerings,
      and
      other arrangements with strategic partners. Although
      we have engaged a venture capital investment bank to assist us in pursuing
      our
      financing alternatives, noassurance can be given that we will be able to
      obtain financing on favorable terms, if at all. If we are unable to obtain
      additional financing when needed, we could be required to modify our business
      plan including selling the iPhotonics business unit assets or shutting down
      our operations depending on the extent of available financing. Our ability
      to continue as a going concern depends upon our ability to raise substantial
      funds for use in our operating plan and activities especially related to our
      iPhotonics business unit. If the company cannot secure additional funds, it
      will
      not be able to meet its obligations as they come due. The accompanying
      consolidated financial statements do not include any adjustments that might
      result from the outcome of this uncertainty.




**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.
  42
  **Item 7.** ***Financial
        Statements***




REPORT
          OF
          INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To
          the
          Board of Directors
 Texas
          Prototypes Inc.
 Richardson,
          Texas
  We
          have
          audited the accompanying consolidated balance sheets of TXP
          Corporation (FKA Texas Prototypes, Inc.) (Company) as
          of
          December 31, 2007 and 2006, and the related consolidated statements of
          operations, stockholders'
          deficit, and cash flows for the years then ended. These
          consolidated financial statements are the responsibility of TXP
          Corporation's management .
          Our
          responsibility is to express an opinion on these financial statements based
          on
          our audits.
  We
          conducted our audits in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. An audit includes examining,
          on a
          test basis, evidence supporting the amounts and disclosures in the financial
          statements. An audit also includes assessing the accounting principles
          used and
          significant estimates made by management, as well as evaluating the overall
          financial statement presentation. We believe that our audits provide a
          reasonable basis for our opinion.
  The
          accompanying consolidated financial statements have been prepared assuming
          that
          the Company will continue as a going concern. As discussed in Note 3 to
          the
          consolidated financial statements, t he
          Company has sustained substantial operating losses, has a stockholders’ deficit
          and its current liabilities exceed their current assets. Management’s
          plans regarding those matters also are described in Note 3. Those conditions
          raise substantial doubt about the Company’s ability to continue as a going
          concern. The consolidated financial statements do not include any adjustments
          that might result from the outcome of this uncertainty.
  In
          our
          opinion, the 2006 consolidated financial statements referred to in the
          first
          paragraph present fairly, in all material respects, the financial position
          of TXP
          Corporation as of
          December 31, 2006, and the results of its operations and its cash flows
          for the
          year then ended in conformity with accounting principles generally accepted
          in
          the United States of America.
  Because
          of the significance of the uncertainty described in the third paragraph,
          we are
          unable to express, and we do not express, an opinion on the 2007 consolidated
          financial statements referred to in the first paragraph.
  /s/
          Payne, Smith & Jones P.C.
  Payne,
          Smith & Jones P.C.
 Dallas,
          Texas
 March
          26,
          2008
 43
  **TXP
        CORPORATION**
 **CONSOLIDATED
        BALANCE SHEETS**
 **December
        31, 2007 and 2006**
 **2007**
                
                **2006****ASSETS****Current
                    assets**Cash
                
                $
                210,000
                
                $
                228,000Accounts
                    receivable, net of allowance of $23,000 and $0 as of December
                    31, 2007 and
                    2006, respectively.
                
                
                1,708,000
                
                
                976,000Inventory
                
                
                1,772,000
                
                
                673,000Other
                    current assets
                
                
                212,000
                
                
                346,000Total
                    current assets
                
                
                3,902,000
                
                
                2,223,000**Property
                    and equipment, net**
                
                
                2,641,000
                
                
                2,667,000**Other
                    assets**
                
                
                140,000
                
                
                13,000**TOTAL
                    ASSETS**
                
                $
                6,683,000
                
                $
                4,903,000**LIABILITIES
                    AND STOCKHOLDERS' DEFICIT****Current
                    liabilities**Current maturities of notes payable
                
                $
                144,000
                
                $
                272,000Current capital lease obligations
                
                
                120,000
                
                
                46,000Lines of credit
                
                
                3,300,000
                
                
                400,000Current derivative financial instruments
                
                
                -
                
                
                1,288,000Current convertible debentures, net of unamortized discount of
                    $423,000 as
                    of December 31, 2006
                
                
                -
                
                
                467,000Accounts payable
                
                
                1,239,000
                
                
                913,000Deferred revenue
                
                
                17,000
                
                
                332,000Accrued expenses
                
                
                704,000
                
                
                412,000Total current liabilities
                
                
                5,524,000
                
                
                4,130,000**Notes
                    payable, net of current maturities**
                
                
                -
                
                
                144,000**Capital
                    lease obligations, net of current obligations**
                
                
                165,000
                
                
                32,000******Line
                    of credit**
                
                
                -
                
                
                1,000,000**Convertible
                    debentures**, net of unamortized discount of $3,370,000 as of
                    December 31, 2007
                
                
                1,630,000
                
                
                -**Derivative
                    financial instruments,**net of current obligation
                
                
                5,178,000
                
                
                2,507,000**Deferred
                    tax liability**
                
                
                48,000
                
                
                48,000**TOTAL
                    LIABILITIES**
                
                
                12,545,000
                
                
                7,861,000**STOCKHOLDERS'
                    DEFICIT**Common
                    Stock , $.001 par value, 300,000,000 authorized, 116,584,428
                    and
                    104,080,623 shares issued and outstanding as of December 31,
                    2007 and
                    2006, respectively
                
                
                117,000
                
                
                104,000Additional
                    paid in capital
                
                
                8,133,000
                
                
                2,121,000Accumulated
                    deficit
                
                
                (14,117,000
                )
                
                (5,190,000
                )Accumulated
                    other comprehensive income
                
                
                5,000
                
                
                7,000**TOTAL
                    STOCKHOLDERS' DEFICIT**
                
                
                (5,862,000
                )
                
                (2,958,000
                )**TOTAL
                    LIABILITIES AND STOCKHOLDER'S DEFICIT**
                
                $
                6,683,000
                
                $
                4,903,000
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
  F-1
 
 **TXP
        CORPORATION**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **For
        the Years Ended December 31, 2007 and 2006**
  **2007**
              
              **2006****Revenues**Prototyping
                  and assembly
              
              $
              4,678,000
              
              $
              3,842,000Material
                  management services
              
              
              3,847,000
              
              
              2,360,000Retrofit
                  solutions
              
              
              1,387,000
              
              
              1,029,000Product
                  and accessory
              
              
              327,000
              
              
              -Design
                  and development
              
              
              747,000
              
              
              997,000Total
                  revenues
              
              
              10,986,000
              
              
              8,228,000**Cost
                  of sales**
              
              
              7,332,000
              
              
              5,523,000**Gross
                  profit**
              
              
              3,654,000
              
              
              2,705,000**Costs
                  and expenses**Selling,
                  general and administrative
              
              
              5,090,000
              
              
              3,834,000Research
                  and development
              
              
              4,578,000
              
              
              52,000Depreciation
              
              
              160,000
              
              
              94,000Total
                  Costs and expenses
              
              
              9,828,000
              
              
              3,980,000**Operating
                  loss**
              
              
              (6,174,000
              )
              
              (1,275,000
              )**Other
                  income (expense)**Interest
                  expense, net
              
              
              (1,707,000
              )
              
              (943,000
              )Change
                  in fair value of derivative financial instruments
              
              
              (1,050,000
              )
              
              (2,703,000
              )Net
                  gain on early extinguishment of debt
              
              
              -
              
              
              161,000Other
                  income
              
              
              -
              
              
              150,000Gain
                  on sale of fixed assets
              
              
              4,000
              
              
              18,000Total
                  other income (expense)
              
              
              (2,753,000
              )
              
              (3,317,000
              )**Loss
                  before income taxes**
              
              
              (8,927,000
              )
              
              (4,592,000
              )**Income
                  tax expense**
              
              
              -
              
              
              -**Net
                  loss**
              
              $
              (8,927,000
              )
              $
              (4,592,000
              )**Foreign
                  currency translation adjustment**
              
              
              (2,000
              )
              
              -**Comprehensive
                  loss**
              
              $
              (8,929,000
              )
              $
              (4,592,000
              )**Basic
                  earnings loss per share**
              
              $
              (0.08
              )
              $
              (0.05
              )**Diluted
                  earnings loss per share**
              
              $
              (0.08
              )
              $
              (0.05
              )**Basic
                  weighted average shares outstanding**
              
              
              111,580,413
              
              
              95,024,296**Diluted
                  weighted average shares outstanding**
              
              
              111,580,413
              
              
              95,024,296
 
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
  F-2
  **TXP
        CORPORATION**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **December
        31, 2007 and 2006**
  **2007**
              
              **2006****CASH
                  FLOWS USED IN OPERATING ACTIVITIES:**Net
                  loss
              
              $
              (8,927,000
              )
              $
              (4,592,000
              )**Adjustments
                  to reconcile net loss to cash used in operating
                  activities:**Depreciation
              
              
              513,000
              
              
              264,000Provision
                  for bad debt
              
              
              30,000
              
              
              -Gain
                  on sales of fixed assets
              
              
              (4,000
              )
              
              (18,000
              )Deferred
                  revenue
              
              
              (315,000
              )
              
              (997,000
              )Amortization
                  of discount on convertible notes
              
              
              1,123,000
              
              
              716,000Gain
                  on early extinguishment of debt
              
              
              -
              
              
              (161,000
              )Stock
                  compensation
              
              
              635,000
              
              
              355,000Changes
                  in assets and liabilities:Aborted
                  offering costs
              
              
              -
              
              
              (281,000
              )Accounts
                  receivable
              
              
              (762,000
              )
              
              697,000Inventory
              
              
              (1,100,000
              )
              
              (555,000
              )Other
                  current assets
              
              
              134,000
              
              
              (167,000
              )Other
                  assets
              
              
              (102,000
              )
              
              13,000Accounts
                  payable
              
              
              326,000
              
              
              436,000Accrued
                  expenses
              
              
              519,000
              
              
              105,000Change
                  in value of derivative financial instruments
              
              
              1,050,000
              
              
              2,703,000**CASH
                  FLOWS USED IN OPERATING ACTIVITIES**
              
              
              (6,880,000
              )
              
              (1,482,000
              )**CASH
                  FLOWS USED IN INVESTING ACTIVITIES:**Capital
                  expenditures
              
              
              (227,000
              )
              
              (368,000
              )Proceeds
                  from sale of fixed assets
              
              
              20,000
              
              
              60,000**CASH
                  FLOWS USED IN INVESTING ACTIVITIES**
              
              
              (207,000
              )
              
              (308,000
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES:**Deferred
                  offering costs
              
              
              -
              
              
              (9,000
              )Proceeds
                  from convertible debenture
              
              
              4,535,000
              
              
              480,000Proceeds
                  from sale of common stock and warrants
              
              
              1,000,000
              
              
              1,485,000Proceeds
                  from note payable
              
              
              -
              
              
              150,000Line
                  of credit, net
              
              
              1,900,000
              
              
              1,150,000Repayment
                  of notes payable and capital lease obligations
              
              
              (364,000
              )
              
              (228,000
              )Payment
                  of redemption premium on convertible debenture
              
              
              -
              
              
              (225,000
              )Redemption
                  of convertible debentures
              
              
              -
              
              
              (1,127,000
              )**CASH
                  FLOWS PROVIDED BY FINANCING ACTIVITIES**
              
              
              7,071,000
              
              
              1,676,000Effect
                  of currency translation on cash balances
              
              
              (2,000
              )
              
              -NET
                  DECREASE IN CASH
              
              
              (18,000
              )
              
              (114,000
              )Cash,
                  beginning of period
              
              
              228,000
              
              
              342,000Cash,
                  end of period
              
              $
              210,000
              
              $
              228,000
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
  F-3
 **TXP
          CORPORATION**
 **CONSOLIDATED
          STATEMENTS OF CASH FLOWS - continued**
 **December
          31, 2007 and 2006**
 **SUPPLEMENTAL
                      DISCLOSURE OF CASH AND NONCASH INVESTING AND FINANCING
                      ACTIVITIES****2007**
                  
                  **2006****CASH**Interest
                      paid
                  
                  $
                  227,000
                  
                  $
                  98,000Taxes
                      paid
                  
                  $
                  -
                  
                  $
                  -**NONCASH
                      INVESTING AND FINANCING ACTIVITIES**1,700,000
                      shares issued to extinguish debt
                  
                  $
                  -
                  
                  $
                  684,000Liabilities
                      assumed upon merger
                  
                  $
                  -
                  
                  $
                  744,000923,657
                      shares issued on conversion of debt
                  
                  $
                  -
                  
                  $
                  145,0002,324,481
                      shares issued on conversion of debt
                  
                  $
                  -
                  
                  $
                  365,000Modifications
                      of debt treated as extinguishment and new debt
                  
                  $
                  -
                  
                  $
                  619,000Assets
                      acquired for consulting services in non-monetary exchange (Note
                      18**)**
                  
                  $
                  -
                  
                  $
                  1,329,000Debt
                      issue costs recorded on issuance of 320,000 warrants
                  
                  $
                  -
                  
                  $
                  120,000125,000
                      shares issued to investor to settle commitment fee liability
                      (Note
                      12)
                  
                  $
                  60,000
                  
                  $
                  -6,730,032
                      shares issued on conversion of debt and accrued interest
                  
                  $
                  792,000
                  
                  $
                  -Property
                      acquired under capital lease obligations and notes payable
                  
                  $
                  300,000
                  
                  $
                  363,000Reclassification
                      of warrants to additional paid in capital (Note 12)
                  
                  $
                  2,684,000
                  
                  $
                  -Fees
                      paid to holder in conjunction with the issuance of convertible
                      note
                  
                  $
                  350,000
                  
                  $
                  -Offering
                      costs charged to additional paid in capital
                  
                  $
                  35,000
                  
                  $
                  -Fair
                      value of embedded conversion option bifurcated from $4M convertible
                      note
                  
                  $
                  2,603,000
                  
                  $
                  -Warrants
                      issued to investor
                  
                  $
                  797,000
                  
                  $
                  -Fees
                      to holder settled in common stock in conjunction with issuance
                      of $4M
                      convertible note
                  
                  $
                  76,000
                  
                  $
                  -Fair
                      value of embedded conversion option bifurcated from $1M convertible
                      note
                  
                  $
                  413,000
                  
                  $
                  -Fees
                      to holder settled in common stock in conjunction with issuance
                      of $1M
                      convertible note
                  
                  $
                  15,000
                  
                  $
                  -
  The
          accompanying notes are an integral part of the consolidated financial
          statements.
  F-4
  **TXP
        CORPORATION**
 **STATEMENTS
        OF STOCKHOLDERS' DEFICIT**
 **For
        the years Ended December 31, 2007 and 2006**
  **COMMON
                  STOCK**
              
              
              
              **Accumulated****Additional**
              
              
              
              **Other****Paid
                  In**
              
              **Accumulated**
              
              **Income****Shares**
              
              **Amount**
              
              **Capital**
              
              **Deficit**
              
              **Comprehensive**
              
              **Total****Balance,
                  December 31, 2005**
              
              
              **89,298,042**
              
              **$**
              **89,000**
              
              **$**
              **17,000**
              
              **$**
              **(598,000**
              **)**
              **$**
              **7,000**
              
              **$**
              **(485,000**
              **)**Addition
                  of YTXP shares
              
              
              4,997,673
              
              
              5,000
              
              
              (5,000
              )
              
              -
              
              
              -
              
              
              -Liabilities
                  assumed upon merger
              
              
              -
              
              
              -
              
              
              (744,000
              )
              
              -
              
              
              -
              
              
              (744,000
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              (4,592,000
              )
              
              -
              
              
              (4,592,000
              )Issuance
                  of shares to extinguish debt
              
              
              1,700,000
              
              
              2,000
              
              
              848,000
              
              
              -
              
              
              -
              
              
              850,000Stock
                  compensation awarded to employees
              
              
              149,000
              
              
              -
              
              
              355,000
              
              
              -
              
              
              -
              
              
              355,000Shares
                  in conversion of debentures
              
              
              923,567
              
              
              1,000
              
              
              144,000
              
              
              -
              
              
              -
              
              
              145,000Unamortized
                  debt discount charged to APIC on conversion of debentures
              
              
              -
              
              
              -
              
              
              (337,000
              )
              
              -
              
              
              -
              
              
              (337,000
              )Shares
                  issued in conversion of debentures
              
              
              2,324,841
              
              
              2,000
              
              
              363,000
              
              
              -
              
              
              -
              
              
              365,000Shares
                  issued in private placement
              
              
              4,687,500
              
              
              5,000
              
              
              1,480,000
              
              
              -
              
              
              -
              
              
              1,485,000**Balance,
                  December 31, 2006**
              
              
              **104,080,623**
              
              **$**
              **104,000**
              
              **$**
              **2,121,000**
              
              **$**
              **(5,190,000**
              **)**
              **$**
              **7,000**
              
              **$**
              **(2,958,000**
              **)**Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              (8,927,000
              )
              
              —
              
              
              (8,927,000
              )Stock
                  compensation: options awarded to employees (Note 5)
              
              
              —
              
              
              —
              
              
              636,000
              
              
              —
              
              
              —
              
              
              636,000Shares
                  issued to employees hired in October 2006
              
              
              1,404,870
              
              
              2,000
              
              
              (2,000
              )
              
              —
              
              
              —
              
              
              -Shares
                  issued to an investor for commitment fee (Note 12)
              
              
              4,125,000
              
              
              4,000
              
              
              1,056,000
              
              
              —
              
              
              —
              
              
              1,060,000Compensation
                  shares (Note 12)
              
              
              195,122
              
              
              —
              
              
              76,000
              
              
              —
              
              
              —
              
              
              76,000Offering
                  costs
              
              
              —
              
              
              —
              
              
              (35,000
              )
              
              —
              
              
              —
              
              
              (35,000
              )Warrants
                  issued to investor (Note 12)
              
              
              —
              
              
              —
              
              
              797,000
              
              
              —
              
              
              —
              
              
              797,000Shares
                  issued in conversion of debentures and accrued interest (Note 12
                  and
                  13)
              
              
              6,730,032
              
              
              7,000
              
              
              785,000
              
              
              —
              
              
              —
              
              
              792,000Reclassification
                  of warrants from derivative financial instruments (Note
                  12)
              
              
              —
              
              
              —
              
              
              2,684,000
              
              
              —
              
              
              —
              
              
              2,684,000Shares
                  issued to an investor (Note 12)
              
              
              48,781
              
              
              —
              
              
              15,000
              
              
              —
              
              
              —
              
              
              15,000Foreign
                  currency translation adjustment
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (2,000
              )
              
              (2,000
              )**Balance,
                  December 31, 2007**
              
              
              **116,584,428**
              
              **$**
              **117,000**
              
              **$**
              **8,133,000**
              
              **$**
              **(14,117,000**
              **)**
              **$**
              **5,000**
              
              **$**
              **(5,862,000**
              **)**
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
  F-5
  **TXP
        CORPORATION**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
        1 - ORGANIZATION AND NATURE OF OPERATIONS**
 
 TXP
        specializes in quick-turn complex circuit card assemblies and optoelectronic
        prototyping, new product introduction, and pilot production of electronic
        assemblies for technology innovators and original equipment manufacturers
        (OEMs)
        and contract manufacturers (CMs) in the United States of America.
  Our
        retrofit solutions business offers custom
        engineering kits to enable incumbent local exchange carriers (ILECs) to upgrade
        their local access service delivery infrastructure. These retrofit kits enable
        a
        wide range of next generation telecom platforms to fit into various remote
        cabinets that have been deployed by ILECs. Our kits cover a diverse range
        of
        cabinets of differing sizes and line counts from a majority of the industry’s
        access vendors. We believe that our retrofit kits offer carriers the ability
        to
        upgrade their network infrastructure for substantially less cost than using
        new
        cabinets. Retrofits are generally deployed due to a generational change of
        access equipment supporting the latest telecom services which require power
        and/or cooling upgrades.
  In
        December of 2006, TXP created a new business unit, iPhotonics, which focuses
        primarily on the development and sale of Optical Network Terminals (“ONTs”) and
        related accessories and to a lesser extent related design and development
        services. ONTs are the customer premise located devices used by a carrier
        to
        serve residential and business customers over a PON-based (Passive Optical
        Networking) system. PON is a maturing point-to-multipoint technology which
        is
        being adopted by telephone companies globally because of its cost effectiveness
        in extending fiber-based service delivery all the way to the customer premise
        (Fiber-to-the-Home [“FTTH”] or Fiber-to-the-Premise [“FTTP”]). TXP's ONTs will
        sit at each customer premise and will be connected over fiber to an Optical
        Line
        Terminal (“OLT”) generally located in the carrier's central office. A single OLT
        can deliver services to thousands of ONTs.
 
 The
        Company was originally formed in Nevada in June of 1994 under the name Cyber
        Synergy, Inc. to develop stock market related software applications. The
        Company’s corporate name has changed several times to date including in November
        1999 to “Jesse Livemore.com” and in December 2001 to “Stock Market Solutions,
        Inc.” and in April of 2006 to “YTXP Corporation”. On April 28, 2006, the reverse
        merger between the wholly owned subsidiary of Stock Market Solutions, Inc.
        was
        consummated with Texas Prototypes, Inc., a private company. The transaction
        was
        treated as a recapitalization of Texas Prototypes, Inc., with Texas Prototypes,
        Inc. treated as the accounting acquirer and continuing reporting entity.
        A
        change of control was deemed to have occurred as a result of the transaction.
        In
        June of 2006, the articles of incorporation were amended and the Company's
        name
        was changed to TXP Corporation (See Note 2 Merger and
        Recapitalization).
 
 **NOTE
        2 - ACCOUNTING POLICIES**
 
 ***Merger
        and Recapitalization***
 
 On
        June
        14, 2005 Stock Market Solutions, Inc. and its wholly owned subsidiary entered
        into a definitive Agreement and Plan of Merger ( “the Agreement”) with Texas
        Prototypes, Inc.
 
 On
        April
        28, 2006, YTXP Corporation (f/k/a Stock Market Solutions, Inc.) issued
        89,298,042 shares or 94.7% of the issued and outstanding shares to the
        shareholders of Texas Prototypes, Inc. and acquired all of the outstanding
        shares of Texas Prototypes, Inc. As contemplated by the Agreement and concurrent
        with closing of the transaction, all directors and officers of YTXP resigned
        and
        were replaced by appointees of the current shareholders of YTXP. A change
        of
        control was deemed to have occurred as a result of the merger. For accounting
        purposes, the acquisition has been treated as recapitalization of Texas
        Prototypes, Inc. with Texas Prototypes, Inc. as the acquirer and as the
        continuing reporting entity. Accordingly, financial statements filed for
        post-merger periods will depict the acquisition of YTXP by the accounting
        acquirer and will include financial statements of the accounting acquirer
        for
        the pre-merger comparable periods. As of April 28, 2006, the Company completed
        a
        recapitalization transaction which resulted in new common shares outstanding
        of
        94,295,715, after giving effect of cancellation of shares in the transaction
        and
        reissuance per the related merger agreement. As required by accounting guidance,
        authorized shares, issued and outstanding shares and per share amounts have
        been
        retroactively restated throughout these consolidated financial statements
        and
        the accompanying notes.
 
 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
        December 31, 2007, TXP had one wholly owned subsidiary, TXP-Asia. All material
        inter-company balances and inter-company transactions have been
        eliminated.
  F-6
  ***Basis
        of Accounting***
 
 TXP
        maintains its accounts on the accrual method of accounting in accordance
        with
        accounting principles generally accepted in the United States of
        America.
 
 ***Use
        of Estimates***
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities at the date of the balance sheet. Actual results could differ
        from
        those estimates.
 
 ***Foreign
        Currency Translation***
 
 Pursuant
        to Statement of Financial Accounting Standards ("SFAS") No. 52, Foreign Currency
        Translation, TXP's investment in TXP- Asia translates all assets and liabilities
        at the respective period-end currency exchange rates and revenues and expenses
        at an average currency exchange rate for the period. The resulting translation
        adjustments are accumulated as a separate component of shareholders'
        deficit.
  ***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 December 31, 2007 and December 31, 2006, the cash balance
        at our
        financial institution exceeded the insured limits by $215,000 and $375,000,
        respectively.
 
 ***Allowance
        for Doubtful Accounts***
 
 Earnings
        are charged with a provision for doubtful accounts based on a current review
        of
        collectibility of accounts receivable. Accounts deemed uncollectible are
        applied
        against the allowance for doubtful accounts.
 
 ***Inventory***
 
 Inventory
        is valued at the lower of cost or market. Cost is determined by using the
        average cost method. Inventory consists primarily of direct raw material
        costs
        related to customer prototyping and assembly projects, retrofit services
        raw
        materials, and ONT related raw materials. In November 2004 the Financial
        Accounting Standards Board ("FASB") issued Statement of Financial Accounting
        Standards No. 151, "Inventory Costs-an amendment of ARB No. 43, Chapter 4"
        ("SFAS 151"). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory
        Pricing," to clarify the accounting for abnormal amounts of idle facility
        expense, freight, handling costs and wasted material (spoilage). Among other
        provisions, the new rule requires that items such as idle facility expense,
        excessive spoilage, double freight and rehandling costs be recognized as
        current-period charges regardless of whether they meet the criterion of "so
        abnormal" as stated in ARB No. 43. Additionally, SFAS 151 requires that the
        allocation of fixed production overhead to the costs of conversion be based
        on
        the normal capacity of the production facilities. SFAS 151 is effective for
        fiscal years beginning after June 15, 2005. As of January 1, 2006, the Company
        adopted SFAS 151. The adoption did not have a material impact on the Company's
        consolidated financial condition and results of operations.
 
 ***Deferred
        Offering Costs***
  Deferred
        offering costs were costs incurred by TXP related to entering into the
        $15,000,000 Standby Equity Distribution Agreement (See Note 10 of Financial
        Statements). These costs consist of related legal, accounting, and commitment
        fees and were charged to expense on April 28, 2006 upon consummation of the
        merger and recapitalization (See Note 2) when the Company became subject
        to SAB
        Topic 5A. SAB TOPIC 5A considers significant delays in offerings to be aborted
        and that the offering costs should be expensed.
 
 ***Property
        and Equipment***
 
 Property
        and equipment are stated at cost less accumulated depreciation. Major renewals
        and improvements are capitalized; minor replacements, maintenance and repairs
        are charged to current operations. Depreciation is computed by applying the
        straight-line method over the estimated useful lives, which are generally
        three
        to seven years.
  F-7
 
 ***Accounting
        for Convertible Debentures, Warrants and Derivative
        Instruments***
 
 The
        Company accounts for its embedded conversion features and freestanding warrants
        pursuant to SFAS No. 133, "Accounting for Derivative Instruments and Hedging
        Activities", and EITF 00-19, “Accounting for Derivative Financial Instruments
        Indexed to and Potentially Settled in, a Company's Own Stock,” (“EITF 00-19”)
        which requires freestanding contracts that are settled in a company's own
        stock,
        including common stock warrants, to be designated as an equity instrument,
        asset
        or a liability. Under the provisions of EITF 00-19, a contract designated
        as an
        asset or a liability must be carried at fair value on a company's balance
        sheet,
        with any changes in fair value recorded in the company's results of operations.
        In accordance with EITF 00-19, certain warrants to purchase common stock
        and
        embedded conversion options are accounted for as liabilities at fair value
        and
        the unrealized changes in the values of these derivatives are recorded in
        our
        consolidated statement of operations as “Changes in Fair Value of Derivative
        Financial Instruments”. The recognition of derivative liabilities is applied
        first to the proceeds of such issuance, at the date of issuance, and the
        excess
        of derivative liabilities over the proceeds is recognized in our consolidated
        statement of operations as “Changes in Fair Value of Derivative Financial
        Instruments.”
 
 TXP
        uses
        the Black-Scholes Pricing Model to determine fair values of its derivatives.
        Valuations derived from this model are subject to ongoing internal and external
        verification and review. The model uses market-sourced inputs such as interest
        rates, exchange rates and option volatilities. Selection of these inputs
        involves management's judgment and may impact net income. The fair value
        of the
        derivative liabilities are subject to the changes in the trading value of
        the
        Company's common stock. As a result, TXP's financial statements may fluctuate
        from quarter-to-quarter based on factors, such as the price of the Company's
        stock at the balance sheet date, the amount of shares converted by note holders
        and/or exercised by warrant holders. Consequently, TXP's financial position
        and
        results of operations may vary from quarter-to-quarter based on conditions
        other
        than its operating revenues and expenses.
 
 TXP
        has
        penalty provisions in the registration rights agreement executed prior to
        the
        year 2007 of its YA
        Global
        Investments, L.P. (f/k/a Cornell Capital Partners, L.P.) debentures
        and warrants **(See NOTE 12 - CONVERTIBLE DEBENTURES, WARRANTS, AND
        SECURITIES)** that
        require TXP to file the registration statement which registers the shares
        underlying the YA Global debentures and warrants no later than 45 days from
        the
        date of closing and to use its best efforts to cause the registration statement
        to be declared effective no later than 120 days after filing and to insure
        that
        the registration statement remains in effect until all of the shares of common
        stock issuable upon conversion of the debentures and exercise of the warrants
        have been sold. In the event of a default of the Company's obligations under
        the
        registration rights agreement, including its agreement to file the registration
        statement for the shares of common stock issuable upon conversion of the
        debentures and exercise of the warrants with the Securities and Exchange
        Commission no later than 45 days from the date of closing, or if the
        registration statement is not declared effective within 120 days of filing,
        TXP
        is required to pay to YA Global, as liquidated damages, for each month that
        the
        registration statement has not been filed or declared effective, as the case
        may
        be, either a cash amount or shares of our common stock at YA Global's option,
        equal to 2% of the liquidated value of the debentures. The agreement does
        not
        specify whether the liquidated damages may be satisfied in unregistered shares
        or how the payment in shares would be valued should YA Global elect to be
        paid
        liquidated damages in common stock. The Company obtained a waiver from YA
        Global waiving
        any claim or payment of liquidated damages up through and including May 15,
        2007. On May 14, 2007, the SEC declared TXP's registration statement effective
        for the aforementioned shares of common stock issuable upon conversion of
        the
        debentures and exercise of the warrants.
 
 On
        October 11, 2006, TXP entered into a securities purchase agreement which
        provided for the filing of a registration statement by the Company with the
        Securities and Exchange Commission registering the shares and the shares
        of
        common stock issuable upon exercise of the warrants. **(See NOTE 12 - CONVERTIBLE DEBENTURES, WARRANTS, AND
        SECURITIES)** The
        Company is obligated to file the registration statement no later than December
        15, 2006 and to use its best efforts to cause the registration statement
        to be
        declared effective no later than 90 days after filing. If the Company does
        not
        meet the aforementioned filing and effectiveness deadlines, it shall pay
        to the
        investor an amount equal to 1% of the purchase price for the first 60 days
        or
        part thereof of the pendency of such non-registration event and 2% for each
        30
        days or part thereof thereafter, of the purchase price of the shares and
        the
        warrants; provided, however, that the aforementioned liquidated damages shall
        only accrue, if at all, for 12 months after the closing date.  The Company
        obtained a waiver from the investor waiving any claim or payment of liquidated
        damages up through and including May 15, 2007. On May 14, 2007, the SEC declared
        TXP's registration statement effective for the aforementioned shares and
        the
        shares of common stock issuable upon exercise of the warrants.
  F-8
 
 On
        March
        30, 2007, TXP entered into a securities purchase agreement with YA Global
        which
        provided for the filing of a registration statement with the Securities and
        Exchange Commission registering 100% of the shares of common stock issuable
        upon
        conversion of the notes and exercise of the warrants **(See NOTE 12-CONVERTIBLE DEBENTURES, WARRANTS, AND
        SECURITIES)** within
        30 days of receipt of written demand of YA Global. The Company is obligated
        to
        use its best efforts to cause the registration statement to be declared
        effective no later than 90 days after filing and to ensure that the registration
        statement remains in effect until all of the shares of common stock issuable
        upon conversion of the notes and exercise of the warrants have been sold.
        In the
        event of a default of TXP's obligations under the registration rights agreement,
        including its agreement to file the registration statement with the Securities
        and Exchange Commission no later than 30 days from receipt of a written demand
        from YA Global, or if the registration statement is not declared effective
        within 90 days of filing, the Company is required pay to YA Global, as
        liquidated damages for each month that the registration statement has not
        been
        filed or declared effective, as the case may be, a cash amount equal to 2%
        of
        the liquidated value of the notes. Notwithstanding the foregoing, the Company
        shall not be liable for liquidated damages with respect to any warrants or
        warrant shares and the maximum aggregate liquidated damages payable to YA
        Global
        by the Company, if any, shall be 15% of the aggregate purchase price paid
        by YA
        Global pursuant to the purchase agreement.
 
 On
        December 13, 2007, the Company and YA Global entered into Amendment No. 1
        to the
        Purchase Agreement pursuant to which the second closing of $1,000,000 was
        revised from the date on which the Company files the Registration Statement
        to
        December 13, 2007. Accordingly, on December 13, 2007 the Company and YA Global
        completed the second closing in which the Company received gross proceeds
        in the
        amount of $1,000,000 and the Company issued to YA Global a Note in the principal
        amount of $1,000,000. In addition, the Company issued 48,781 shares of common
        stock to YA Global as an original issue discount which represents a number
        of
        shares equal to 2% of the second closing proceeds of $1,000,000 at a per
        share
        price equal to $0.41, which represents the fixed conversion price of the
        Notes.
        Moreover, on December 13, 2007 the Company and YA Global entered into Amendment
        No. 1 to the Registration Rights Agreement pursuant to which the Scheduled
        Filing Date was revised to 180 calendar days from the second closing date
        of
        December 13, 2007.
 
 On
        September 6, 2007, TXP entered into a securities purchase agreement with
        a
        strategic investor/qualified institutional buyer pursuant to which provides
        for
        the filing of a registration statement by the Company with the Securities
        and
        Exchange Commission registering the shares issued to the investor and the
        shares
        of common stock issuable upon exercise of the warrants **(See NOTE 12-CONVERTIBLE DEBENTURES, WARRANTS, AND
        SECURITIES)** . The
        Company is obligated to file the registration statement no later than December
        15, 2007 and to use its best efforts to cause the registration statement
        to be
        declared effective by the Securities and Exchange Commission no later than
        90
        days after filing. If the Company does not meet the aforementioned filing
        and
        effectiveness deadlines, it shall pay to the investor an amount equal to
        1% of
        the purchase price of the shares and the warrants, in cash or at the investor's
        election in shares of common stock, for each 30 days or part thereof for
        the
        first 60 days after the occurrence of a non-registration event and 2% for
        each
        30 days or part thereof thereafter; provided, however, that the aforementioned
        liquidated damages shall only accrue, if at all, for 12 months after the
        closing
        date. As
        of
        December 31, 2007, an aggregate of $5,161 in liquidated damages has accrued
        and
        been recorded as an expense.
 
 TXP
        accounts for these penalties as contingent liabilities, applying the accounting
        guidance of Financial Accounting Standard No. 5, “Accounting for Contingencies”
(“FAS 5”). This accounting is consistent with views established by the Emerging
        Issues Task Force in its consensus set forth in EITF 05-04 and FASB Staff
        Positions FSP EITF 00-19-2 “Accounting for Registration Payment Arrangements”,
        which was issued December 21, 2006. Accordingly, TXP recognizes the damages
        when
        it becomes probable that they will be incurred and amounts are reasonably
        estimable.
 
 On
        December 28, 2007, TXP entered into an Agreement with James Von Ehr, II an
        accredited investor pursuant to which we will, within 90 days from the date
        the
        Collateral (as defined below) is deposited into the account of a Lender (the
        “Closing Date”), issue to the investor seven-year warrants to purchase an
        aggregate of 1,280,000 shares of common stock as consideration for the investor
        agreeing to pledge an aggregate of $2,000,000 in free-trading shares of common
        stock of Fossil Incorporated (NASDAQ:FOSL) or such other shares of free-trading
        common stock having a value of $2,000,000 in the aggregate beneficially owned
        by
        the Investor as may be agreed upon between the parties (the “Collateral”). The
        Collateral is to be pledged on our behalf in favor of First Bank of Canyon
        Creek, or such other lending or financing institution as may be agreed upon
        between the parties (a “Lender”), as Collateral for a loan to be obtained by us
        from a Lender in an amount up to $2,000,000 with a term of January 16, 2009
        (the
“Term”), which will be further guaranteed personally and through the pledge of
        common stock beneficially owned by Michael Shores, our Chief Executive Officer,
        in an amount equal to the initial amount pledged by the investor at a per
        share
        price equal to $0.50. The warrants are exercisable into shares of our common
        stock at a price equal to $0.40 per share.
 
 As
        additional consideration of the investor’s agreement to pledge the Collateral to
        a Lender, on or prior to the Closing Date TXP will pay to the investor a
        one-time commitment fee through the issuance of 100,000 restricted shares
        of our
        common stock. In addition, TXP and the investor agreed to extend the permitted
        maturity dates of the Loans previously received by us from the Lender as
        set
        forth in the agreements entered into between TXP and the Investor on July
        28,
        2006 and October 12, 2006, from July 28, 2008 and October 12, 2007,
        respectively, to January 16, 2009.
  F-9
  ***Revenue
        Recognition***
 
 Revenues
        are derived from the following sources:
 
 ·
            Prototyping and assembly services; 
 ·
            Prototyping -Photonics/Optoelectronics
                services; 
 ·
            Material supply chain management
                services; 
 ·
            Turn-key solution - consists of material supply chain management
                services
                and one of the other services listed
                above; 
 ·
            Telecom cabinet retrofit kits and design
                solutions; 
 ·
            Optical Network Terminal (ONT) product and accessory sales;
                and 
 ·
            ONT design and development services. 
 The
        following is a description of each revenue source and our revenue recognition
        policy for each source:
 
 Prototyping
        and assembly services typically consist of assembling and designing surface
        mount technology and other build-to-order products in accordance with the
        customer provided design specifications. These services are priced based
        on the
        complexity, time-to-turn and unit volume of the customer project. The majority
        of TXP's prototyping and assembly services projects are completed in less
        than
        three weeks. TXP recognizes revenue when persuasive evidence of an arrangement
        exists, delivery has occurred, services have been performed, the sales price
        is
        fixed or determinable and 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 consist of assembling and designing optical and optical
        related products in accordance with the customer provided design specifications.
        TXP recognizes revenue when persuasive evidence of an arrangement exists,
        delivery has occurred, services have been performed, the sales price is fixed
        or
        determinable and 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 consist of locating and procuring materials
        according to customer design specifications, qualifying components and auditing
        vendors, inventorying materials, and providing dual vendor sourcing if
        necessary. Material supply chain management services are priced on a cost
        of
        material plus basis. The pricing is solely dependent on the complexity and
        volume of the services performed. TXP recognizes revenue when persuasive
        evidence of an arrangement exists, delivery has occurred, services have been
        performed, the sales price is fixed or determinable and collectability is
        probable. These criteria are generally met at the time materials have been
        received and inventoried, and the materials have shipped.
  Turn-key
        solution is a combination of material supply chain management and one of
        the
        other service revenue sources described above. Revenue is generally recognized
        after both services have been performed and the products have
        shipped.
 
 Telecom
        cabinet retrofit revenue kits and design solutions typically consist of
        designing and assembling retrofit kits to enable ILEC’s (Incumbent Local
        Exchange Carriers) to upgrade their local access service delivery
        infrastructure. TXP recognizes revenue when persuasive evidence of an
        arrangement exists, delivery has occurred, services have been performed,
        the
        sales price is fixed or determinable and collectability is probable. These
        criteria are generally met after an internal quality control review of the
        product and at the time product is shipped.
 
 In
        December of 2006, TXP created a new business unit, iPhotonics, which focuses
        primarily on the development and sale of ONT's and related accessories. ONTs
        are
        the customer premise located devices used by a carrier to serve residential
        and
        business customers over a PON-based (Passive Optical Networking) system.
        PON is
        a maturing point-to-multipoint technology which is being adopted by telephone
        companies globally because of its cost effectiveness in extending fiber-based
        service delivery all the way to the customer premise (Fiber-to-the-Home [FTTH]
        or Fiber-to-the-Premise [FTTP]). TXP's ONTs will sit at each customer premise
        and will be connected over fiber to an Optical Line Terminal (OLT) generally
        located in the carrier's central office. A single OLT can deliver services
        to
        thousands of ONTs. TXP recognizes revenue when persuasive evidence of an
        arrangement exists, delivery has occurred, services have been performed,
        the
        sales price is fixed or determinable and collectibility is probable. These
        criteria are generally met after an internal quality control review of the
        product and at the time product is shipped.
  F-10




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





***Income
      Taxes***





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





***Stock-Based
      Compensation***




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





In
      June
      of 2006, a majority of shareholders approved the Company’s 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 of TXP. As of December 31, 2007, 5,458,270 stock
      options and 1,662,076 shares of common stock have been awarded to employees,
      directors or consultants under this plan of which the Company recognized
      $635,000 of stock compensation expense in selling, general and administrative
      expense in the statement of operations for year ended December 31,
      2007.





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





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





***Reclassifications***





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




**NOTE
        3 - LIQUIDITY AND GOING CONCERN**
 
 The
        accompanying consolidated financial statements have been prepared in conformity
        with generally accepted accounting principles, which contemplates continuation
        of the company as a going concern. As shown in the accompanying consolidated
        financial statements, the Company incurred net losses of $8,927,000 and
        $4,592,000 for the years ended December 31, 2007 and 2006, respectively.
        As of
        those dates, the Company’s current liabilities exceeded current assets by
        $1,622,000 and $1,907,000 respectively and total liabilities exceed total
        assets
        by $5,862,000 and $2,958,000, respectively. Further, during 2007 the Company
        violated certain provisions of a loan agreement. Any default under the loan
        agreement permits the bank to demand immediate payment of the debt including
        principal and accrued interest. During 2007, the Company was in default due
        to
        failure to maintain debt coverage, debt-to-net-worth and current ratios as
        provided for in the loan agreement. The Company has entered into forbearance
        agreements with the lending institution which waived non-compliance of the
        covenants as explained in Note 8. Those factors, as well as the uncertainty
        that
        the Company faces regarding obtaining additional working capital create an
        uncertainty about the Company’s ability to continue as a going concern.
 
 Based
        on
        funds currently available to the Company, management believes that there
        is
        adequate cash resources to fund our operations including our iPhotonics business
        into April 2008. The cash required to operate the iPhotonics business unit,
        which was formed in the fourth quarter of 2006, is significant. The formation
        of
        the iPhotonics business unit resulted in TXP adding 35 full-time employees
        and
        amending its lease in November of 2006 to expand the operating facility by
        16,000 square feet. Incremental personnel cost and lease payments are expected
        to average approximately $340,000 and $8,000, respectively, per month. Other
        research and development and operational costs are expected to average just
        under $150,000 per month for the next twelve months. Revenues to date related
        to
        the iPhotonics' business unit have been insignificant relative to the related
        expenditures which, coupled with lower than expected revenues from our other
        operating units, continues to place significant strain on our cash and liquidity
        position.


F-11




To
        continue to operate under our current business model of which our iPhotonics
        business unit is integral and material, we will need to raise additional
        funds
        by late April 2008. To obtain funds to continue our operations, we may utilize
        any of several potential options, including the issuance of debt or equity
        securities, the exercise of warrants issued to investors in conjunction with
        previous private offerings, and other arrangements with strategic partners. Although
        we have engaged a venture capital investment bank to assist us in pursuing
        our
        financing alternatives, no assurance
        can be given that we will be able to obtain financing on favorable terms,
        if at
        all. If we are unable to obtain additional financing when needed, we could
        be
        required to modify our business plan including selling the iPhotonics business
        unit assets or shutting down its operations, or cease our operations altogether,
        depending on the extent of available financing. Our ability to continue as
        a
        going concern depends upon our ability to raise substantial funds for use
        in our
        operating plan and activities especially related to our iPhotonics business
        unit.
 
 Because
        it is unclear whether the Company will be successful in accomplishing these
        objectives, there is uncertainty about the Company’s ability to continue as a
        going concern. The accompanying consolidated financial statements do not
        include
        any adjustments that might result from the outcome of this
        uncertainty.




**NOTE
      4 - RELATED PARTY TRANSACTIONS**





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





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





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





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





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





**NOTE
      5 - STOCK BASED COMPENSATION**




In
      June
      of 2006, a majority of shareholders approved the 2006 Stock Incentive Plan.
      The
      purpose of the Plan is to promote the long-term growth and profitability of
      the
      Company by providing key people, including employees, officers, directors
      and consultants, with incentives to improve stockholder value and to contribute
      to the growth and financial success of the Company through their future
      services, and enabling the Company to attract, retain and reward the
      best-available persons.  The Plan permits the granting of stock options
      (including incentive stock options qualifying under Section 422 of the Internal
      Revenue Code and nonqualified stock options), stock appreciation rights,
      restricted or unrestricted stock awards, phantom stock, performance awards,
      other stock-based awards, or any combination of the foregoing. The plan 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.





F-12





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





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




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





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 twelve months ended December 31, 2007 is
      presented in the following table.




**Weighted****Weighted**
            
            
            
            **Average****Average**
            
            **Aggregate**
            
            **Remaining****Exercise**
            
            **Intrinsic**
            
            **Contractual****Options**
            
            **Price**
            
            **Value**
            
            **Life
                (years)****Outstanding
                at January 1, 2007**
            
            
            **2,407,329**
            
            **$**
            **0.31**Granted
            
            
            3,050,941
            
            
            **0.34**Exercised
            
            
            -Forfeited
            
            
            -Expired
            
            
            -**Outstanding
                at December 31, 2007**
            
            
            **5,458,270**
            
            **$**
            **0.33**
            
            **$**
            **1,690,000**
            
            
            **9.25****Exercisable
                at December 31, 2007**
            
            
            **802,443**
            
            **$**
            **0.31**
            
            **$**
            **261,000**
            
            
            **8.71**




The
      Company adopted SFAS No. 123R effective January 1, 2006. In the
      Company's statement of operations for the year ended December 31, 2007 it
      recorded a total of $635,000 of compensation cost for stock option share-based
      payment arrangements and the issuance of free trading shares. No stock options
      were exercised during the year ended December 31, 2007.





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




**Expected
                volatility**
            
            
            **102%
                - 120**%******Expected
                Term (years)**
            
            
            **5.75
                - 6.0****Risk-free
                interest rate**
            
            
            **3.8%
                - 4.9**%******Expected
                dividend yield**
            
            
            **0**%******Forfeiture
                rate**
            
            
            **10%
                - 12**%****




F-13





As
      of
      December 31, 2007, there was $934,000 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 2.25 years.





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




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




**For the year ended December 31:****2007**
            
            **2006****Numerator:**Net
                loss available to common stockholders
            
            $
            (8,927,000
            )
            $
            (4,592,000
            )Denominator:For
                basic net income per share - weighted average shares
            
            
            111,580,413
            
            
            95,024,296Dilutive
                potential securities
            
            
            -
            
            
            -Denominator
                    for diluted net income per share–adjusted weighted average
                    shares
            
            
            111,580,413
            
            
            95,024,296Basic
                net loss per share
            
            $
            (0.08
            )
            $
            (0.05
            )Diluted
                net loss per share
            
            $
            (0.08
            )
            $
            (0.05
            )




For
      the
      years ended December 31, 2007 and 2006, certain potential shares of common
      stock
      have been excluded from diluted loss per share because the exercise price was
      greater than the average market price of TXP's common stock, and therefore,
      the
      effect on diluted loss per share would have been anti-dilutive. Other
      convertible securities and employee stock options were excluded because their
      inclusion was anti-dilutive.  The following table sets forth the number of
      potential shares of common stock that have been excluded from diluted net loss
      per share because their effect was anti-dilutive:




**2007**
            
            **2006**Warrants
                to purchase common shares
            
            
            18,478,000
            
            
            9,348,000Stock
                options issued under the 2006 incentive stock plan
            
            
            5,458,000
            
            
            2,407,000Convertible
                Debentures
            
            
            12,751,000
            
            
            5,669,000**Total**
            
            
            **36,687,000**
            
            
            **17,424,000**




F-14





**NOTE
      7 – PROPERTY AND EQUIPMENT**





**2007**
            
            **2006**Machinery
                and Equipment
            
            $
            2,645,000
            
            $
            2,561,000Computers
            
            
            184,000
            
            
            124,000Software
            
            
            711,000
            
            
            413,000Vehicles
            
            
            12,000
            
            
            12,000Furniture
                and fixtures
            
            
            183,000
            
            
            176,000Leasehold
                improvements
            
            
            74,000
            
            
            54,0003,809,000
            
            
            3,340,000Less:
                accumulated depreciation
            
            
            (1,168,000
            )
            
            (673,000
            )**Total
                Property & Equipment**
            
            **$**
            **2,641,000**
            
            **$**
            **2,667,000**




**NOTE
      8 - LINES OF CREDIT**





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





On
      June
      1, 2007 TXP renewed its revolving line of credit for $500,000. The line of
      credit has a one-year term with a variable interest rate of prime plus 2%.
      The
      line of credit is secured by all assets of the Company. The majority shareholder
      and Chief Executive Officer of the Company, Michael C. Shores, has provided
      his
      personal guarantee on this loan (See NOTE 4). Interest payments are due monthly
      beginning July 1, 2007 and the principal is due when the one-year term expires.
      The line of credit has provisions that the maximum TXP may have outstanding
      is
      $500,000 or 70% of the borrowing base, whichever is less. The borrowing base
      is
      defined as the value of accounts receivable less than 90 days past their invoice
      date. TXP was in compliance with these provisions as of December 31, 2007 and
      December 31, 2006. The revolving line of credit also has financial and
      non-financial covenants. A summary of the significant covenants are as
      follows:





·
            maintain
                a debt-to-net worth ratio of not greater than 2:1. This ratio is
                calculated by dividing total liabilities by net worth (total stockholders'
                equity). Net worth is to include the subordinated debt in the form
                of debt
                owed YA Global 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
      December 31, 2007, the Company was in default due to failure to maintain a
      debt
      coverage ratio as provided for in the loan agreement. Any default under the
      loan
      agreement permits the bank to demand immediate payment of the debt under this
      note including principal and accrued interest. However, the lending institution
      and TXP entered into a forbearance agreement on August 3, 2006 which waived
      non-compliance of this covenant so long as the Company maintained the
      debt-to-net-worth ratio and current ratio as provided for in the loan agreement.
      As of December 31, 2007, the debt-to-net-worth and the current ratio are no
      longer in compliance with the loan agreement. The balance outstanding on the
      note at December 31, 2007 and December 31, 2006 was $400,000 and $400,000,
      respectively. The lending institution and TXP entered into a forbearance
      agreement on November 13, 2007 which waived non-compliance of the current ratio
      covenant so long as the Company maintains the debt-to-net-worth ratio. On March
      31, 2008 the lending institution and TXP entered into another forbearance
      agreement which waived non-compliance to the debt-coverage ratio.





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





The
      Company consummated a loan agreement dated as of August 3, 2006 with a financial
      institution pursuant to which the institution extended a line of credit to
      the
      Company in an aggregate amount of $1,000,000 to be used by the Company for
      working capital and general corporate purposes. On December 21, 2006, the
      Company consummated a second loan agreement with the same financial institution
      dated as of November 15, 2006 which renews and supersedes the prior loan
      agreement dated as of August 3, 2006 and increased the Company's line of credit
      from $1,000,000 to $3,000,000 to be used by the Company for working capital
      and
      general corporate purposes. On August 14, 2007, the line of credit was amended
      to increase the Line from $3,000,000 to $3,500,000. The loan accrues interest
      at
      the Wall Street Journal Prime Rate or 8% per annum, whichever is higher. All
      principal and accrued and unpaid interest is due on August 3, 2008. The
      Company's obligations under the loan agreement are secured by a pledge of
      marketable securities by an investor of the Company (as more fully discussed
      in **NOTE 12 - CONVERTIBLE DEBENTURES, WARRANTS, AND SECURITIES** under
      the subheadings “July 2006 Warrants” and “October 2006 Warrants” In addition,
      the Company's obligations under the loan agreement are further guaranteed
      personally and through the pledge of an aggregate of 8,520,000 shares of common
      stock beneficially owned by Michael C. Shores, the Company's Chief Executive
      Officer. As of December 31, 2007 and December 31, 2006, the balance
      outstanding on the line of credit was $2,900,000 and $1,000,000,
      respectively.





F-15





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





**NOTE
      9 - NOTES PAYABLE**





On
      March
      15, 2004, TXP entered into a standard bank loan agreement for $45,000 to
      purchase equipment and issued a promissory note to evidence such loan. The
      note
      has a three-year term with a variable interest rate of prime plus 2%. The note
      is secured by the equipment. The majority shareholder and Chief Executive
      Officer of the Company, Michael C. Shores, has provided his personal guarantee
      on this loan (See NOTE 4). Monthly payments of $1,400 began May 15, 2004. The
      loan was repaid in full during the second quarter of 2007. The balance
      outstanding on the note at December 31, 2006 was $5,000.





In
      December 2003, TXP entered into a standard bank loan agreement for $350,000
      to
      purchase equipment. The note has a three-year term with a 6.5% interest rate
      and
      is secured by accounts receivable and equipment. The majority shareholder and
      Chief Executive Officer of the Company, Michael C. Shores, has provided his
      personal guarantee on this loan (See NOTE 4). Monthly payments for this note
      are
      $11,000 and began February 18, 2004. The loan was repaid in full in the first
      quarter of 2007. The balance outstanding on the note at December 31, 2006 was
      $10,000.





In
      May of
      2006, TXP entered into a loan agreement with the majority shareholder and Chief
      Executive Officer of the Company, Michael C. Shores, for $150,000 (See Note
      4).
      The note has a one year term with a 10% interest rate and is unsecured.
      Principal and interest are contractually due at maturity. The Company repaid
      $37,500 of principal in 2006. The loan was repaid in full during the second
      quarter of 2007. The balance outstanding on the note December 31, 2006 was
      $112,500.





In
      November of 2006, TXP entered into a standard bank loan agreement for $300,000
      to purchase equipment from Global Investments, Inc., a Texas corporation,
      pursuant to which the Company purchased all of the SMT line production assets
      of
      G3. G3 is 100% owned and controlled by Mr. Michael C. Shores, the Company's
      Chief Executive Officer. The two year note bears interest at 9.25% and requires
      monthly payments of approximately $14,000. The loan is secured by the purchased
      assets, in addition to all of the assets of the Company. The balance outstanding
      on this note at December 31, 2007 and December 31, 2006 was $144,000 and
      $288,000, respectively.





**NOTE
      10 - CAPITAL LEASE OBLIGATIONS**





In
      June
      of 2005, TXP entered into a standard lease agreement for $62,000 to lease
      certain operating and production equipment. The lease has a three-year term
      and
      is secured by the equipment. The majority shareholder and Chief Executive
      Officer of the Company, Michael C. Shores, has provided his personal guarantee
      on this lease (See NOTE 4). Monthly lease payments are $2,000 and began in
      June
      of 2005. The balance outstanding at December 31, 2007 and December 31, 2006
      was
      $10,000 and $33,000, respectively. The lease has been accounted for as a
      capitalized lease in accordance with generally accepted accounting
      principles.





In
      March
      of 2006, TXP entered into a standard lease agreement for $25,000 to lease
      certain computer equipment. The lease has a three-year term and is secured
      by
      the computer equipment. The majority shareholder and Chief Executive Officer
      of
      the Company, Michael C. Shores, has provided his personal guarantee on this
      lease (See NOTE 4). Monthly lease payments are $1,000 and began in March of
      2006. The balance outstanding at December 31, 2007 and December 31, 2006 was
      $12,000 and $20,000, respectively. The lease has been accounted for as a
      capitalized lease in accordance with generally accepted accounting
      principles.





F-16





In
      March
      of 2006, TXP entered into a standard lease agreement for $37,000 to lease
      certain software. The lease has a thirty-month term and is secured by the
      software. The majority shareholder and Chief Executive Officer of the Company,
      Michael C. Shores, has provided his personal guarantee on this lease (See NOTE
      4). Monthly lease payments are $1,000 and began in March of 2006. The balance
      outstanding at December 31, 2007 and December 31, 2006 was $10,000 and $25,000,
      respectively. The lease has been accounted for as a capitalized lease in
      accordance with generally accepted accounting principles.





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





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





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





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





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





The
      following is a schedule by years of future minimum lease payments under the
      capital leases together with the present value of the net minimum lease payments
      as of December 31, 2007:




**Year**
            
            **Amount**01/01/08
                - 12/31/2008
            
            $
            161,00001/01/09
                - 12/31/2009
            
            
            111,00001/01/10
                - 12/31/2010
            
            
            40,00001/01/10
                - 12/31/2011
            
            
            28,00001/01/10
                - 12/31/2012
            
            
            19,000Total
                Minimum Lease Payments
            
            
            359,000Less
                amounts representing interest
            
            
            (74,000
            )**Present
                Value of Minimum Lease Payments**
            
            **$**
            **285,000**




**NOTE
      11 - 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 YA
      Global
      Investments, L.P. for
      a
      total purchase price of up to $15.0 million. Subject to certain conditions,
      TXP
      will be entitled to commence drawing down on the Standby Equity Distribution
      Agreement when common stock issued under the Standby Equity Distribution
      Agreement is registered with the SEC and TXP is within the commitment period
      as
      defined under the terms of the agreement. The commitment period is the period
      commencing on the earlier to occur of the effective date (which is the date
      on
      which the SEC first declares effective a registration statement registering
      the
      resale of the common stock under the Standby Equity Distribution Agreement),
      or
      such earlier date as TXP and YA Global may mutually agree in writing, and
      expiring on the earliest to occur of the date on which the YA Global shall
      have
      made payment of advances pursuant to the agreement in the aggregate amount
      of
      $15,000,000, or the date occurring 24 months after the effective
      date.





F-17





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





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





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





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





***August
      2004 Secured Convertible Debt***





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





F-18





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




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





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





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





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





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





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




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





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





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





F-19





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





On
      June
      5, 2006, the Company consummated a securities purchase agreement dated June
      5,
      2006 with YA Global providing for the sale by the Company to YA Global of its
      10% secured convertible debentures in the aggregate principal amount of
      $1,127,000 with principal and interest due on or before June 5, 2009. The terms
      of this debenture require the Company to obtain prior written consent from
      the
      holder, YA Global, 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 the holder,
      YA Global, with a right of first refusal on capital raises by the Company.
      Specifically, for a period if 18 months after the closing date, if the Company
      intends to raise additional capital by the issuance or sale of capital stock
      of
      the Company, including without limitation shares of any class of common stock,
      any class of preferred stock, options, warrants or any other securities
      convertible or exercisable into shares of common stock (whether the offering
      is
      conducted by the Company, underwriter, placement agent or any third party)
      the
      Company shall be obligated to offer to the holder such issuance or sale of
      capital stock, by providing in writing the principal amount of capital it
      intends to raise and outline of the material terms of such capital raise, prior
      to the offering such issuance or sale of capital stock  to any third
      parties including, but not limited to, current or former officers or directors,
      current or former shareholders and/or investors of the obligor, underwriters,
      brokers, agents or other third parties.  YA Global shall have 10 business
      days from receipt of such notice of the sale or issuance of capital stock to
      accept or reject all or a portion of such capital raising offer. The debenture
      is secured by a second priority security interest in all of our goods,
      inventory, contractual rights and general intangibles, receivables, documents,
      instruments, and chattel paper. In the event of default, YA Global may cause
      the
      obligation to become immediately due and payable. In addition, upon the
      occurrence of an event of default, YA Global shall: (i) be entitled to
      receive all distributions with respect to the pledged property, (ii) to
      cause the pledged property to be transferred into its name or its nominee,
      (iii) to dispose of the pledged property, and (iv) to realize upon any
      and all rights in the pledged property then held by YA Global; provided however,
      that YA Global’s security interest is second in priority behind First Bank of
      Canyon Creek.





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





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





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





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





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





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





F-20




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




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





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





***YA
      Global Registration Rights Agreement***





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




***July
      2006 Warrants***





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





The
      Collateral is to be pledged on behalf of the Company in favor of First 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.





F-21





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





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





As
      additional consideration of the Investor's agreement to pledge the Collateral
      to
      a Lender, the Company agreed to pay to the Investor a one-time commitment fee,
      during the Term, of $40,000 (the “Commitment Fee”) no later than 90 days after
      the Collateral is deposited into the account of a Lender; provided, however,
      that the Company shall pay an additional Commitment Fee within 90 days after
      the
      renewal of the Loan by a Lender. TXP consummated the loan facility with the
      First Bank of Canyon Creek in early third quarter of 2006 (See
      Note7).





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





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





***October
      2006 Warrants***





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





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




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





F-22





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





As
      additional consideration of the investor's agreement to pledge the collateral
      to
      a Lender, the Company agreed to pay to the investor a one-time commitment fee
      during the term of 125,000 shares of the Company's common stock (the “Commitment
      Fee”) no additional Commitment Fee within 90 days after the renewal of the Loan
      by a Lender. TXP increased its Line of Credit from $1 million to $3.5 million
      with the First Bank of Canyon Creek (See Note 7).





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





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





***October
      2006 Securities Purchase Agreement***





On
      October 11, 2006, TXP entered into a securities purchase agreement with a
      qualified institutional buyer pursuant to which the Company sold an aggregate
      of
      $1,500,000 in shares of the Company's common stock, par value $.001 per share,
      at a per share purchase price of $.32, together with five year warrants to
      purchase 2,343,750 shares of common stock at an exercise price equal to $0.50
      per share and five year warrants to purchase 2,343,750 shares of common stock
      at
      an exercise price equal to $1.00 per share The entire purchase price of the
      shares and the warrants was used by the Company to redeem its principal amount
      $550,000 and $577,000 10% secured convertible debentures issued to YA Global
      in
      June 2005 and June 2006, respectively, each at a 20% premium, for a total
      redemption price of approximately $1,392,000.





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





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





F-23





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





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





***March
      2007 Securities Purchase Agreement***




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




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





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




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





F-24





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





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





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





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





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





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





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





F-25








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





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





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





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





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





This
      convertible note was originally discounted by $3,826,000. The discount included
      $350,000 in fees paid to the lender and 195,122 shares of common stock issued
      valued at $76,000 based on the closing price of common stock on the date of
      issuance. Additionally, the note was further discounted by $2,603,000 upon
      bifurcation and recording at fair value the embedded conversion option, and
      by
      $797,000 representing the fair value of the warrants issued in conjunction
      with
      the note. The discount is being amortized over the life of the notes of three
      years. At
      December 31, 2007, the convertible debenture had balance of $1,131,000 net
      $2,869,000 of unamortized discount. The
      effective interest rate on the debenture is 11.8% compared to the
      stated interest of 8% which takes into account the debt discount and issue
      costs
      related to the debenture.





On
      December 13, 2007, we and YA Global entered into amendment no. 1 to the
      securities purchase agreement pursuant to which the second closing of $1,000,000
      was revised from the date on which we file the registration statement to
      December 13, 2007. Accordingly, on December 13, 2007 we and YA Global completed
      the second closing in which we received gross proceeds in the amount of
      $1,000,000 and we issued to YA Global a note in the principal amount of
      $1,000,000. In addition, we issued 48,781 shares of common stock to YA Global
      as
      an original issue discount which represents a number of shares equal to 2%
      of
      the second closing proceeds of $1,000,000 at a per share price equal to $0.41,
      which represents the fixed conversion price of the notes. At
      December 31, 2007, the convertible debenture had balance of $499,000 net
      $501,000 of unamortized discount. The effective interest rate on the
      debenture is 11.2% compared to the stated interest of 8% which takes
      into account the debt discount and issue costs related to the
      debenture.





F-26





***September
      2007 Securities Purchase Agreement***





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





The
      exercise prices of the warrants are subject to adjustment in certain events,
      including, without limitation, upon the Company’s consolidation, merger or sale
      of all of substantially all of its assets, a reclassification of the Company's
      common stock, or any stock splits, combinations or dividends with respect to
      the
      Company's common stock.





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





***December
      2007 Agreement***




On
      December 28, 2007, we entered into an Agreement with an accredited investor
      pursuant to which we will, within 90 days from the date the Collateral (as
      defined below) is deposited into the account of a Lender (the “Closing Date”),
      issue to the investor seven-year warrants to purchase an aggregate of 1,280,000
      shares of common stock as consideration for the investor agreeing to pledge
      an
      aggregate of $2,000,000 in free-trading shares of common stock of Fossil
      Incorporated (NASDAQ:FOSL) or such other shares of free-trading common stock
      having a value of $2,000,000 in the aggregate beneficially owned by the Investor
      as may be agreed upon between the parties (the “Collateral”). The Collateral is
      to be pledged on our behalf in favor of First Bank of Canyon Creek, or such
      other lending or financing institution as may be agreed upon between the parties
      (a “Lender”), as Collateral for a loan to be obtained by us from a Lender in an
      amount up to $2,000,000 with a term of January 16, 2009 (the “Term”), which will
      be further guaranteed personally and through the pledge of common stock
      beneficially owned by Michael Shores, our Chief Executive Officer, in an amount
      equal to the initial amount pledged by the investor at a per share price equal
      to $0.50. The warrants are exercisable into shares of our common stock at a
      price equal to $0.40 per share.





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





***Summary
      of Secured Convertible Notes***





Presented
      below is summary of the secured convertible notes at December 31,
      2007:




****
            
            **Fair Value of****Principal**
            
            **Unamortized**
            
            **Derivative**
            
            **Accrued****Description:**
            
            **Balance**
            
            **Discount**
            
            **Instrument**
            
            **Interest**March
                2007 Secured Convertible Note
            
            $
            4,000,000
            
            $
            2,869,000
            
            $
            4,080,000
            
            $
            224,000December
                2007 Secured Convertible Note
            
            
            1,000,000
            
            
            501,000
            
            
            1,098,000
            
            
            4,000Total
            
            $
            5,000,000
            
            $
            3,370,000
            
            $
            5,178,000
            
            $
            228,000





F-27





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




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




**1
                Million**
            
            **$4
                Million****Note**
            
            **Note****Expected
                volatility**
            
            
            99%
            
            
            99%**Expected
                Term (years)**
            
            
            2.95
            
            
            2.25**Risk-free
                interest rate**
            
            
            2.76%
            
            
            2.76%**Expected
                dividend yield**
            
            
            0%
            
            
            0%





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





***Reclassification
      of derivative financial instruments***





EITF
      00-19 also requires that the classification of a contract should be reassessed
      at each balance sheet date. If the classification required under this issue
      changes as a result of events during the period, the contract should be
      reclassified as of the date of the event that caused the reclassification.
      At
      the end of the first quarter 2007, the Company reviewed the contracts, in its
      case the warrants, and determined because the convertible debenture that did
      not
      have limits on the net shares that would have to be delivered in net share
      settlement was fully converted during the period, that the Company now had
      sufficient authorized and unissued shares to net-share settle the warrants.
      Accordingly, these warrants and all other warrants were reclassified from
      liabilities to equity and no gains or losses recorded during the period that
      warrants were classified as liabilities were reversed. The warrants were
      re-valued and marked to market immediately prior to the reclassification. The
      total amount reclassified on March 30, 2007 from derivative financials
      instruments to additional paid in capital was $2,684,000. In accordance with
      EITF 00-19, the Company reassessed all of the contract classifications at the
      end of each balance sheet date and determined no reclassification was necessary
      as of December 31, 2007.





**NOTE
      13 - 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 YA Global 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 YA Global in
      conversion of $145,000 of convertible debentures. The conversion price was
      equal
      to $0.157 per share in accordance with debenture agreement.




F-28


In
        June
        of 2006, the Company amended its articles of incorporation and increased
        the
        authorized shares from 100,000,000 to 300,000,000.
 
 In
        August
        of 2006, the Company issued a combined 149,000 free-trading shares of common
        stock registered by the Company on a registration statement on Form S-8 to
        all
        of its employees who were employed as of April 28, 2006, except for the CFO
        and
        CEO.
 
 In
        September of 2006, the Company awarded 1,543,334 options to purchase common
        stock at $.30 to generally all of its employees, except for the CEO and CFO.
        The
        options have a term of approximately 3 years with 1/3 vesting each
        year.
 
 In
        October of 2006, the Company awarded 863,995 options to purchase common stock
        at
        $.34 to a group on newly hired employees. The options have a term of
        approximately 3 years with 1/3 vesting each year.
 
 In
        October of 2006, the Company issued 2,324,841 shares of common stock to YA
        Global in conversion of $365,000 of convertible debentures. The conversion
        price
        was equal to $0.157 per share in accordance with debenture
        agreement.
 
 In
        November of 2006, the Company issued 4,687,500 shares of common stock for
        $1,500,000 to an investor in a private placement pursuant to a securities
        purchased agreement dated October 11, 2006.
 
 In
        March
        of 2007, the Company issued 6,730,032 shares of common stock in full conversion
        of convertible debentures issued in August of 2004 and accrued interest.
        The
        conversion price was equal to $0.157 per share in accordance with debenture
        agreement. (See Note 12).
  In
        March
        of 2007, the Company issued 195,122 shares of common stock which were related
        to
        fees paid to YA Global in conjunction with the securities purchase agreement
        consummated on March 30, 2007 between the company and YA Global. (See Note
        12).
 
 In
        April
        of 2007, the Company issued 1,404,870 shares of common stock to certain
        employees who were hired as of October 2, 2006, none of whom were officers
        or
        directors. The agreement between the Company and employees provided that
        the
        stock would vest 50% on January 1, 2007 with the remaining 50% vesting daily
        through April 2, 2007.
 
 In
        May of
        2007, the Company issued 125,000 share of common stock to an accredited investor
        to settle a commitment fee (See Note 12).
 
 In
        September 2007, the Company issued 4,000,000 shares of common stock to a
        strategic investor/qualified institutional buyer for $1,000,000 in a private
        placement pursuant to a securities purchase agreement dated September 6,
        2007.
 
 In
        December of 2007, the Company issued 48,781 shares of common stock to YA
        Global
        (formerly known as Cornell Capital) in conjunction with amendment no. 1 of
        the
        securities purchase agreement consummated on March 30, 2007 between the company
        and YA Global. (See Note 12).
 
 **NOTE
        14 - COMMITMENTS**
 
 TXP
        executed a new lease with its landlord in December 2004. The new lease began
        March 15, 2005 and will last for five years. The Company's lease was amended
        effective November 15, 2006 to include approximately 16,500 additional square
        feet. On February 21, 2007 an additional amendment was made to the schedule
        of
        annual rent and monthly installments. The incremental monthly lease payment
        is
        approximately $8,000 per month for the term of the lease. The lease required
        a
        deposit in the amount of $13,000. The annual rent payments increase each
        year as
        outlined below:
 
 Year
              
              Amount01/01/08
                  - 12/31/08
              
              
              327,00001/01/09
                  - 12/31/09
              
              
              336,00001/01/10
                  - 12/31/10
              
              
              71,000Total
              
              $
              734,000
  Rent
        expense for the twelve months ended December 31, 2007 and 2006 amounted to
        $317,000 and $198,000, respectively.
  F-29
 
 **NOTE
        15 - MAJOR CUSTOMERS**
 
 During
        the year ending December 31, 2007 and 2006, TXP had sales to five customers
        which amounted to 56% and 57% of net sales, respectively. Tellabs Inc and
        AMX
        Corporation accounted for 30% and 12% respectively of net sales in 2007 while
        no
        other customer accounted for more than 10% of net sales for 2007. AMX
        Corporation, Flextronics and Essex Corporation accounted for 17%, 16%, and
        11%
        of net sales in 2006, respectively, while no other customer accounted for
        more
        than 10% of net sales for 2006.
 
 **NOTE
        16 – INCOME TAXES**
 
 The
        provision for federal income tax consists of the following for the years
        ended
        December 31:
 
 **2007**
              
              **2006**Current
                  provision (benefit)
              
              $
              -
              
              $
              -Deferred
                  provision (benefit)
              
              
              -
              
              
              -$
              -
              
              $
              -
  
 The
        deferred tax asset and liability comprised the following at December
        31:
 
 **2007**
              
              **2006****Deferred
                  tax asset:**Net
                  operating loss carry-forward
              
              $
              1,350,000
              
              $
              340,000Derivative
                  financial instrument
              
              
              158,000
              
              
              405,000Stock
                  compensation
              
              
              95,000
              
              
              44,000Gross
                  deferred tax asset
              
              
              1,603,000
              
              
              789,000Valuation
                  allowance
              
              
              (1,603,000
              )
              
              (789,000
              )Net
                  deferred tax asset
              
              $
              -
              
              $
              -**Deferred
                  tax liability:**Depreciation
              
              $
              (48,000
              )
              $
              (48,000
              )Gross
                  deferred tax liability
              
              
              (48,000
              )
              
              (48,000
              )Net
                  deferred tax liability
              
              $
              (48,000
              )
              $
              (48,000
              )
 
 The
        following is a reconciliation of income taxes calculated at the United States
        federal statutory rate to the income tax provision (benefit):
 
 **2007**
              
              **2006**Provision
                  (benefit) for income taxes at U.S. statutory rate
              
              
              15
              %
              
              15
              %Other,
                  net
              
              
              (-15
              %)
              
              (-15
              %)Income
                  tax provision (benefit)
              
              
              0
              %
              
              0
              %
 
 TXP
        had
        taxable losses of approximately $6,743,000 and $1,512,000 for the years ended
        12/31/2007 and 12/31/2006 respectively.
 
 **NOTE
        17 - STOCK INCENTIVE PLAN**
 
 In
        June
        of 2006, the majority of shareholders approved the 2006 Stock Incentive Plan.
        The plan provides for up to 10,000,000 shares of TXP's common stock to be
        issued
        in the form of incentive and/or non-qualified common stock for employees,
        directors and consultants to TXP. As of December 31, 2007, 5,458,270 stock
        options and 1,662,076 shares of common stock have been awarded to employees,
        directors or consultants under this plan of which the Company recognized
        $635,000 of stock compensation expense in SGA in the statement of operations
        for
        year ended December 31, 2007.
 
 In
        the
        fourth quarter of 2006, the Company agreed to issue a combined 1,404,870
        free-trading shares on April 2, 2007 to certain employees who were hired
        as of
        October 2, 2006. The agreement between the Company and employees provided
        that
        the stock would vest 50% on January 1, 2007 with the remaining 50% vesting
        daily
        through April 2, 2007. In accordance with the agreement, 1,404,870 shares
        of
        common stock were issued to these employees in April of 2007.
  F-30
 
 **NOTE
        18 - NONMONETARY EXCHANGE TRANSACTION**
 
 In
        December of 2006, TXP completed a reciprocal exchange transaction with Siemens
        Networks GmbH Co. KG pursuant to a Transfer and License Agreement executed
        by
        both TXP and Siemens. TXP received the following as a result of the
        exchange:
 
 ·
              Component
                  inventory intended for the manufacture of Optical Network Terminals
                  (“ONT”);
 
 ·
              Fixed
                  assets including technical equipment, machinery, tooling used in
                  the
                  design of ONT products and related operational
                  software;
 
 ·
              Computer
                  servers, personal computers, and computer peripherals;
                  and
 
 ·
              Siemens
                  granted TXP non-exclusive, non-transferable and non-sub licensable
                  right
                  and license to use, modify or otherwise deploy documents, data,
                  software
                  code related to the ONT business. Siemens granted TXP non-exclusive,
                  non-transferable and non-sub licensable right and license under
                  the
                  pertinent patents related to the ONT
                  business.
  TXP
        agreed to complete development releases for certain ONT's for Siemens in
        exchange for the assets received. The development of those releases required
        substantially all of the time of our 35 employee ONT development group from
        October 2, 2006 through January 31, 2007.
 
 The
        exchange transaction was accounted for as a non-monetary exchange as provided
        for under Statement of Financial Accounting Standards No. 153, “Exchanges of
        Non-Monetary Assets”, an amendment of APB Opinion No. 29. Thus, the cost of the
        non-monetary assets acquired by TXP in the exchange was recorded at the fair
        value of the services provided to obtain it. The fair value of the development
        services was calculated as the four months of personnel costs TXP would pay
        its
        development team which amounted to approximately $1,329,000. Therefore, the
        assets acquired were recorded at approximately $1,329,000. In addition, TXP
        recognized $997,000 in design and development services revenue as of December
        31, 2006 and recognized the remaining $332,000 in deferred revenue as of
        December 31, 2006 in the first quarter of 2007. TXP recognizes design and
        development services revenue using the percentage-of-completion method of
        accounting, in accordance with SOP 81-1, “Accounting for Performance of
        Construction-Type and Certain Production-Type Contracts.” Revenues are
        recognized primarily based on costs incurred to date compared with total
        estimated contract costs. Generally, the Company's design services costs
        consist
        of engineering labor costs.
 
 **NOTE
        19 - SUBSEQUENT EVENTS**
  ***February
        2008 Fourth Loan Agreement***
 
 As
        disclosed elsewhere in this annual report, on December 28, 2007 the Company
        entered into an Agreement with an accredited investor pursuant to which we
        will,
        within 90 days from the date the Collateral (as defined below) is deposited
        into
        the account of a Lender (the “Closing Date”), issue to the investor seven-year
        warrants to purchase an aggregate of 1,280,000 shares of common stock as
        consideration for the investor agreeing to pledge an aggregate of $2,000,000
        in
        free-trading shares of common stock of Fossil Incorporated (NASDAQ:FOSL)
        or such
        other shares of free-trading common stock having a value of $2,000,000 in
        the
        aggregate beneficially owned by the investor as may be agreed upon between
        the
        parties (the “Collateral”). The Collateral is to be pledged on behalf of the
        Company in favor of First Bank of Canyon Creek (“FBCC”), or such other lending
        or financing institution as may be agreed upon between the parties, 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 January 16, 2009 (the “Term”), which will be
        further guaranteed personally and through the pledge of common stock
        beneficially owned by Michael Shores, the Company’s Chief Executive Officer, in
        an amount equal to the initial amount pledged by the Investor at a per share
        price equal to $0.50. The warrants are exercisable into shares of the Company’s
        common stock at a price equal to $0.40 per share.
 
 On
        February 25, 2008, the Company consummated a fourth Loan Agreement (the “Loan
        Agreement”) dated as of February 14, 2008 with FBCC which renews and supersedes
        the prior Loan Agreement dated as of August 14, 2007 and increased the Company’s
        line of credit from $3,500,000 to $5,100,000 (the “Loan”) to be used by the
        Company for working capital and general corporate purposes. The entire Loan
        pays
        interest at a rate of 8.00% per annum and all principal, and accrued and
        unpaid
        interest is due on January 16, 2009. The Company’s obligations under the Loan
        Agreement are secured by a pledge of an aggregate of $6,375,000 in Collateral
        by
        the Investor. In addition, the Company’s obligations under the Loan Agreement
        are further guaranteed personally and through the pledge of an aggregate
        of
        4,000,000 shares of common stock beneficially owned by Michael Shores, the
        Company’s Chief Executive Officer.
  F-31
 
 On
        March
        26, 2008 an amendment to our 2006 Stock Incentive Plan which was adopted
        by our
        board of directors for the sole purpose of increasing the number of authorized
        shares of our common stock underlying awards available for issuance from
        10,000,000 to 15,000,000 shares.
 
 ***Manufacturer*** ***’s
        Representative Agreement***
 
 On
        February 6, 2008, the Company entered into a non-exclusive and non-assignable
        Manufacturer’s Representative Agreement with Marsh Technologies, Inc., an entity
        partially owned and controlled by Michael Shores, the Company’s President and
        Chief Executive Officer, pursuant to which the Company engaged Marsh as an
        independent sales representative for the sale of the Company’s products and/or
        services. In exchange for such services, the Company will pay to Marsh, in
        cash
        or in restricted shares of common stock, commissions equal to (i) 1% of ONT
        sales, (ii) 3% of prototyping and engineering services sales, and (iii) 4%
        on
        retrofit kit sales.
  F-32
  **Item 8.** ***Changes
        In and Disagreements With Accountants on Accounting
        and***  ***Financial
        Disclosure.***
 
 On
        January 3, 2006, LBB & Associates, Ltd., LLP (f/k/a Lopez, Blevins, Bork and
        Associates, LLP) was terminated by us as the auditors for our company. On
        January 3, 2006, we engaged Payne, Smith and Jones, P.C., as our independent
        registered public accountant. Our decision to engage Payne, Smith and Jones,
        P.C. was approved by our board of directors on January 3, 2006.
 
 The
        reports of LBB & Associates, Ltd., LLP on our financial statements for the
        fiscal years ending December 31, 2004 and 2003, did not contain an adverse
        opinion or disclaimer of opinion and was not qualified or modified as to
        uncertainty, audit scope or accounting principles.
 
 During
        our fiscal years ending December 31, 2004 and 2003 and the subsequent interim
        period through the date of termination, there were no reportable events as
        the
        term described in Item 304(a)(1)(iv) of Regulation S-B.
 
 During
        our fiscal years ending December 31, 2004 and 2003 and the subsequent interim
        period through the date of termination, there were no disagreements with
        LBB
& Associates, Ltd., LLP on any matters of accounting principles or
        practices, financial statement disclosure or auditing scope or procedure,
        which,
        if not resolved to the satisfaction of LBB & Associates, Ltd., LLP, would
        have caused it to make reference to the subject matter of the disagreements
        in
        connection with its reports on these financial statements for those
        periods.
 
 We
        did
        not consult with Payne, Smith and Jones, P.C. regarding the application of
        accounting principles to a specific transaction, either completed or proposed,
        or the type of audit opinion that might be rendered on our financial statements,
        and no written or oral advice was provided by Payne, Smith and Jones, P.C.
        that
        was a factor considered by us in reaching a decision as to the accounting,
        auditing or financial reporting issues.
  On
        May
        22, 2006, Salberg & Company, P.A., the independent registered public
        accounting firm of Stock Market Solutions, Inc. prior to the merger transaction
        with Texas Prototypes, Inc. was terminated by us as the auditors upon the
        completion of the Stock Market Solutions, Inc. filing of the March 31, 2006
        Form
        10-QSB on May 22, 2006. On April 28, 2006, Payne, Smith and Jones, P.C. was
        engaged as our independent registered public accountant for our surviving
        company. Our decision to engage Payne, Smith and Jones, P.C. was approved
        by our
        Board of Directors on April 28, 2006.
 
 The
        reports of Salberg & Company, P.A. on the financial statements for Stock
        Market Solutions for the fiscal years ending December 31, 2005 and 2004,
        did not
        contain an adverse opinion or disclaimer of opinion and was not qualified
        or
        modified as to uncertainty, audit scope or accounting principles except that
        that there was an explanatory paragraph describing conditions regarding Stock
        Market Solutions, Inc ability to continue as a going concern.
 
 During
        the fiscal years of Stock Market Solutions ending December 31, 2005 and 2004
        and
        the subsequent interim period through the date of termination, there were
        no
        reportable events as the term described in Item 304(a)(1)(iv) of Regulation
        S-B.
 
 During
        the fiscal years of Stock Market Solutions ending December 31, 2005 and 2004
        and
        the subsequent interim period through the date of termination, there were
        no
        disagreements with Salberg & Company, P.A. on any matters of accounting
        principles or practices, financial statement disclosure or auditing scope
        or
        procedure, which, if not resolved to the satisfaction of Salberg & Company,
        P.A., would have caused it to make reference to the subject matter of the
        disagreements in connection with its reports on these financial statements
        for
        those periods.
 
 We
        did
        not consult with Payne, Smith and Jones, P.C. regarding the application of
        accounting principles to a specific transaction, both completed or proposed,
        or
        the type of audit opinion that might be rendered on our financial statements,
        and no written or oral advice was provided by Payne, Smith and Jones, P.C.
        that
        was a factor considered by us in reaching a decision as to the accounting,
        auditing or financial reporting issues.
 
 **Item 8A.** ***Controls
        and Procedures.***
 
 (a)***Evaluation of Disclosure Controls and Procedures***.
        Based
        on an evaluation of our disclosure controls and procedures (as defined in
        Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
        1934, as amended) required by paragraph (b) of Rule 13a-15 or
        Rule 15d-15, as of December 31, 2007, our Chief Executive Officer and Chief
        Financial Officer have concluded that our disclosure controls and procedures
        were effective in ensuring that information required to be disclosed by us
        in
        the reports that we file or submit under the Exchange Act is recorded,
        processed, summarized and reported within the time periods specified in the
        Commission's rules and forms. Our Chief Executive Officer and Chief
        Financial Officer also concluded that, as of December 31, 2007, our disclosure
        controls and procedures were effective in ensuring that information required
        to
        be disclosed by us in the reports that we file or submit under the Exchange
        Act
        is accumulated and communicated to our management, including our Chief Executive
        Officer and Chief Financial Officer, to allow timely decisions regarding
        required disclosure.
  44
 
 (b) ***Changes in internal controls*** .
        During
        the year ended December 31, 2007, there were no changes in our internal control
        over financial reporting identified in connection with the evaluation required
        by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially affected,
        or
        is reasonably likely to materially affect, our internal control over financial
        reporting.
 
 **Management’s
        Report on Internal Control Over Financial Reporting** ****
 
 The
        management of TXP Corporation is responsible for establishing and maintaining
        adequate internal control over financial reporting, as such term is defined
        in
        Exchange Act Rule 13a-15(f). The Company’s internal control system was designed
        to provide reasonable assurance to the Company’s management and board of
        directors regarding the preparation and fair presentation of published financial
        statements.
 
 All
        internal control systems, no matter how well designed, have inherent
        limitations. Therefore, even those systems determined to be effective can
        provide only reasonable assurance with respect to financial statement
        preparation and presentation.
 
 The
        Company’s management, including the Company’s Chief Executive Officer and Chief
        Financial Officer, assessed the effectiveness of the Company’s internal control
        over financial reporting as of December 31, 2007. In making this
        assessment, the Company’s management used the criteria set forth by the
        Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
        Internal Control—Integrated Framework. Based on this assessment, management
        believes that, as of December 31, 2007, the Company’s internal control over
        financial reporting was effective based on those criteria.
 
 */s/
                  Michael Shores*
              */s/
                  R. Christopher Ryan***Michael
                  Shores**
                **Chief
                  Executive Officer**
              **R.
                  Christopher Ryan**
                **Chief
                  Financial Officer**
 
 **Item
        8B.** ***Other
        Information.***
 
 We
        do not
        have any information required to be disclosed in a report on Form 8-K during
        the
        fourth quarter of 2007 that was not reported.
  45
  **PART III**
 
 **Item 9.** ***Directors,
        Executive Officers, Promoters, Control Persons And***  ***Corporate
        Governance; Compliance With Section 16(a) Of The***  ***Exchange
        Act.***
 
 **Executive
        Officer and Directors**
 
 Our
        current directors and executive officers are as follows:
 
 **Name**
              
              **Age**
              
              **Position**Michael
                  C. Shores
              
              41
              
              President,
                  Chief Executive Officer and Chairman of the Board of
                  DirectorsR.
                  Christopher Ryan
              
              49
              
              Chief
                  Financial OfficerEric
                  Miscoll
              
              45
              
              Vice
                  PresidentTheodore
                  Dubbs
              
              46
              
              DirectorPasquale
                  M. LaVecchia
              
              41
              
              DirectorWilliam
                  L. Martin III
              
              60
              
              DirectorDavid
                  P. McNeil
              
              40
              
              Director
  **Michael
        C. Shores** is our
        President, Chief Executive Officer and Chairman of the Board of Directors.
        Mr.
        Shores was the President and Chief Executive Officer of Texas Prototypes,
        Inc.
        and was sole director and was serving in those capacities since Texas
        Prototypes, Inc. was established in March 2002. Prior to launching Texas
        Prototypes, Inc., Mr. Shores worked at Flextronics International, Ltd., a
        provider of electronics manufacturing services to original equipment
        manufacturers, from 1997 through 2002 in a variety of capacities, most recently
        as Business Development Manager helping launch Flextronics Photonics division.
        Mr. Shores also worked as an Account Manager for the Flextronics Design Center
        in their New Product Introduction Center area. Mr. Shores is a member of
        the
        Optics & Photonics Steering Committee and the International Society for
        Optical Engineering, Advisory Board Member of the Korean Photonics Technology
        Institute, the Richardson Technology Business Council and the Metroplex Business
        Council. Mr.Shores
        received a Bachelor of Arts in Business from The University of Arkansas in
        1990.
 
 **R.
        Christopher Ryan** was
        appointed as ourChief
        Financial Officeron
        August
        16, 2007. His career
        spans over twenty years and encompasses a broad scope of financial expertise
        that includes building and implementing business and accounting systems,
        arranging financings, profit forecasting, budgeting, M&A activities and
        supervision of business units in the telecom sector. From to 2006 to 2007,
        Mr.
        Ryan was a financial executive at Tellabs, a company which is engaged in
        the
        business of the design, development, deployment, and support of
        telecommunications networking products worldwide, where he led the financial
        operations of the broadband products division and was responsible for managing
        revenue recognition, revenue and profit forecasting, budgeting and expense
        controls. From 2004 to 2006, Mr. Ryan was chief financial officer of Chiaro
        Networks, Inc., a developer of infrastructure-class IP routing platforms,
        where
        he performed financial, human resource and legal functions in the US, Israel
        and
        other sales offices throughout the world. From 2000 to 2004, he served as
        chief
        financial officer at Xtera Communications, a company which is engaged in
        the
        business of supplying optical transport solutions, where he led an asset
        purchase for Metro-Optix, Inc. and completed a reverse triangular merger
        with
        Cheetah Optics. At Xtera, he was also responsible for financial, human resource,
        legal and public relations functions. From 1987 to 2000, Mr. Ryan held key
        positions in various divisions of Alcatel, a company which is engaged in
        the
        business of providing enterprises and governments with voice, data, and video
        communication equipment and services. Mr. Ryan held a wide range of positions
        during his tenure at Alcatel including plant controller in the fiber optic
        cable
        division at Alcatel Cable Systems and vice president of finance in the
        transmission products division of Alcatel USA. Mr. Ryan earned a Bachelor
        of
        Science degree in Business Administration from Francis Marion College in
        Florence, South Carolina in 1983 and an MBA from Wake Forest University in
        Winston-Salem, North Carolina in 1986.
  46
 
 **Eric
        Miscoll** is Vice
        President is a Vice President of TXP, a position that he has held since June
        of
        2006. 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.
 
 **Theodore
        Dubbs** was
        appointed to our Board of Directors on December 19, 2006. Since 1997 Mr.
        Dubbs has served at Foxconn Electronics, Inc. as Vice President of Business
        Development and as Vice President of Sales driving Foxconn's business
        penetration in the communications and networking sectors. Mr. Dubbs led the
        strategic effort to bring up several new businesses in Foxconn such as
        Networking Enclosure Technology Business Unit, Backplane Products Group,
        Optical
        Integration Business Unit and the Network Communications Systems Business
        Group
        related to design, manufacturing, and fulfillment of customer products. Prior
        to
        1997, Mr. Dubbs also held senior positions, including regional management,
        marketing management, and product management roles with companies such as
        Tyco
        Electronics, ITT Corporation, and FCI. Mr.Dubbs
        graduated from Bradley University with a Bachelor of Science degree in
        Operations Management, Information Systems in 1983.
 
 **Pasquale
        M. LaVecchia** was
        appointed to our board of directors on July 3, 2007. Heis the Managing
        Partner of LaVecchia Capital LLC and has over 19 years of experience on Wall
        Street. Mr. LaVecchia has built and run several major Wall Street groups
        and has
        extensive expertise in capital markets including IPOs, secondary’s, high yield
        and corporate debt offerings, private company raises and PIPEs. In terms
        of
        equity capital markets, he has raised over $15.0 billion in public offerings,
        private equity transactions and PIPE transactions involving a multitude of
        industries including the telecommunications, technology, media, financial
        services, healthcare/life sciences, business services, general industrial,
        consumer and internet sectors. Mr. LaVecchia has also played the leading
        role in
        numerous mergers, acquisitions, debt private placements and high yield
        transactions. From 2005 to the present, Mr. LaVecchia has served on the board
        of
        directors of HAPC, Inc. (OTCBB: HAPN) as well as serving on a non profit
        board.
        From 2005 to 2007, Mr. LaVecchia served as a Managing Director and Head of
        Capital Markets at FTN Midwest, where he was responsible for a number of
        equity
        and debt capital markets transactions. He also served as Managing Director
        and
        head of the Private Equity Placement Group at Bear, Stearns & Company from
        1994 to 1997, Group Head of Global Private Corporate Equity Placements at
        Credit
        Suisse First Boston (CSFB) from 1997 to 2000, as well as Managing Director
        and
        Group Head of the Private Finance and Sponsors Group at Legg Mason Wood Walker,
        Inc. from 2001 to 2003. In addition, from 2000 until 2001 Mr. LaVecchia was
        a
        venture capitalist and Senior Managing Director at Hawk Holdings, LLC, an
        investment and holding company that was a joint venture between Qwest
        Communications and Baxter Investments. Mr. LaVecchia received his MBA from
        The
        Wharton School of the University of Pennsylvania with a major in Finance
        and a
        concentration in Strategic Planning in 1991. He received his BA, magna cum
        laude, from Clark University, where he was elected to Phi Beta Kappa in
        1988.
 
 **William
        L. Martin III** was
        appointed to our board of directors on July 3, 2007. Hebrings over 35
        years of executive experience in the telecom industry.  From 1999 to 2006,
        Mr. Martin served as Chief Executive Officer of White Rock Networks, a company
        he founded.  White Rock Networks provided optical transport systems to
        North American carriers for their metro-area networks and was acquired by
        Turin
        Networks in October 2006.  From 2004 to the present, Mr. Martin has served
        on the board of directors for Lightwaves Systems, and from 1996 to 2000 he
        served on the boards of Efficient Networks (EFNT), and from 2000 to 2002
        he
        served on the board of Adaptive Broadband (ADAP), and from 2000 to 2004 he
        served on the board of Quarry Technologies. From 1994 to 1999, Mr. Martin
        served
        as President of the Business Broadband Group at ADC Telecommunications, Inc.,
        which provided a broad array of transport and access products to carriers
        worldwide.  From 1989 to 1994, Mr. Martin held the Marketing and Sales
        leadership positions at Ascom/Timeplex, a provider of wide area network
        equipment to enterprises worldwide. Mr. Martin received an MBA from Harvard
        Business School in 1972, as well as a BS and MS from Caltech in 1969 and
        1970,
        respectively.
 
 **David
        P. McNeil** .
        was
        appointed to our board of directors on October 23, 2007.From 1997 to the
        present, Mr. McNeil has served as the Vice President, Executive Vice President,
        and most recently President of Shafer Property Company, a commercial real
        estate
        development firm based in Dallas, Texas, where he has been responsible for
        site
        selection, acquisitions, feasibility, capitalization and construction of
        numerous commercial real estate projects primarily located in Texas, Arkansas
        and Colorado. In addition, while at Shafer Property Company, Mr. McNeil arranged
        for traditional debt financings as well as private equity investments for
        projects. From 1991 to 1996, Mr. McNeil served as the sales and leasing
        representative of the real estate department of Wal-Mart Stores, Inc., where
        he
        disposed of excess and non-performing real estate assets. Mr. McNeil received
        a
        Bachelor of Arts degree in Finance from the University of Arkansas in
        1990.
  47
 
 **B** **oard
        Committees**
 
 Our
        board
        of directors has established the following two committees:
  ·
              audit;
                  and
 ·
              compensation.
 
 The
        proposed membership and the function of each committee are described
        below.  During 2007, the board held one meeting and took
        action by written consent in lieu of meeting eight times. The
        audit and compensation committees held no meetings as they were formed in
        October 2007. Each director attended at least 100% of the aggregate number
        of
        board meetings.  It is the board’s policy that directors are expected to
        attend our annual meeting of shareholders.
 
 *Audit
        Committee*
 
 The
        audit
        committee will assist the board with the oversight of the integrity of our
        financial statements and internal controls, our compliance with legal and
        regulatory requirements, our independent registered public accounting firm’s
        qualifications and independence, and the performance of our internal audit
        function and the independent auditors.  More specifically, under its
        charter, the audit committee, among other things:
  ·
              will
                  be solely responsible for the appointment, compensation and oversight
                  of
                  the work of our independent
                  auditors;
 ·
              will
                  pre-approve all audit and non-audit services to be performed by
                  the
                  independent auditors;
 ·
              will
                  engage in dialogue with the independent auditors with respect to
                  relationships or services that may impact the objectivity and independence
                  of the independent auditors;
 ·
              will
                  review and discuss with management and the independent auditors
                  our annual
                  and quarterly financial statements;
 ·
              will
                  review, with management, the independent auditors and our chief
                  financial
                  officer, the adequacy and effectiveness of, and any significant
                  changes
                  in, our internal controls, and our accounting policies, procedures
                  or
                  practices; and
 ·
              will
                  review the status of compliance with laws, regulations and internal
                  procedures, contingent liabilities and risks that may be material
                  to
                  us.
 
 The
        audit
        committee consists of Messrs. Pasquale M. LaVecchia (chairman) and David
        P.
        McNeil.  The board has determined that each of the members of the audit
        committee is “independent” within the meaning of the applicable rules of the
        SEC.  The board has determined that Pasquale M. LaVecchia is an “audit
        committee financial expert” as defined under the applicable rules of the
        SEC.
  *Compensation
        Committee*
  The
        compensation committee will establish our philosophy and policies regarding
        executive and director compensation, oversees the administration of our director
        and executive compensation programs, and will review the compensation of
        directors, executive officers and senior management.  More specifically,
        under its charter, the executive compensation committee, among other
        things:
  ·
              based
                  on the performance evaluation conducted by the nominating and governance
                  committee, will set the compensation level of our Chief Executive
                  Officer,
                  set performance goals and approve awards for our Chief Executive
                  Officer
                  under incentive compensation plans;
 ·
              will
                  review and approve the individual elements of total compensation
                  for our
                  executive officers, other than our Chief Executive Officer, and
                  review and
                  approve revisions to our executive and senior management salary
                  range
                  structure and annual salary increase guidelines;
                  and
 ·
              will
                  make recommendations to the board with respect to our incentive
                  plans and
                  other similar plans.
 
 The
        compensation committee will consist of Messrs. David P. McNeil (chairman),
        Pasquale M. LaVecchia and Theodore Dubbs.  The board has determined that
        Messrs. David P. McNeil (chairman), Pasquale M. LaVecchia and Theodore Dubbs
        are
“independent” within the applicable rules of the SEC.
  48
  *Executive
        Sessions of the Board*
  At
        regularly scheduled board meetings, the board will generally conduct executive
        sessions of the board, which are discussions that involve only the
        non-management directors.  Because our Chairman is not an independent
        director, our lead independent director, David P. McNeil, will chair the
        executive sessions of the board.
  **Advisory
        Board**
  We
        do not
        currently have an advisory board.
  **Director
        Independence**
  We
        believe that of
        Messrs. Pasquale M. LaVecchia, David P. McNeil and
        Theodore Dubbs  are
        considered independent directors as defined by any national securities exchange
        registered pursuant to Section 6(a) of the Securities Exchange Act of
        1934.
 
 **Family
        Relationships**
  There
        are
        no family relationships among our executive officers and directors.
  **Involvement
        in Certain Legal Proceedings.**
 
 None
        of
        our officers or directors have, during the last five years: (i) been
        convicted in or is currently subject to a pending a criminal proceeding;
        (ii) been a party to a civil proceeding of a judicial or administrative
        body of competent jurisdiction and as a result of such proceeding was or
        is
        subject to a judgment, decree or final order enjoining future violations
        of, or
        prohibiting or mandating activities subject to any federal or state securities
        or banking laws including, without limitation, in any way limiting involvement
        in any business activity, or finding any violation with respect to such law,
        nor
        (iii) has any bankruptcy petition been filed by or against the business of
        which such person was an executive officer or a general partner, whether
        at the
        time of the bankruptcy of for the two years prior thereto.
  **Compliance
        with Section 16(a) of the Exchange Act**
 
 Section 16(a)
        of the Securities Exchange Act of 1934, as amended, requires our directors,
        executive officers, and shareholders holding more than 10% of our outstanding
        common stock, to file with the Securities and Exchange Commission initial
        reports of ownership and reports of changes in beneficial ownership of our
        common stock. Executive officers, directors and greater-than-10% shareholders
        are required by SEC regulations to furnish us with copies of all
        Section 16(a) reports they file. Messrs. Dubbs, Miscoll and Martin each
        filed a Form 3 late. In addition, Messrs. Dubbs, Miscoll, LaVecchia, Martin,
        Bruce, and McNeil each filed a Form 4 late. Other than as set forth in this
        paragraph, to our knowledge, based solely on review of the copies of such
        reports furnished to us for the year ended December 31, 2007, the
        Section 16(a) reports required to be filed by our executive officers,
        directors and greater-than-10% shareholders were filed on a timely
        basis.
 
 **Code
        of Ethics**
 
 We
        have
        adopted a Code of Ethics within the meaning of Item 406(b) of Regulation
        S-B of
        the Securities Exchange Act of 1934, which is filed as an exhibit to this
        report. Our Code of Ethics applies to our chief executive officer and our
        senior
        financial officers.
 
 **Item 10.** ***Executive
        Compensation.***
 
 The
        following table sets forth all compensation for the last fiscal year awarded
        to,
        or earned by, our Chief Executive Officer and all other executive officers
        serving as such at the end of fiscal year ended December 31, 2007 whose salary
        and bonus exceeded $100,000 for the year ended December 31, 2007 or who,
        as of
        December 31, 2007, was being paid a salary at a rate of at least $100,000
        per
        year.
  49
  **Summary
        Compensation Table**
 **All
                    "compensation" listed in US Dollars****Name
                    & Principal Position**
                
                **Year**
                
                **Salary**
                
                **Bonus**
                
                **Stock**
                  **Awards**
                
                **Option**
                  **Awards**
                
                **Non-**
                  **Equity**
                  **Incentive**
                  **Plan**
                  **Compensation**
                
                **Non-**
                  **Qualified**
                  **Deferred**
                  **Compensation**
                  **Earnings**
                
                **All Other
                    Compensation**
                
                **Total
                    Compensation**Michael
                    Shores, President,
                
                
                2006
                
                $
                168,332
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                168,332CEO
                    and Director
                
                
                2007
                
                $
                230,500
                
                $
                47,380
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                277,880Robert
                    Bruce, Former CFO
                
                
                2006
                
                $
                146,096
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                146,096and
                    Director (1) (2)
                
                
                2007
                
                $
                131,746
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                131,746Robert
                    Christopher Ryan (3) (6)
                
                
                2007
                
                $
                60,577
                
                $
                -
                
                $
                6,700
                
                $
                465,000
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                532,277Eric
                    Miscoll, Vice President
                
                
                2006
                
                $
                57,115
                
                $
                -
                
                
                
                
                $
                34,400
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                91,515and
                    Former Director (4) (5)
                
                
                2007
                
                $
                113,077
                
                $
                -
                
                $
                -
                
                $
                18,400
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                131,477
  (1)
        On
        July 3, 2007, Mr. Robert Bruce resigned as a director but remained as our
        Chief
        Financial Officer.
 
 (2)
        On
        August 8, 2007, Mr. Robert Bruce resigned as our Chief Financial Officer
        to
        pursue other endeavors, effective as of August 16, 2007. There was no
        disagreement or dispute between Mr. Bruce and us which led to his
        resignation.
 
 (3)
        On
        August 8, 2007 the Board of Directors appointed Mr. Robert Christopher Ryan
        as
        our Chief Financial Officer, effective as of August 16, 2007.
 
 (4)
        On
        October 23, 2007, Mr. Eric Miscoll resigned as a director, but will remain
        as
        our Vice President. There was no disagreement or dispute between Mr. Miscoll
        and
        us which led to his resignation as a director.
 
 (5)
        Mr.
        Miscoll was issued 133,334 stock options on September 5, 2006 and an additional
        66,666 stock options on October 19, 2007 as compensation for services performed
        in his capacity of director. See NOTE
        5 - STOCK BASED COMPENSATION in the audited financial statements contained
        herein for a discussion of the assumptions related to the determination of
        the
        fair value of the stock options.
 
 (6)
        Mr.
        Ryan was issued 1,686,160 options to purchase shares of common stock as
        compensation for services performed on our behalf in his capacity as Chief
        Financial Officer (CFO). See NOTE
        5 - STOCK BASED COMPENSATION in the audited financial statements contained
        herein for a discussion of the assumptions related to the determination of
        the
        fair value of the stock options. Additionally, on October 19, 2007 the TXP
        Board
        of Directors approved stock awards for Mr. Ryan of $5,000 for services performed
        as CFO and an additional 5,000 shares for services previously rendered as
        a
        consultant.
 
  50
  **Outstanding
        Equity Awards at Fiscal Year-End Table**
  The
        following table sets forth information with respect to stock awards and grants
        of options to purchase our common stock under our 2006 Stock Incentive Plan
        to
        the named executive officers during the fiscal year ended December 31,
        2007.
  **Option
                  awards**
              
              **Stock
                  awards**Number of
                securities
                underlying
                unexercised
                options
                (#)
              
              Number of
                securities
                underlying
                unexercised
                options
                (#)
              
              Equity
                incentiveplan
                awards:
                Number of
                securities
                underlying
                unexercised
                unearned
                options
              
              Option
                exercise
                price
              
              Option
                expiration
                date
              
              Number of
                shares or
                units of
                stock that
                have not
                vested
              
              Market
                value of
                shares of
                units of
                stock
                that
                have not
                vested
              
              Equity
                  incentive plan
                awards:
                Number
                  of
                unearned
                shares, unitsor
                other rightsthat
                have notvested
              
              Equity incentive
                planawards:
                Market
                  or
                payout valueof
                unearned
                shares, unitsor
                other rightsthat
                have notvested**Name**
              
              Exercisable
              
              Unexercisable
              
              (#)
              
              ($)
              
              
              
              (#)
              
              ($)
              
              (#)
              
              ($)Robert
                  Christopher Ryan (1)
              
              
              
              
              
              1,686,160
              
              
              
              
              $
              0.34
              
              
              19-Oct-2017Eric
                  Miscoll, Vice President and Former Director (2)
              
              
              -
              
              
              66,666
              
              
              
              
              $
              0.34
              
              
              19-Oct-2017
  (1)
        Mr.
        Ryan was issued 1,686,160 options to purchase shares of common stock as
        compensation for services performed on our behalf in his capacity as Chief
        Financial Officer (CFO). See NOTE
        5 - STOCK BASED COMPENSATION in the audited financial statements contained
        herein for a discussion of the assumptions related to the determination of
        the
        fair value of the stock options. One-third of these options vest annually
        beginning on August 6, 2008 and ending on August 6, 2010.
  (2)
        Mr.
        Miscoll was issued 66,666 stock options on October 19, 2007 as compensation
        for
        services performed in his capacity of director. See NOTE
        5 - STOCK BASED COMPENSATION in the audited financial statements contained
        herein for a discussion of the assumptions related to the determination of
        the
        fair value of the stock options. One-third of these options vest annually
        beginning on October 19, 2008 and ending on October 19, 2010.
 
 **Director
        Compensation**
 
 The
        following table sets forth with respect to the named director, compensation
        information inclusive of equity awards and payments made in the year end
        December 31, 2007.
  **Name**
              
              **Fees
                  earned or paid in**
                **cash ($)**
              
              **Stock**
                **Awards**
              
              **Option**
                **Awards**
              
              **Non-Equity**
                **Incentive Plan
                  Compensation**
              
              **Non-Qualified**
                **Deferred**
                **Compensation**
                **Earnings**
              
              **All
                  Other**
                **Compensation**
              
              **Total**
                **Compensation**Theodore
                  Dubbs (1) (5)
              
              $
              -
              
              $
              -
              
              $
              50,700
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              50,700Pasquale
                  LaVecchia (2) (5)
              
              $
              -
              
              $
              -
              
              $
              61,300
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              61,300William
                  L. Martin (3) (5) (6)
              
              $
              167,139
              
              $
              -
              
              $
              61,300
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              228,439David
                  McNeil (4) (5)
              
              $
              -
              
              $
              -
              
              $
              54,700
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              54,700
  51
  (1)
        Represents options to purchase 200,000 shares of common stock issued to Theodore
        Dubbs on February 21, 2007 at an exercise price equal to $.30.
 
 (2)
        Represents options to purchase 200,000 shares of common stock issued to Pat
        LaVecchia on July 3, 2007 at an exercise price equal to $.37.
 
 (3)
        Represents options to purchase 200,000 shares of common stock issued to William
        Martin on July 3, 2007 at an exercise price equal to $.37.
 
 (4)
        Represents options to purchase 200,000 shares of common stock issued to David
        McNeil on October 19, 2007 at an exercise price equal to $.34.
 
 (5)
        See
        NOTE 5 - STOCK BASED COMPENSATION in the audited financial statements contained
        herein for a discussion of the assumptions related to the determination of
        the
        fair value of the stock options.
 
 (6)
        Fees
        earned as a Consultant for TXP in 2007.
 
 **Stock
        Option Plan**
 
 On
        June
        8, 2006, a majority of our shareholders approved the 2006 Stock Incentive
        Plan.
        The following description of the 2006 Stock Incentive Plan is only a summary
        of
        the important provisions of the 2006 Stock Incentive Plan and does not contain
        all of the terms and conditions of the 2006 Stock Incentive Plan.
 
 The
        2006
        Incentive Stock Plan has initially reserved 10,000,000 shares of common stock
        for issuance. In addition, under the 2006 Incentive Stock Plan, options may
        be
        granted which are intended to qualify as Incentive Stock Options under Section
        422 of the Internal Revenue Code of 1986 or which are not intended to qualify
        as
        incentive stock options thereunder. In addition, direct grants of stock or
        restricted stock may be awarded.
  The
        primary purpose of the 2006 Incentive Stock Plan is to attract and retain
        the
        best available personnel in order to promote the success of our business
        and to
        facilitate the ownership of our stock by employees and others who provide
        services to us. The 2006 Incentive Stock Plan is administered by our board
        of
        directors, as the board of directors, who may at any time, appoint a committee
        of at least two members of the board of directors, and delegate to the committee
        the authority of the board of directors to administer the 2006 Incentive
        Stock
        Plan.
  Under
        the
        2006 Stock Incentive Plan, options or common stock may be granted to key
        employees, officers, directors or consultants of our company. The purchase
        price
        of the common stock subject to each incentive stock option shall not be less
        than the fair market value (as set forth in the 2006 Incentive Stock Plan).
        The
        dates on which each option (or portion thereof) shall be exercisable and
        the
        conditions precedent to such exercise, if any, shall be fixed by the board
        of
        directors, in its discretion, at the time such option is granted. All options
        or
        grants, which include a vesting schedule, will vest in their entirety upon
        a
        change of control transaction as described in the 2006 Incentive Stock Plan.
        The
        board of directors, in its discretion, shall fix the expiration of each option,
        at the time such option is granted. Each option shall be subject to earlier
        termination or repurchase as expressly provided in the 2006 Incentive Stock
        Plan
        or as determined by the board of directors, in its discretion, at the time
        such
        option is granted. The 2006 Incentive Stock Plan may at any time be terminated
        and from time to time be modified or amended by a majority vote of the board
        of
        directors.
 
 On
        March
        26, 2008, our board of directors adopted an amendment to our 2006 Stock
        Incentive Plan for the sole purpose of increasing the number of authorized
        shares of our common stock underlying awards available for issuance from
        10,000,000 to 15,000,000 shares.
 
 **Employment
        Agreements**
 
 We
        have
        not entered into any employment agreements with any of our current executive
        officers.
 
 **Item 11.** ***Security
        Ownership of Certain Beneficial Owners and Management***  ***and
        Related Stockholder Matters.***
 
 The
        following table sets forth information regarding the beneficial ownership
        of our
        common stock as of March 24, 2008 by:
  52


·   each
      person known by us to be the beneficial owner of more than 5% of our outstanding
      shares of  common
      stock;


·   each
      of
      our officers and directors; and


·  all
      our
      officers and directors as a group.





Based
      on
      information available to us, all persons named in the table have sole voting
      and
      investment power with respect to all shares of common stock beneficially owned
      by them, unless otherwise indicated. Beneficial ownership is determined in
      accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
      amended. In computing the number of shares beneficially owned by a person or
      a
      group and the percentage ownership of that person or group, shares of our common
      stock subject to options or warrants currently exercisable or exercisable within
      60 days after the date of this prospectus are deemed outstanding, but are not
      deemed outstanding for the purpose of computing the percentage of ownership
      of
      any other person. Applicable percentage ownership as of March 31, 2008 is based
      upon 116,584,428 shares of common stock outstanding.





Unless
      otherwise indicated, the address of each individual named below is our address
      located at 1299 Commerce Drive, Richardson, TX 75081.





**Name of Beneficial Owner**
            
            **Number ofShares******
            
            **Percentage ofSharesBeneficiallyOwned******Michael
                Shores (1)
            
            
            79,983,533
            
            
            68.6
            %R.
                Christopher Ryan (2)
            
            
            19,706
            
            
            *Eric
                Miscoll (3)
            
            
            44,445
            
            
            *Theodore
                Dubbs (4)
            
            
            100,000
            
            
            *Pasquale
                M. LaVecchia (5)
            
            
            —
            
            
            —William
                L. Martin, III (5)
            
            
            —
            
            
            —David
                McNeil (6)
            
            
            464,490
            
            
            *YA
                Global Investments, L.P. (7)
            
            
            10,309,437
            
            
            8.8
            %All
                Directors and Executive Officers as a group (7 persons)
            
            
            80,612,174
            
            
            69.1
            %




*Less
      than 1%





(1)
      Includes (i) 62,123,924 shares of common stock beneficially owned by Mr. Shores
      directly, and (ii) 17,859,609 shares of common stock beneficially owned by
      Mr.
      Shores indirectly through the Michael Shores Trust.





(2) **** Includes
      shares of common stock. Does not include options to purchase an aggregate of
      1,686,160 shares of common stock at $0.34 per share, of which options to
      purchase (i) 562,053
      shares of common stock vest on August 6, 2008; (ii) 562,053 shares of common
      stock vest on August 6, 2009; and (iii) 562,054 shares of common stock vest
      on
      August 6, 2010.





(3)
      Includes options to purchase 44,445 shares of common stock which vested on
      September 5, 2007. Does not include options to purchase (i) 44,445 shares of
      common stock at $0.30 per share vesting on September 5, 2008; (ii) 44,444 shares
      of common stock at $0.30 per share vesting on September 5, 2009; (iii) 22,222
      shares of common stock at $0.34 per share vesting on October 19, 2008; (iv)
      22,222 shares of common stock at $0.34 per share vesting on October 19, 2009;
      and (v) 22,222 shares of common stock at $0.34 per share vesting on October
      19,
      2010.





(4)
      Does
      not include options to purchase 100,000 shares of common stock at $0.30 per
      share which vest on February 21, 2009.





(5)
      Does
      not include options to purchase 200,000 shares of common stock at $0.37 per
      share, of which (i) 100,000 shares of common stock vest on July 3, 2008; and
      (ii) 100,000 shares of common stock vest on July 3, 2009.





(6) Includes
      shares of common stock. Does
      not
      include options to purchase 200,000 shares of common stock at $0.34 per share,
      of which (i) 100,000 shares of common stock vest on October 19, 2008; and (ii)
      100,000 shares of common stock vest on October 19, 2009.




53




(7)
      All
      investment decisions of, and control of, YA Global Investments (f/k/a Cornell
      Capital Partners, L.P.) are held by its general partner, Yorkville Advisors,
      LLC. Mark Angelo, the managing member of Yorkville Advisors, makes the
      investment decisions on behalf of and controls Yorkville Advisors.





**Item 12.** ***Certain
      Relationships and Related Transactions, and Director***  ***Independence.***





During
      fiscal 2006 and 2007, the following related party transactions occurred in
      addition to the transactions disclosed elsewhere in this prospectus.





In
      September 2004, we 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 of our company. The majority
      shareholder will contribute his ownership of TXP-Asia when he is legally allowed
      by South Korean law. During December 2005, TXP-Asia transferred $14,000 to
      the
      majority shareholder 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 for the amount of transferred funds. In the first
      quarter of 2006, the majority shareholder 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.





We
      leased
      operating equipment from Global Investments, Inc., a Texas corporation, which
      is
      100% owned by Michael C. Shores, our chief executive officer and majority
      shareholder, 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. The lease was
      terminated in November 2006 pursuant to an asset purchase agreement between
      us
      and Global Investments, Inc. which is described in detail below.




In
      the
      second quarter of 2006, our majority shareholder and chief executive officer,
      Michael C. Shores, loaned us $150,000. The unsecured loan has a one-year term
      and bears interest at 10%. The loan principal and interest are due at maturity.
      We repaid $37,500 of principal in the third quarter of 2006. The balance on
      the
      note at December 31, 2006 was $112,500. The loan was repaid in full in the
      second quarter of 2007.




Our
      majority shareholder and chief executive officer, Michael C. Shores, has
      provided his personal guarantee on all of our notes payables, line of credit,
      and capital leases.





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





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




54




On
      September 19, 2007, we advanced $35,535 to our majority shareholder and chief
      executive officer, Michael C. Shores, for bonus compensation related to
      completion of the 2007 performance-related objectives. The bonus compensation
      was paid on November 6, 2007 and the advance was repaid in full.





On
      February 6, 2008, we entered into a non-exclusive and non-assignable
      Manufacturer’s Representative Agreement with Marsh Technologies, Inc., an entity
      partially owned and controlled by Michael Shores, our President and Chief
      Executive Officer, pursuant to which we engaged Marsh as an independent sales
      representative for the sale of our products and/or services. In exchange for
      such services, we will pay to Marsh, in cash or in restricted shares of common
      stock, commissions equal to (i) 1% of ONT sales, (ii) 3% of prototyping and
      engineering services sales, and (iii) 4% on retrofit kit sales.





We
      believe that all these transactions were entered into on terms as favorable
      as
      could have been obtained from unrelated third parties because, based upon its
      experience in the industry, we believe we would have had to pay independent
      third parties more for comparable assets or services.





Other
      than the above transactions, we have not entered into any material transactions
      with any director, executive officer, and nominee for director, beneficial
      owner
      of five percent or more of our common stock, or family members of such persons.
      Also, other than the above transactions, we have not had any transactions with
      any promoter.




**Conflicts
      of Interest**




Certain
      potential conflicts of interest are inherent in the relationships between our
      officers and directors of and us.




***Conflicts
      Relating to Officers and Directors***




To
      date,
      we do not believe that there are any conflicts of interest involving our
      officers or directors.




With
      respect to transactions involving real or apparent conflicts of interest, we
      have adopted policies and procedures which require that: (i) the fact of
      the relationship or interest giving rise to the potential conflict be disclosed
      or known to the directors who authorize or approve the transaction prior to
      such
      authorization or approval, (ii) the transaction be approved by a majority
      of our disinterested outside directors, and (iii) the transaction be fair
      and reasonable to us at the time it is authorized or approved by our directors.




55




**Item 13.** ***Exhibits.***


**EXHIBIT
        INDEX**




**Exhibit
                No.**
            **Description**2.1
            Agreement
                and Plan of Merger made as of June 13, 2005 (incorporated by reference
                to
                Form 8-K filed with the Securities and Exchange Commission on June
                21,
                2005).3.1
            Articles
                of Incorporation of Cyber Energy, Inc. (incorporated by reference
                to Form
                10-SB filed with the Securities and Exchange Commission on April
                22,
                2002).3.2
            Bylaws
                of Stock Market Solutions, Inc. (incorporated by reference to Form
                10-SB
                filed with the Securities and Exchange Commission on April 22,
                2002).3.3
            Certificate
                of Amendment to the Articles of Incorporation of Cyber Energy, Inc.
                (incorporated by reference to Form 10-SB filed with the Securities
                and
                Exchange Commission on April 22, 2002).3.4
            Certificate
                of Amendment to the Articles of Incorporation of JesseLivermore.com
                Inc.
                (incorporated by reference to Form 10-SB filed with the Securities
                and
                Exchange Commission on April 22, 2002).3.5
            Certificate
                of Amendment to the Articles of Incorporation of Stock Market Solutions,
                Inc. (incorporated by reference to Registration Statement on Form
                SB-2
                filed with the Securities and Exchange Commission on January 26,
                2007).3.6
            Audit
                Committee Charter of TXP Corporation.*3.7
            Compensation
                Committee Charter of TXP Corporation.*10.1
            Form
                of Convertible Debenture issued to YA Global Investments, L.P. dated
                as of
                June 5, 2006 (incorporated by reference to Form 8-K filed with the
                Securities and Exchange Commission on June 9, 2005).10.2
            Form
                of $0.50 Warrant issued to YA Global Investments, L.P. dated as of
                June 5,
                2006 (incorporated by reference to Form 8-K filed with the Securities
                and
                Exchange Commission on June 9, 2005).10.3
            Form
                of $0.70 Warrant issued to YA Global Investments, L.P. dated as of
                June 5,
                2006 (incorporated by reference to Form 8-K filed with the Securities
                and
                Exchange Commission on June 9, 2005).10.4
            Securities
                Purchase Agreement dated as of June 5, 2006 between the Company and
                YA
                Global Investments, L.P. (incorporated by reference to Form 8-K filed
                with
                the Securities and Exchange Commission on June 9,
                2005).10.5
            Investor
                Registration Rights Agreement dated as of June 5, 2006 between the
                Company
                and YA Global Investments, L.P. (incorporated by reference to Form
                8-K
                filed with the Securities and Exchange Commission on June 9,
                2005).10.6
            Security
                Agreement dated as of June 5, 2006 between the Company and YA Global
                Investments, L.P. (incorporated by reference to Form 8-K filed with
                the
                Securities and Exchange Commission on June 9, 2005).10.7
            Amended
                and Restated Security Agreement dated as of June 5, 2006 between
                Texas
                Prototypes, Inc. and YA Global Investments, L.P. (incorporated by
                reference to Form 8-K filed with the Securities and Exchange Commission
                on
                June 9, 2005).10.8
            2006
                Stock Incentive Plan (incorporated by reference to Schedule 14C filed
                with
                the Securities and Exchange Commission on June 12,
                2006).10.9
            Agreement
                dated as of July 28, 2006 by and between TXP Corporation and James
                Von
                Ehr, II (incorporated by reference to Form 8-K filed with the Securities
                and Exchange Commission on August 2, 2006).10.10
            Warrant
                issued to James Von Ehr, II dated as of July 28, 2006 (incorporated
                by reference to Form 8-K filed with the Securities and Exchange Commission
                on August 2, 2006).10.11
            Asset
                Purchase Agreement dated as of July 28, 2006 by and between TXP
                Corporation and Richard Smitten (incorporated by reference to Form
                8-K
                filed with the Securities and Exchange Commission on August 2,
                2006).10.12
            Loan
                Agreement dated as of August 3, 2006 by and between TXP Corporation
                and
                First Bank of Canyon Creek (incorporated by reference to Form 8-K
                filed
                with the Securities and Exchange Commission on August 15,
                2006).




56




10.13
            Securities
                Purchase Agreement dated as of October 11, 2006 by and between TXP
                Corporation and Kuekenhof Equity Fund, L.P. (incorporated by reference
                to
                Form 8-K filed with the Securities and Exchange Commission on October
                17,
                2006).10.14
            $0.50
                Warrant issued to Kuekenhof Equity Fund, L.P. dated as of October
                11, 2006
                (incorporated by reference to Form 8-K filed with the Securities
                and
                Exchange Commission on October 17, 2006).10.15
            $1.00
                Warrant issued to Kuekenhof Equity Fund, L.P. dated as of October
                11, 2006
                (incorporated by reference to Form 8-K filed with the Securities
                and
                Exchange Commission on October 17, 2006).10.16
            Agreement
                dated as of October 12, 2006 by and between TXP Corporation and James
                Von
                Ehr, II (incorporated by reference to Form 8-K filed with the Securities
                and Exchange Commission on October 17, 2006).)10.17
            Warrant
                issued to James Von Ehr, II dated as of October 12, 2006 (incorporated
                by
                reference to Form 8-K filed with the Securities and Exchange Commission
                on
                October 17, 2006).10.18
            Asset
                Purchase Agreement dated as of November 22, 2006 by and between TXP
                Corporation and G3 Global Investments, Inc. (incorporated by reference
                to
                Form 8-K filed with the Securities and Exchange Commission on November
                22,
                2006).10.19
            Promissory
                Note dated as of November 15, 2006 by and between TXP Corporation
                and
                First Bank of Canyon Creek (incorporated by reference to Form 8-K
                filed
                with the Securities and Exchange Commission on November 22,
                2006).10.20
            Equipment
                Lease dated May 1, 2005 by and between Texas Prototypes, Inc and
                G3 Global
                Investments, Inc. (incorporated by reference to Form 8-K filed with
                the
                Securities and Exchange Commission on November 22,
                2006).10.21
            Commencement
                Date Memorandum and Lease by and between TCIT Dallas Industrial,
                Inc. and
                Texas Prototypes, Inc. (incorporated by reference to Form 8-K filed
                with
                the Securities and Exchange Commission on November 29,
                2006).10.22
            First
                Amendment to Lease dated as of November 15, 2006 by and between TCIT
                Dallas Industrial, Inc. and Texas Prototypes, Inc. (incorporated
                by
                reference to Form 8-K filed with the Securities and Exchange Commission
                on
                November 29, 2006).10.23
            Promissory
                Note of TXP Corporation dated as of May 17, 2006 issued to Michael
                C.
                Shores. (incorporated by reference to Registration Statement on Form
                SB-2
                filed the Securities and Exchange Commission on January 26,
                2007).10.24
            Standby
                Equity Distribution Agreement dated as of August 25, 2004 by and
                between
                Texas Prototypes, Inc. and YA Global Investments, L.P. (incorporated
                by
                reference to Registration Statement on Form SB-2 filed the Securities
                and
                Exchange Commission on January 26, 2007).10.25
            Securities
                Purchase Agreement dated as of August 25, 2004 by and between Texas
                Prototypes, Inc. and YA Global Investments, L.P. (incorporated by
                reference to Registration Statement on Form SB-2 filed the Securities
                and
                Exchange Commission on January 26, 2007).10.26
            Registration
                Rights Agreement dated as of August 25, 2004 by and between Texas
                Prototypes, Inc. and YA Global Investments, L.P. (incorporated by
                reference to Registration Statement on Form SB-2 filed the Securities
                and
                Exchange Commission on January 26, 2007).10.27
            Secured
                Convertible Debenture of Texas Prototypes, Inc. dated as of August
                25,
                2004 issued to YA Global Investments, L.P. (incorporated by reference
                to
                Registration Statement on Form SB-2 filed the Securities and Exchange
                Commission on January 26, 2007).10.28
            Securities
                Purchase Agreement dated as of March 30, 2007 between the Company
                and YA
                Global Investments, L.P. incorporated by reference to Form 8-K filed
                with
                the Securities and Exchange Commission on April 5,
                2007).10.29
            Loan
                Agreement dated as of November 15, 2006 by and between TXP Corporation
                and
                First Bank of Canyon Creek. (incorporated by reference to Form 8-K
                filed
                with the Securities and Exchange Commission on December 28,
                2006).10.30
            Secured
                Convertible Note issued to YA Global Investments, L.P. dated as of
                March
                30, 2007 (incorporated by reference to Form 8-K filed with the Securities
                and Exchange Commission on April 5, 2007).10.31
            0.60
                Warrant issued to YA Global Investments, L.P. dated as of March 30,
                2007(incorporated by reference to Form 8-K filed with the Securities
                and
                Exchange Commission on April 5,
                2007).




57




10.32
            $0.75
                Warrant issued to YA Global Investments, L.P. dated as of March 30,
                2007(incorporated by reference to Form 8-K filed with the Securities
                and
                Exchange Commission on April 5, 2007).10.33
            $0.85
                Warrant issued to YA Global Investments, L.P. dated as of March 30,
                2007
                (incorporated by reference to Form 8-K filed with the Securities
                and
                Exchange Commission on April 5, 2007).)10.34
            $1.00
                Warrant issued to YA Global Investments, L.P. dated as of March 30,
                2007
                (incorporated by reference to Form 8-K filed with the Securities
                and
                Exchange Commission on April 5, 2007).10.35
            Registration
                Rights Agreement dated as of March 30, 2007 between the Company and
                YA
                Global Investments, L.P. (incorporated by reference to Form 8-K filed
                with
                the Securities and Exchange Commission on April 5,
                2007).10.36
            Security
                Agreement dated as of March 30, 2007 between the Company and YA Global
                Investments, L.P. (incorporated by reference to Form 8-K filed with
                the
                Securities and Exchange Commission on April 5, 2007).10.37
            Transfer
                and License Agreement between TXP Corporation and Siemens Networks
                GmbH
                & Co. KG dated November 14, 2006 (incorporated by reference to
                Registration Statement on Form SB-2 filed the Securities and Exchange
                Commission on May 7, 2007).10.38
            Amendment
                #1 to Investor Registration Rights Agreement dated as of November
                13, 2006
                by and between TXP Corporation and Cornell Capital Partner L.P.
                (incorporated by reference to Registration Statement on Form SB-2
                filed
                the Securities and Exchange Commission on May 7, 2007).10.39
            Loan
                Agreement dated August 1, 2006 between TXP Corporation and First
                Bank
                Canyon Creek (incorporated by reference to Registration Statement
                on Form
                SB-2 filed the Securities and Exchange Commission on May 7,
                2007).10.40
            Loan
                Agreement dated April 1, 2006 between TXP Corporation and First Bank
                Canyon Creek (incorporated by reference to Registration Statement
                on Form
                SB-2 filed the Securities and Exchange Commission on May 7,
                2007).10.41
            Equipment
                Lease Agreement dated June 15, 2005 between Texas Prototypes, Inc.,
                and
                U.S. Bancorp Manifest Funding Services (incorporated by reference
                to
                Registration Statement on Form SB-2 filed the Securities and Exchange
                Commission on May 7, 2007).10.42
            Lease
                Agreement dated February 14, 2006 between Texas Prototypes, Inc.,
                and Blue
                Street Capital, LLC (incorporated by reference to Registration Statement
                on Form SB-2 filed the Securities and Exchange Commission on May
                7,
                2007).10.43
            Amendment
                to Senior Convertible Note Issued March 30, 2007 by and between TXP
                Corporation and YA Global Investments, L.P. dated as of July 13,
                2007(incorporated by reference to Form 8-K filed with the Securities
                and
                Exchange Commission on July 18, 2007).10.44
            Securities
                Purchase Agreement dated as of September 6, 2007 by and between TXP
                Corporation and Dyna Porter International Limited (incorporated by
                reference to Form 8-K filed with the Securities and Exchange Commission
                on
                September 11, 2007).10.45
            $0.65
                Warrant of TXP Corporation dated as of September 6, 2007 issued to
                Dyna
                Porter International Limited. (incorporated by reference to Form
                8-K filed
                with the Securities and Exchange Commission on September 11,
                2007).10.46
            $0.75
                Warrant of TXP Corporation dated as of September 6, 2007 issued to
                Dyna
                Porter International Limited (incorporated by reference to Form 8-K
                filed
                with the Securities and Exchange Commission on September 11,
                2007).10.47
            $0.85
                Warrant of TXP Corporation dated as of September 6, 2007 issued to
                Dyna
                Porter International Limited. $0.75 Warrant of TXP Corporation dated
                as of
                September 6, 2007 issued to Dyna Porter International Limited
                (incorporated by reference to Form 8-K filed with the Securities
                and
                Exchange Commission on September 11, 2007).10.48
            $1.00
                Warrant of TXP Corporation dated as of September 6, 2007 issued to
                Dyna
                Porter International Limited (incorporated by reference to Form 8-K
                filed
                with the Securities and Exchange Commission on September 11,
                2007).10.49
            Amendment
                No. 1 to the Securities Purchase Agreement dated as of December 13,
                2007
                by and between TXP Corporation and YA Global Investments, L.P.
                (incorporated by reference to Form 8-K filed with the Securities
                and
                Exchange Commission on December 17,
                2007).




58




10.50
            Amendment
                No. 1 to the Registration Rights Agreement dated as of December 13,
                2007
                by and between TXP Corporation and YA Global Investments, L.P.
                (incorporated by reference to Form 8-K filed with the Securities
                and
                Exchange Commission on December 17, 2007).10.51
            Secured
                Convertible Note of TXP Corporation issued to YA Global Investments,
                L.P.
                dated as of December 13, 2007 (incorporated by reference to Form
                8-K filed
                with the Securities and Exchange Commission on December 17,
                2007).10.52
            Agreement
                dated as of December 28, 2007 by and between TXP Corporation and
                James Von
                Ehr, II (incorporated by reference to Form 8-K filed with the Securities
                and Exchange Commission on December 31, 2007).10.53
            Warrant
                of TXP Corporation to be issued to James Von Ehr, II (incorporated
                by
                reference to Form 8-K filed with the Securities and Exchange Commission
                on
                December 31, 2007).10.54
            Loan
                Agreement dated as of February 14, 2008 by and between TXP Corporation
                and
                First Bank of Canyon Creek (incorporated by reference to Form 8-K
                filed
                with the Securities and Exchange Commission on February 26,
                2008).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.*99.1
            Code
                of Ethics of TXP Corporation *





*
      Filed
      herewith.





**Item 14.** ***Principal
      Accountant Fees and Services.***





**Appointment
      of Auditors**





Our
      Board
      of Directors selected Payne, Smith and Jones, P.C. our auditors for the year
      ended December 31, 2007.





**Audit
      Fees**





Payne,
      Smith and Jones, P.C. billed us $66,675 and $22,000 in fees for audit services
      for the year ended December 31, 2007 and 2006, respectively.





**Audit-Related
      Fees**





We
      did
      not pay any fees to Payne, Smith and Jones, P.C. for assurance and related
      services that are not reported under Audit Fees above during our fiscal year
      ending December 31, 2007. For the fiscal year ending December 31, 2006, we
      paid
      fees of $2,250 to Payne, Smith and Jones, P.C. for assurance and related
      services that are not reported under Audit Fees above.





**Tax
      and All Other Fees**





We
      did
      not pay any fees to Payne, Smith and Jones, P.C. for tax compliance, tax advice,
      tax planning or other work during our fiscal years ending December 31, 2007
      and
      December 31, 2006.





**Pre-Approval
      Policies and Procedures**





We
      have
      implemented pre-approval policies and procedures related to the provision of
      audit and non-audit services. Under these procedures, our audit committee
      pre-approves all services to be provided by Payne, Smith and Jones, P.C. and
      the
      estimated fees related to these services.





With
      respect to the audit of our financial statements as of December 31, 2007, and
      for the year then ended, none of the hours expended by Payne, Smith and Jones,
      P.C.’s engagement to audit those financial statements were attributed to work by
      persons other than Payne, Smith and Jones, P.C., and its full-time, permanent
      employees.





59




**SIGNATURES**




Pursuant
        to the requirements of Section 13 or 15(d) of the Exchange Act, the
        registrant has duly caused this Form 10-KSB/A Annual Report, Amendment No.
        1, to be signed on its behalf by the undersigned on April 16, 2008, thereunto
        duly authorized.





**TXP
      CORPORATION**




*/s/
                Michael C. Shores*Michael
                C. ShoresPresident
                and Chief Executive Officer (Principal
              Executive
                Officer)




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


In
        accordance with the requirements of the Securities Exchange Act of 1934,
        this
        Form 10-KSB/A Annual Report, Amendment No. 1, has been signed by the
        following persons in the capacities and on the dates indicated.


**Position**
            
            **Date***/s/
                Michael C. Shores*
            
            President,
                Chief Executive Officer
            
            April
                16, 2008Michael
                C. Shores
            
            and
                Chairman of the Board of DirectorsDirectorTheodore
                Dubbs*/s/
                Pasquale M. LaVecchia*
            
            Director
            
            April
                  16, 2008Pasquale
                M. LaVecchia*/s/**William
                L. Martin III*
            
            Director
            
            April
                  16, 2008William
                L. Martin III*/s/
                David McNeil*
            
            Director
            
            April
                  16, 2008David
                McNeil




60