Document:

exv10w26

 

EXHIBIT 10.26

Amendment No. 8 to Systems Integrator Agreement

This
Amendment No. 8 (“Amendment”) to the Systems Integrator Agreement dated November 13, 2001, as
amended (the “Agreement”) is entered into by and between Cisco Systems, Inc., a California
corporation (“Cisco”), having its principal place of business at 170 West Tasman Drive, San Jose,
California, 95134, and INX Inc. (formerly known as InterNetwork Experts, Inc.) (“Integrator”), a
Delaware corporation having its principal place of business at 1955 Lakeway Drive, Suite 220,
Lewisville, Texas 75057. Integrator’s right to resell the Services shall commence at the time when
both parties’ authorized representatives have executed this Amendment (the “Effective Date”), as
evidence by their signatures below. Except as modified by this Amendment, all terms and conditions
of the Agreement shall remain in full force and effect. To the extent there is a conflict between
the terms of the Agreement and this Amendment, the terms of this Amendment shall control. Unless
otherwise agreed upon by the parties in writing, this Amendment shall terminate when the Agreement
is terminated or expires.

WHEREAS, Cisco and Integrator have previously entered into the Agreement in order to set forth the
terms and conditions pursuant to which Cisco will provide services to Integrator;

WHEREAS, Cisco and Integrator desire to further amend the Agreement in the manner stated herein;

NOW, THEREFORE, in consideration of the foregoing and the mutual promises and covenants contained
herein, and for other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereby agree as follows:

The parties hereby agree to amend the Agreement as follows:

	1.	 	Ex. H: EXHIBIT FOR THE RESALE OF CISCO REMOTE OPERATIONS SERVICES (“CISCO
ROS”) is hereby attached to and made a part of the Agreement.

This Amendment is the complete agreement among the parties concerning the subject matter herein and
replaces any prior oral or written communications by the parties, including but not limited to any
prior or existing agreement that Integrator may have or held with NetSolve, Incorporated. There are
no conditions, understandings, agreements, representations, or warranties, expressed or implied,
which are not specified herein. This Amendment may only be modified by a written document executed
by the parties hereto.

Each party warrants and represents that its respective signatories, whose signatures appear below,
have been and are on the date of signature, duly authorized to execute this Amendment.

	 	 	 	 	 	 	 
	INTEGRATOR	 	CISCO SYSTEMS, INC.
	 
	 	 	 	 	 	 
	Authorized Signature:

	 	/s/ Paul Klotz
	 	Authorized Signature:
	 	/s/ Perry Booth
	 

	 	 
	 	 	 	 
	 
	 	 	 	 	 	 
	Print Name:

	 	Paul Klotz
	 	Print Name:
	 	Perry Booth
	 

	 	 
	 	 	 	 
	 
	 	 	 	 	 	 
	Print Title:

	 	Vice President
	 	Print Title:
	 	Cisco Financial
	 

	 	 
	 	 	 	 
	 
	 	 	 	 	 	 
	Date:

	 	3-7-06
	 	Date:
	 	3/20/06
	 

	 	 
	 	 	 	 

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EXHIBIT H

EXHIBIT FOR THE RESALE OF CISCO REMOTE OPERATIONS SERVICES (“CISCO ROS”)

     This Exhibit (“Exhibit”), and all referenced Attachments, supplement the Agreement, and
pertain to Integrator’s resale of Cisco’s Remote Operations Services (“Services”).

     This Exhibit consists of the following: the Terms and Conditions for the resale of the
Services, Attachment 1 (Glossary of Terms), Attachment 2 (Services Availability), Attachment 3
(Integrator Requirements), Attachment 4 (Pricing), Attachments 5 and 6 (Approval Forms),
Attachment 7 (Limited Warranty statement).

CISCO ROS RESALE TERMS AND CONDITIONS

	1.0	 	DEFINITIONS.
	 
	 	 	All capitalized terms not defined herein shall have the meaning ascribed in Attachment 1
(Glossary of Terms).
	 
	2.0	 	SCOPE. Integrator is authorized on a non-exclusive basis to resell Services to End Users in
the Territory. The Services Integrator is authorized to resell are set forth in Attachment 2
(Services Availability). This Exhibit shall apply to Integrator’s resale of, and Cisco’s
provisioning of, the Services.
	 
	3.0	 	CISCO RIGHTS AND OBLIGATIONS. For each End User to whom Integrator resells Services, Cisco
will use commercially reasonable efforts to provide the Services to Integrator’s End User in
accordance with the following.

	 	3.1	 	Resale of Services. Cisco will make the Services listed in Attachment 2
(Services Availability) available to Integrator for resale to
Integrator’s End Users, subject to the specified limitations.
	 
	 	3.2	 	Communications with End Users. Cisco will, from time to time, communicate
with End Users, regarding such matters as Service activation, support and troubleshooting. All such
communications will be in English unless otherwise agreed by Cisco and the End User. End Users calling Cisco
for technical support should be fluent in English.

	4.0	 	INTEGRATOR RIGHTS AND OBLIGATIONS.

	 	4.1	 	Services Descriptions. When Integrator resells the Services to an End
User, Integrator shall provide at the time of sale to End User a copy of the Service Description of each Service ordered
by the End User. Integrator further agrees to:

	 	(i)	 	provide or ensure that each End User provides the required
Management Connections for each ordered service; and
	 
	 	(ii)	 	ensure that Integrator and End User comply with all
requirements listed in Section 5.0 (Customer Responsibilities) of the Services
Description of each ordered Services; and
	 
	 	(iii)	 	comply with all requirements set forth in Attachment 3 (Integrator
Requirements).

	 	 	 	Integrator may not make any modification(s) to the Service Descriptions, except as
delineated in section 5.2 below. Cisco shall only be obligated to provide the Services
set forth in Attachment 2 (Services Availability) and shall not be obligated to
provide any other services, including, without limitation, any services described in a
Modified Description.
	 
	 	4.2	 	Valid Customer Service Order. Cisco requires a valid Customer Service
Order from Integrator prior to commencing Services to End Users.
	 
	 	4.3	 	Submission of Transaction Details. Orders must state the name of the End
User and provide contact information for the End User employee or contractor who is responsible for
coordinating activation of the

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	 	 	 	Service with Cisco. An Order must also specify the Components that are to be managed by each
ordered Service. Integrator will be responsible for providing all additional information
reasonably requested by Cisco to fill the Order, such as the sites at which Components are
located. Such information may be provided with the Order or promptly following Cisco’s
request.
	 
	 	4.4	 	Ordering. Integrator agrees to be bound by all Orders submitted by Integrator or on
Integrator’s behalf. Each Order shall be limited to a single End User. Orders are subject to acceptance or
rejection by Cisco. An Order received by Cisco will be deemed accepted unless Cisco rejects it in writing (by fax, e-mail or
otherwise) within ten (10) Business Days of receipt.
	 
	 	4.5	 	Supplemental Orders. Integrator may purchase additional quantities of a Service
(“Supplemental Order”) for resale to an End User to which Integrator has previously sold that Service by adding additional
Components to the existing Order for that service and End User (“Existing Order”). The Service Term of
the Supplemental Order will be coterminous with the Service Term of the Existing Order. Supplemental
Orders are subject to acceptance or rejection by Cisco.
	 
	 	4.6	 	Start Date of Service Term.
	 
	 	 	 	A Service may be turned up over the course of several weeks or months, as the End User
makes each Component available for management of that Service. The initial Service Term of
a Service will begin on the Start Date of that Service, whether or not the End User makes
Components available for management on that date. However, as set forth in Section 9.3,
Component-based fees will not be invoiced until the Service is initiated for the Component.
	 
	 	4.7.	 	Activation Schedule. Delays. Rescheduling.

	 	 	Each party will use reasonable efforts to meet the Start Date of each Order accepted by Cisco, and
will promptly inform each other of any expected delays. Either party may defer the scheduled Start
Date of a Service by up to thirty (30) days by notifying the other party at least five (5)
Business Days before the original Start Date. The notice will propose a new Start Date, which will
be subject to the other party’s approval, such approval not to be unreasonably withheld or
delayed.

	 	4.8	 	Cancellation Without Cause.
	 
	 	 	 	Integrator may cancel all or any portion of an accepted Order, without cause, by notice to
Cisco, provided:

	 	(i)	 	if Integrator reschedules activation of a Service for a Component for which
such activation had already been scheduled pursuant to Section 4.7 (Activation
Schedule), Integrator agrees to pay the rescheduling charge for that Component; and
	 
	 	(ii)	 	if Integrator cancels all or substantially all of Integrator’s Order for a
Service for an End User, effective either before the start of or during the Service
Term of that Service, Integrator agrees to pay Cisco the cancellation
fee per Section 9.2.

	 	 	 	In either (i) or (ii) above, Integrator shall pay Cisco the rescheduling or cancellation
fees within thirty (30) days of the effective date of cancellation.
	 
	 	4.9	 	Services Renewal. At the end of the initial Service Term of an Order, that Service
Term will automatically be extended on a month-to-month basis until the Order for that Service is renewed for a
longer term (which will be considered a new Service Term), or cancelled by either party on thirty (30) days notice.
Cisco will give Integrator sixty (60) days notice of any price increases that will apply to such month-to-
month services.

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	 	4.10	 	Effect of Termination. Termination or expiration of this Exhibit does
not terminate Orders previously accepted by Cisco under this Exhibit, except as set
forth in the Term and Termination section of the Agreement.

	5.0	 	COPYRIGHT LICENSE FOR USE OF SERVICE DESCRIPTIONS.

	 	5.1	 	Each Service is described in a Service Description, which also sets forth
requirements for use of that Service.
	 
	 	5.2	 	Service Descriptions are copyrighted by Cisco, and may be used and modified only
as permitted herein. Subject to this Agreement, Cisco grants Integrator a non-exclusive, non-transferable
(except as permitted in Section 4.2) and nonsublicenseable (except as permitted in this Section) license,
during the Term, with respect to the Service Description of each Service that Integrator seek to sell, to:

	 	(i)	 	modify the Service Description by adding Integrator’s
Marks, provided such branding complies with Cisco’s then-current copyright

(http://www.cisco.com/en/US/about/ac50/ac47/copyright_material_guidelines.html) and other brandling guidelines at

http:/www.cisco.com/en/US/about/ac50/ac47/about_cisco_brand_center.html;
	 
	 	(ii)	 	modify the Service Description to create a Modified Description;
	 
	 	(iii)	 	use the Service Description or Modified Description solely
to sell the Service and products or services Integrator bundle with that Service;
	 
	 	(iv)	 	reproduce and distribute the Service Description or Modified
Description solely to End Users and potential End Users, in connection with the
marketing and sale of the Service; and
	 
	 	(v)	 	sublicense third parties to exercise the rights granted in
this Section 5.0, solely to perform services for Integrator.

	6.0	 	USE OF CISCO’S MARKS.

	 	6.1	 	Integrator may use the Cisco Marks solely for use for the Services in connection
with Integrator’s advertisement, promotion and distribution of the Services.
Integrator’s use of Cisco’s Marks must comport with Cisco’s then-current policies.
	 
	 	6.2	 	Notwithstanding section 6.1 above, Integrator may not use Cisco Marks in a
Modified Description, unless approved by Cisco in writing for a specific Modified Description. Cisco may give or
withhold such approval in its sole discretion. Cisco’s approval does not constitute an endorsement or
approval of the contents of the Modified Description, and does not relieve Integrator of full responsibility for
such content.
	 
	 	6.3	 	Before publishing or disseminating any advertisement, promotional materials or
documentation bearing any of Cisco’s Marks, Integrator will deliver a sample of the proposed item to Cisco’s designated
representative for approval, which will not be unreasonably withheld or delayed.
	 
	 	6.4	 	Integrator may not publish or otherwise disseminate any such item until approved by Cisco. All such
advertising and other material will include such statements or other identifying references as Cisco may
reasonably request. Any use of the Cisco Marks by Integrator will inure to Cisco’s benefit.
	 
	 	6.5	 	Cisco (and its respective suppliers as the case may be), own all right, title and
interest in the Marks, the Services and the software used to provide Services. Integrator has paid no
consideration for the use of the Cisco Marks, and nothing in this Exhibit will give Integrator any interest in any of
the Marks.

	7.0	 	USE OF INTEGRATOR’S MARKS.

	 	7.1	 	During the Term, Cisco may list Integrator as an Integrator of Services on
Cisco.com, and in presentations to current and potential investors and customers, using
Integrator’s name and logo.

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	 	7.2	 	Before publishing or disseminating any other form of advertisement or
promotional materials bearing any of Integrator’s Marks, Cisco will deliver a sample of the proposed item to Integrator
for Integrator’s approval, which will not be unreasonably withheld or delayed.
	 
	 	7.3	 	Cisco will not publish or otherwise disseminate any such items until approved by
Integrator. All such advertising and other material will include such statements or other identifying
references as Integrator may reasonably request. Any use by Cisco of Integrator’s Marks will inure to
Integrator’s benefit. Cisco will comply with Integrator’s standard usage guidelines concerning use of Integrator’s
Marks.
	 
	 	7.4	 	Integrator owns all right, title and interest in Integrator’s Marks. Cisco has
paid no consideration for the use of Integrator’s Marks, and nothing in this Agreement will give Cisco any interest
in any of Integrator’s Marks.
	 
	 	7.5	 	Upon termination or expiration of the Agreement or this Exhibit or both, for any
reason, each party will immediately cease all display, advertising and use of the other party’s name and
Marks, and Integrator will cease all use of the Service Descriptions and Modified Descriptions.

	8.0	 	LIMITED SERVICE WARRANTY.
	 
	 	 	The Services are provided with the Limited Service Warranty set forth in Attachment 7
(Limited Warranty Statement).
	 
	9.0	 	PRICE AND PAYMENT TERMS.

	 	9.1	 	Pricing. Cisco’s price(s) and discounts for the Services are set forth
in Attachment 4 (Pricing) and
http://www.cisco.com/partner/services/remote_ops/docs/cros_pricing.xls. All
prices are exclusive of any taxes and duties which, if applicable, shall be paid by Integrator. Applicable taxes
are billed as a separate item. Integrator may not set off against any invoices any amounts claimed due to
Integrator from Cisco.
	 
	 	9.2	 	Pursuant to Section 9.1 above (Pricing) and Attachment 4 (Pricing), the discount
applicable to Integrator for each Service is based on the term for which the Service is ordered for a specific
End User.
	 
	 	 	 	If the sum of all recurring monthly charges paid by Integrator to Cisco at the time
of cancellation (per Section 4.8) or at the end of Service Term is less than
eighty-five percent (85%) of total recurring contract value, then Integrator agrees
to pay Cisco a sum equal to eighty-five percent (85%) of such recurring contract
value less the total recurring monthly charges actually paid to Cisco by Integrator.
	 
	 	 	 	Integrator shall remit payment to Cisco within thirty (30) days of the cancellation
date or at the end of the applicable Service Term, unless, upon expiration of the
Service Term, Integrator agrees in writing:

(a) to extend that Service Term for the number of whole months necessary to
permit Integrator to achieve the minimum eighty-five percent (85%) of total contract value for that
Service, and

(b) to pay Cisco, during each month of that extension, recurring charges that
are, at a minimum, equal to the amount charged in the final month of the original Service Term.

	 	9.3	 	Invoices. Invoices for recurring charges for a Service will be issued
monthly, in advance (generally on the first day of each calendar month). Each such invoice will include charges only for
those Components for which the Service has been implemented by the Cisco internal billing cut-off date in
the month preceding the date of the invoice. The first invoice for a newly-implemented Component will
include pro-rated charges for the period from the date Service was implemented for the Component until
the start of the current billing period, as well as charges for the current billing period. One-time
charges (initiation and set up fees, cancellation fees, time and materials fees, etc.) will be invoiced as
incurred. Payment for all invoiced charges is due thirty (30) days from the invoice date in U.S. Dollars.

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	 	9.4	 	Additional Terms. Integrator agrees to pay for each
ordered Service at the price in effect on the date
Cisco receives an Order for the Service. Prices may be reduced by
Cisco at any time, and may be increased on ninety (90) days notice. The applicable monthly charge
for each Service is based on the number and types of Components to be managed under that Service, as
referenced in Attachment 4 (Pricing).
	 
	 	 	 	Price reductions and increases will apply to all Orders received
after the effective date of the price change, except that the
price applicable to each Component listed on a Supplemental Order
will be the lower of: (i) the price charged for that Component on
the Existing Order, or (ii) the then-current price for that
Component, applying the same discount tier as applied to the
Existing Order. If Integrator purchases a Service for some
Components for an End User, and later purchase that Service for
additional Components for the same End User, Integrator may take
advantage of the higher discount (if any) that results from
increasing number of Components under management, only if: (a)
Integrator commits to a new one, two or three year Service Term
for all Components, and (b) the new Service Term exceeds the
number of months remaining in the Service Term of the existing
Service.
	 
	 	9.5	 	Resale Price. Integrator is free to determine its resale prices unilaterally. Integrator understands
that neither Cisco, nor any employee or representative of Cisco, may give any special treatment (favorable or
unfavorable) to Integrator as a result of Integrator’s selection of resale prices. No employee or
representative of Cisco or anyone else has any authority to specify what Integrator’s resale prices for the
Services must be, or to inhibit in anyway, Integrator’s pricing discretion with respect to the Services.

	10.0	 	TERMINATION.
	 
	 	 	This Exhibit may be terminated by Cisco and/or Cisco may suspend its
performance of any and all Services on five days notice if Integrator
fails to pay for the Services when due and fails to make such payment
within fifteen (15) days after notice from Cisco of such past due
payment. Integrator will be charged the normal daily rate for suspended
Services during the period of suspension, and a Service restoration
charge may apply. In addition, a deposit may be required prior to
Service restoration.
	 
	11.0	 	TIME AND MATERIAL SERVICE CHARGES — UNCOVERED CAUSES.

	 	11.1	 	Notwithstanding any provision of a Service Description, the Services do not include troubleshooting or
resolution of a reported Network problem, answering calls, or providing on-site assistance to the extent the
reported problem results from, or the time or expenses incurred are due to, an Uncovered Cause.
	 
	 	11.2	 	Subject to the limitations set forth in this Section 11, Integrator agrees to pay Cisco’s then-current time
and material service rates for time and expenses Cisco incurs in providing services due to an Uncovered
Cause. For example, such charges would be incurred if: (i) Integrator’s End User calls Cisco for
assistance regarding a Component that is not managed by Cisco’s Service and Cisco has Integrator’s
permission pursuant to Section 12.1 or (ii) Integrator’s Modified Description of a Service requires Cisco to
change its normal processes or procedures or to incur more time in providing the Service.
	 
	 	11.3	 	Cisco will promptly consult Integrator (or End User, if Cisco has Integrator’s permission pursuant to
Section 12.1) once Cisco determines that a chargeable event has been
identified or is about to occur. Prior to proceeding further, Cisco will require Integrator’s written
authorization, unless pre-authorized pursuant to Section 12 below, to pay for time spent and expenses
beyond that incurred in isolating or identifying a problem.

	12.0	 	OTHER SERVICES CHARGES — AUTHORIZED BY INTEGRATOR OR END USER.

	 	12.1	 	From time to time, one of Integrator’s End
Users may request that Cisco perform services (other than moves,
adds, changes and disconnects) that are beyond the scope of the
Services Integrator has purchased for resale to that End User
(e.g., with respect to an Uncovered Cause). If Integrator checks
“Yes” on Attachment 5 (Approval Form for Cisco to Provide Hourly
Services to End Users), Integrator

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	 	 	 	authorizes Cisco to perform such services, and bill Integrator for those services at
Cisco’s then-current rates.
	 
	 	12.2	 	From time to time, one of Integrator’s End Users may request that Cisco
perform moves, adds, changes and disconnects. If Integrator checks “Yes” on Attachment
6 (Approval Form for Processing End User MACDs), Integrator authorizes Cisco to
perform the services requested by Integrator’s End User, and bill Integrator for those
services at Cisco’s then-current rates.

	13.0	 	DESIGN, REVIEW, ORDER SUSPENSION AND TERMINATION.
	 
	 	 	Cisco will promptly notify Integrator if Cisco concludes that a Network is not reasonably
supportable (for example, because of incorrect wiring of a LAN, protocols not disclosed to
Cisco at the time Cisco accepted the Order, or a Network design that will require unusually
high levels of troubleshooting and support), describing the problem encountered and any
suspected cause(s). Notwithstanding any other provision of this Exhibit or the Agreement:

	 	(i)	 	If Cisco provides such notice prior to the date the Service is
initiated for any Component of the affected Network, Cisco may, without
liability to Integrator, suspend the Order for that Service until the problem is
resolved to Cisco’s satisfaction;
	 
	 	(ii)	 	If Cisco provided such notice after the Service is initiated for a
Component of that Network, Cisco will continue to provide the Service for all
Components for which Service has previously been initiated, but Cisco may,
without liability to Integrator, refuse to initiate the Service for additional
Components until the problem is resolved to Cisco’s satisfaction; and
	 
	 	(iii)	 	Either party may terminate the Order for the affected Service and
End User Network if the problem is not resolved within sixty (60) days of the
date of Cisco’s notice. Cisco will have no liability to Integrator, and
Integrator will have no liability to Cisco, arising from such termination.

	14.0	 	SUSPENSION OF SERVICES FOR MISUSE OF MANAGEMENT CONNECTION.
	 
	 	 	Cisco will have the right to suspend affected Services if a Management Connection
established for use in providing such Services is used for any other purpose (for example,
in an attempt to gain access to Cisco’s network or data). Cisco will promptly inform
Integrator of any such suspension. Integrator will be charged the normal daily rate for
suspended Services during the period of suspension. When Cisco is satisfied that adequate
measures have been implemented to prevent a recurrence of the problem, Services will
promptly be restored.
	 
	15.0	 	GENERAL.

	 	15.1	 	Entitlement. Integrator acknowledges that an End User is entitled to
receive Services only for which Integrator has paid the service fees to Cisco.
	 
	 	15.2	 	Disclosure of Contract Information. Integrator acknowledges and agrees
that in no event shall any of the information contained in this Exhibit or Integrator’s Agreement be disclosed to any
third party.
	 
	 	15.3	 	Representations and Warranties. Integrator shall not make any
representations or warranties on behalf of Cisco, except as expressly authorized herein or as expressly authorized by Cisco in
writing. Neither Integrator nor Cisco will make any obligation to End Users on behalf of the other, nor
commit the resources of the other to End Users.
	 
	 	15.4	 	Independent Contractors. The relationship of Cisco and Integrator
established by this Exhibit is that of independent contractors. Nothing in this Exhibit shall be construed to (i) give either
party the power to direct and control the day-to-day activities of the other, (ii) constitute the parties
as joint ventures, co-owners or otherwise as participants in a joint or common undertaking, or (iii) allow
Integrator to create or assume any obligation on behalf of Cisco for any purpose whatsoever. All financial
obligations associated with Integrator’s business are the sole responsibility of Integrator. All sales and
other agreements

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	 	 	 	between Integrator and its End Users are Integrator’s exclusive responsibility and
shall have no effect on Integrator’s obligations under this Agreement.
	 
	 	15.5	 	Indemnification. Integrator hereby indemnifies and holds Cisco harmless from any
claim, loss, damage or expense, including reasonable court costs and attorney’s fees, resulting from any claim made by End User
against Cisco hereunder under claim of a third party beneficiary or otherwise. This shall not limit Cisco’s
obligations, subject to the terms and conditions of this Exhibit, to provide the Services described herein.
Integrator shall be solely responsible for, and shall indemnify and hold Cisco free and harmless from, any
and all claims, damages or lawsuits (including Cisco’s attorneys’ fees) arising out of the acts of Integrator,
its employees or its agents including, without limitation, any warranties made in addition to Cisco’s Limited
Services Warranty and for any misrepresentation of Cisco’s reputation or the Services.
	 
	 	15.6	 	No Third Party Beneficiaries. Except as expressly set forth herein, nothing expressed or referred to in this
Exhibit shall be construed to give any person or entity other than the parties to this
Exhibit any legal or equitable right, remedy, or claim under or with respect to this Exhibit or any provision of
this Exhibit. This Exhibit and all of its provisions and conditions are for the sole and exclusive benefit of
the parties to this Exhibit.

-Attachment 1 Follows-

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ATTACHMENT 1 to EXHIBIT H

GLOSSARY OF TERMS

The terms identified below define the terms set forth in this Exhibit.

     Agreement means the Cisco Systems Integrator Agreement and all incorporated Exhibits,
amendments, and other identified documents.

     Attachments means the Attachments marked 1 through 7 to this Exhibit, which are incorporated
and made a part of this Exhibit.

     Business
Day(s) means Monday through Friday, excluding Cisco-observed holidays.

     Cisco means Cisco Systems, Inc., a California corporation having its principal place of
business at 170 West Tasman Drive, San Jose, California 95134.

     Cisco.com means Cisco’s suite of on-line Services and information at www.cisco.com,
previously known as CCO.

     Cisco Remote Network Management Services means the Cisco brand services listed in Attachment
2, which are available for resale to End Users per the terms of this Exhibit and Agreement.

     Component(s) means a device, circuit, link, interface, or other component of a Network.

     Customer Service Order — CSO means a written/sealed or electronic order from Integrator to
Cisco for the Services to be provided by Cisco under this Agreement.

     DBU means dial back up.

     Downtime means any time a managed component is not available to perform normal services,
according to the Cisco ROS incident monitoring tools.

     End User means an entity (including Integrator) that purchases a Service from Integrator
solely for the management of its IT infrastructure), and not for further distribution or resale.

     High Risk Activities means on-line control equipment in environments requiring fail-safe
performance, such as in the operation of nuclear facilities, aircraft navigation or aircraft
communication systems, air traffic control, direct life support machines or weapons systems, in
which the failure of the products or services could lead directly to death, personal injury, or severe physical or environmental damage.

     IT means Information Technology.

     Layer 3 means the third layer of the OSI model, also referred to as the “network layer.”

     LAN means Local Area Network.

     Managed
Component(s) means an element for which remote IT-infrastructure management services
are provided by Cisco.

     Management Connections mean the network connections that are required to enable to provide an
ordered Service. These connections are specified in the Service Description of the Service.

     Marks means the name, trademarks, trade names and logos of a party, and the trademarks, trade
names, logos and designations of any of its products or services.

     Modified Description means a Service Description that has been changed by Integrator (by
additions, deletions or otherwise) in any way, for example, to describe other services Integrator
bundle with the Service. Notwithstanding the foregoing, adding Integrator’s Marks to a Service
Description does not, alone, create a Modified Description.

     Network means a set of interconnected and interworking Cisco supported hardware and software.

     Network Availability means the percentage of time that the Network is available to perform
normal services, according to the Cisco ROS incident monitoring tools.

     Network Component means a device or link that makes up part of a network.

     NOC means the Cisco Network Operations Center, the organization that performs management
duties on End User networks.

     Order means a Customer Service Order.

     OSI Model means the Open System Interconnection Reference Model.

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     The Portal means the online Web user interface supplied for Integrator and End Users to
receive and submit information to and from the NOC.

     Service Description means Cisco will provide the Services and perform the Cisco
responsibilities described in the standard Cisco Service Descriptions located at
http://www.cisco.com/partner/services/remote ops/docs/cros
ServiceDescriptions.pdf (or such
other location of which Cisco may notify Integrator from time to time).

     Service Term means the term for the Services as stated on the CSO.

     Service(s) means Cisco Remote Operations Services (“Cisco ROS”) described in the standard
Cisco Service Description or a mutually agreed upon custom statement of work. The Services can also
include those provided by Cisco per Integrator’s request per the Move, Add, Change process for new
or existing Service Orders.

     Start Date means the date on which Cisco agrees to begin providing an ordered Service,
as set forth on Cisco’s acceptance of the Order for that Service (or if no date is specified there,
then the Start Date requested in Integrator’s Order).

     Territory means the fifty United States.

     Uncovered Cause means (i) the failure of Integrator or Integrator’s End User to comply with
any of the requirements in Section 5.0 (Customer Responsibilities) of a Service Description or in
this Agreement, or Integrator’s failure to comply with any of the Integrator’s responsibilities
listed in this Agreement; (ii) the fault, negligence, act or omission (including operator error) of
anyone other than Cisco and its subcontractors; (iii) inaccurate information provided to us by
Integrator, Integrator’s End User or a third party (such as an equipment or facilities vendor);
(iv) Integrator’s failure to provide an End User the Service Description of a Service (even if
Integrator provided a Modified Description to that End User); (v) an item (including a Component)
that is not managed by a Service; (vi) a Network design provided by anyone other than Cisco; or
(vii) a managed Component or a Network Connection that adversely affects the provision of any
Service or increases our cost of providing that Service.

     VPN mean Virtual Private Network.

     WAN means Wide Area Network.

-End of Attachment 1-

Page 10 of 17

 

ATTACHMENT 2 to EXHIBIT H

Services AVAILABILITY

	 	 	 
	 	 	Services Available and requirements for
	Cisco Remote IT Infrastructure and Change	 	commercial resale in the United States
	Management Services	 	(excluding sales to U.S. Federal Government)
	WAN/LAN — Management
	 	No specialization required
	 
	 	 
	IP Telephony — Management

	 	Must have Cisco IPC Specialization to resell
	 
	 	 
	Security
— Management

	 	Must have Cisco Security Specialization to resell

A current list of Services is provided above. List may be updated from time to time. Current information is available
upon request.

***************

-End of Attachment 2-

Page 11 of 17

 

ATTACHMENT 3 TO EXHIBIT H

INTEGRATOR REQUIREMENTS

INTEGRATOR SHALL MEET ALL OF THE FOLLOWING CRITERIA AS A CONDITION TO THE RIGHT TO RESELL THE
SERVICES:

	1.	 	Integrator shall be in good standing (i.e. at least maintain its partnership status and
remain current on outstanding invoices);
	 
	2.	 	Integrator shall have Cisco’s IPC specialization criteria;
	 
	3.	 	Integrator shall have a corporate main office or be headquartered in the United States; and
	 
	4.	 	Integrator shall be in good CSAT standing (maintaining the minimum score for the U.S. Theatre)

-End of Attachment 3-

Page 12 of 17

 

ATTACHMENT 4 TO EXHIBIT H

PRICING

All pricing terms of Section 9.0 apply. Pricing subject to change.

See the Cisco ROS service descriptions

http://www.cisco.com/partner/services/remote_ops/docs/cros_ServiceDescriptions.pdf for
additional information and a full list of supported equipment.

Cisco ROS
Price List — Volume Variable List (VVL) Price located at:

http://www.cisco.com/partner/services/remote_ops/docs/cros_pricing.xls

Recurring and non-recurring (one-time) fees are rounded to the nearest dollar, actual prices may
vary. Non-recurring fees listed are for existing networks.

All
Services contain two charges (1) one-time service activation fee (non-recurring fees) and (2)
monthly recurring fee.

Prices are determined by device counts and term length.

The following table reflects the discount that Integrator shall receive for monthly recurring fees.

MAC fees are not discounted.

	 	 	 	 	 	 	 	 	 	 	 	 	 
	All Recurring Services
	Months of Term:
	 	 	12	 	 	 	24	 	 	 	36	 
	 	 	 
	Discounts
from VVL Price:
	 	 	15	%	 	 	20	%	 	 	25	%

International Pricing Notes:

If the physical location of the managed device is outside the United States, the price may be
subject to the following increase over the domestic VVL prices:

	 	 	 	 	 
	Canada
	 	 	0	%
	EMEA
	 	 	15	%
	Japan
	 	 	15	%
	Australia
	 	 	15	%
	Latin America
	 	 	25	%
	APAC
	 	 	25	%
	Rest of world
	 	 	25	%

-End of Attachment 4-

Page 13 of 17

 

ATTACHMENT 5 TO EXHIBIT H

APPROVAL FORMS

Approval
Form for Cisco to Provide Hourly Services to End Users

	 	 	 	 	 
	Integrator Name:	  Inx
	 	 	 
	Integrator HQ Address:	  1955 Lavelay Dr. Ste 220
	 

	 	 

	o	 	YES. When Integrator’s End User requests or requires technical assistance or other services
(other than moves, adds, changes and disconnects, as defined on Cisco’s price list) that are
beyond the scope of the Services Integrator have purchased from Cisco (e.g., with respect to
an Uncovered Cause), Integrator HEREBY AUTHORIZES Cisco to e-mail the End User (with copy to
Integrator) requesting the End User’s approval for Integrator to provide that service to the
End User for a quoted hourly rate.

If Integrator checks YES, and if the End User approves Integrator’s providing the service for an
hourly fee, we will provide that service as Integrator’s subcontractor, and will bill Integrator for such services as set forth
in Section 12.0 (Other Services Charges — Authorized by Integrator or End User). Unless Integrator indicates otherwise
below, Cisco will quote the then-standard Professional Services Rate (located in the Move, Add, Change section of
Attachment 4 (Pricing)) to the End User for these services. As a courtesy, if Integrator prefers that Cisco quote a different
hourly rate for such services, enter that hourly rate here:
$          /hour.

	 	 	 	 	 	 	 
	Integrator contact to cc: on authorization form:
	 
	 	 	 	 	 	 
	Integrator contact name:	 	 
	 

	 	 	 	 	 	 
	Cell Phone:	 	 	 	 
	 	 	 	 	 
	Pager:
	 	 	 	 	 	 
	 	 	 
	Email:
	 	 	 	 	 	 
	 	 	 

Approval
will be received from the end-user via email or facsimile before Cisco will render the
requested services.

	x 	 	NO. When Integrator’s End User requests or requires technical assistance or other services
that are beyond the scope of the Services Integrator has purchased from Cisco (e.g., with
respect to an Uncovered Cause), Integrator DOES NOT AUTHORIZE Cisco to e-mail the End User
requesting the End User’s approval for Integrator to provide that service for a quoted
hourly rate.
	 
	 	 	If Integrator checks “No”, Integrator must provide contact information for Integrator’s support
or sales personnel who can be reached 24x7 to provide or authorize the requested or required
services.

	 	 	 	 	 	 	 
	Integrator 24X7 contact name:	 	Integrator 24X7 contact name:
	 

	 	Jon Groves
	 	 	 	Gary Derheim
	 
	 	 	 	 	 	 
	Cell Phone	 	Cell Phone
	 

	 	972-786-4006
	 	 	 	214-893-1409
	 
	 	 	 	 	 	 
	Pager:	 	Pager:
	 
	 	 	 	 	 	 
	Email:	 	Email:
	 

	 	jonathan.groves@inxi.com
	 	 	 	gary.derheim@inxi.com

Designate additional contacts on an attachment to this Exhibit. If contact information
changes, it is Integrator’s responsibility to notify Cisco of the change.

-End of Attachment 5-

Page 14 of 17

 

ATTACHMENT 6 TO EXHIBIT H

Approval Form For Processing End User MACDs

	 	 	 	 	 
	Integrator Name:	  Inx
	 	 	 
	Integrator HQ Address:	  1955 Lavelay Dr. Ste 220
	 

	 	 

When Integrator’s End User makes request to Cisco for moves, adds, changes or disconnects
(MACDs) as defined on Cisco’s price list, Cisco will be unable to provide the requested service
without Integrator’s written approval. The time for Cisco to provide that service will therefore be
increased by the time it takes to obtain Integrator’s written approval or submission of that
request. If Integrator wants to expedite the MACD process for Integrator’s End Users, Integrator
may authorize Cisco to provide the requested service, and bill Integrator for that service
automatically, by checking “Yes” below:

	o	 	YES. When Integrator’s End User requests MACDs, Integrator HEREBY AUTHORIZES Cisco to provide
the requested service.

If Integrator checks YES, Cisco will provide that service as Integrator’s subcontractor, and
will bill Integrator for such services at the rates set forth in Cisco’s then-current price list. Unless Integrator
indicates otherwise below, Cisco will quote the then-current rates to the End User for these services. As a courtesy, if Integrator
prefers that Cisco quote a different rate for such services, enter
those rates here:           

	x	 	NO. Integrator does not want Cisco to begin processing a MACD request until Cisco receives
Integrator’s specific written authorization in each instance. Integrator understands that
this election will increase the time it takes for Cisco to respond to such requests from
Integrator’s End Users.
	 
	 	 	In either case, Integrator would like Cisco to provide information about MACDs requested by the
End Users to the following contacts:

	 	 	 	 	 	 	 
	Billing contact:	 	Gary Derheim
	 

	 	 	 	 	 	 
	Cell Phone:	 	214.893.1409
	 	 	 	 	 
	Pager:
	 	 	 	 	 	 
	 	 	 
	Email:	 	gary.derheim@inxi.com
	 	 	 
	MAC & Disconnect contact:	 	Jon Groves
	 

	 	 	 	 	 	 
	Cell Phone:	 	972.786.4006
	 	 	 	 	 
	Pager:
	 	 	 	 	 	 
	 	 	 
	Email:	 	jonathan.groves@inxi.com
	 	 	 

Designate any additional contacts on an attachment to this Exhibit. If contact information
changes, it is Integrator’s responsibility to notify Cisco of the change.

-End of Attachment 6-

Page 15 of 17

 

Attachment 7 TO EXHIBIT H

Limited Warranty and Disclaimer for Remote Operations Services

1.0 GENERAL WARRANTY REGARDING ALL SERVICES FOR EACH END USER.

WITH RESPECT TO SERVICES, CISCO’S EXCLUSIVE WARRANTY IS THAT THE SERVICES SHALL BE PERFORMED IN A
WORKMANLIKE FASHION. IN ANY MONTH IN WHICH CISCO HAS BREACHED THIS WARRANTY, CISCO WILL CREDIT
INTEGRATOR UP TO ONE HUNDRED PERCENT (100%) OF THE SERVICE FEES FOR THAT MONTH FOR THE SERVICES. IN
ORDER TO RECEIVE A CREDIT, INTEGRATOR MUST NOTIFY CISCO IN WRITING WITHIN THIRTY (30) DAYS
FOLLOWING THE END OF THE MONTH DURING WHICH THE SERVICES WERE PROVIDED STATING (I) THE REASON
INTEGRATOR IS DISSATISFIED WITH THE SERVICES AND (II) THE AMOUNT OF SERVICE FEES INTEGRATOR
REQUESTS TO BE CREDITED. ANY CREDIT PAID BY CISCO TO INTEGRATOR (UP TO THE LIMITS ABOVE) APPLY TO
THE NEXT BILLING CYCLE AND WILL CONSTITUTE INTEGRATOR’S SOLE AND EXCLUSIVE REMEDY FOR BREACH OF THE
WARRANTY UNDER THIS SECTION 1.0. CISCO SHALL NOT BE OBLIGATED TO CREDIT INTEGRATOR AN AGGREGATE
AMOUNT EXCEEDING TWO MONTHS’ SERVICE FEES IN ANY TWELVE MONTH PERIOD, OR AN AGGREGATE AMOUNT
EXCEEDING THREE MONTHS’ SERVICE FEES IN ANY EIGHTEEN (18) MONTH PERIOD.

2.0 ISDN WARRANTY.

ON MANAGED COMPONENTS CONFIGURED BY CISCO TO USE AN ISDN DIAL BACKUP (DBU) CIRCUIT, INTEGRATORS
ARE RESPONSIBLE FOR ISDN CHARGES ASSOCIATED WITH ANY CONFIGURATION AND TESTING, THE NORMAL
OPERATION OF THE ISDN DBU IN THE EVENT OF A PRIMARY WAN CIRCUIT FAILURE, AND INTEGRATOR-REQUESTED
ACTIVATION OF THE ISDN DBU. IN THE EVENT OF A CONFIGURATION ERROR MADE BY CISCO THAT CAUSES THE
ISDN DBU TO BECOME ACTIVE, INTEGRATOR’S SOLE AND EXCLUSIVE REMEDIES FOR A BREACH OF WARRANTY UNDER
THIS SECTION 2.0 SHALL BE FOR CISCO TO CORRECT THE CONFIGURATION UPON DISCOVERY WITHIN THE CHANGE
MANAGEMENT PROCESS, AND ALSO THAT CISCO MAY CREDIT THE INTEGRATOR FOR UP TO $2,500.00 PER ISDN
LINE PER EVENT.

3.0
NETWORK AVAILABILITY (WAN MANAGEMENT SERVICES ONLY).

NETWORK AVAILABILITY EXTENDS UP TO AND INCLUDING LAYER 3 OF THE OSI MODEL, PROVIDED THAT THE SOURCE
OF THE PROBLEM(S) IS A NETWORK COMPONENT, AND IS CALCULATED AS FOLLOWS:

	 	 	 
	Availability =1-

	 	Total Downtime (in minutes) for all Network Links
	 	 
	 	(#
of minutes in month) x (Total Network Links)

CISCO WARRANTS THAT NETWORK AVAILABILITY WILL BE EQUAL TO OR GREATER THAN 99.5% FOR EACH MONTH
DURING THE SERVICE TERM. IN THE EVENT SUCH NETWORK AVAILABILITY GOAL FOR ANY GIVEN CALENDAR MONTH
IS NOT ACHIEVED, INTEGRATOR’S SOLE AND EXCLUSIVE REMEDY FOR A BREACH OF WARRANTY UNDER THIS SECTION
3.0 SHALL BE FOR CISCO TO CREDIT INTEGRATOR 50% OF THE WAN MANAGEMENT CHARGES FOR THAT MONTH, UP TO
A MAXIMUM CREDIT OF $10,000 IF THE CAUSE IS A CARRIER OUTAGE BEYOND CISCO’S REASONABLE CONTROL, OR
UP TO A MAXIMUM CREDIT OF $20,000 FOR ALL OTHER COVERED CAUSES (SEE EXCLUSIONS FROM COVERED CAUSES
BELOW).

FOR PURPOSES OF DETERMINING WHETHER THE MONTHLY NETWORK AVAILABILITY GOAL IS MET, DOWNTIME
EXCLUDES OUTAGES RESULTING FROM (I) VPN SITES; (II) FAILURES OF ANY FACILITIES, EQUIPMENT,
SERVICES, OR THE LIKE WHICH ARE NOT NETWORK COMPONENTS, INCLUDING BUT NOT LIMITED TO LAN
COMPONENTS; (III) FAILURE OF INTEGRATOR TO PERFORM ITS RESPONSIBILITIES DEFINED IN THIS DOCUMENT,
OR ANY FAULT, NEGLIGENCE, OPERATOR ERROR, ACT OR OMISSION OF INTEGRATOR, INCLUDING THE SUPPLYING
OF INACCURATE INFORMATION TO CISCO; (IV) UNAVAILABILITY OF END USER PERSONNEL TO GRANT CISCO
ACCESS TO END USER FACILITIES; (V) FAILURE OF EQUIPMENT OR CARRIER FACILITIES AT HEADQUARTER/HUB
LOCATIONS UNLESS REDUNDANT EQUIPMENT, AND REDUNDANT AND DIVERSE CARRIER FACILITIES ARE IN PLACE
AND OPERATING; (VI) UNAVAILABILITY OF ANY OTHER REQUIRED (PER THE CISCO-APPROVED NETWORK DESIGN)
DIAL BACK-UP OR OTHER REDUNDANT FACILITIES OR EQUIPMENT; (VII) FAILURE OF EQUIPMENT NOT COVERED BY
A MAINTENANCE AGREEMENT WITH CISCO UNLESS INTEGRATOR, END USER OR ITS THIRD PARTY
MAINTENANCE PROVIDER

Page 16 of 17

 

RESTORES THE EQUIPMENT WITHIN AGREED UPON TIMEFRAMES; (VIII) MASS OUTAGES, DEFINED AS
CATASTROPHIC OUTAGES OF END USER’S CARRIER’S NETWORK AFFECTING MULTIPLE END USERS, BEYOND CISCO’S
REASONABLE CONTROL; OR (IX) LOCATIONS OUTSIDE CONTINENTAL UNITED STATES.

4.0 GENERAL DISCLAIMER FOR ALL SERVICES.

4.1 ANY WARRANTIES AND RELATED REMEDIES
IN THIS ATTACHMENT 7 ARE EXCLUSIVE AND IN
LIEU OF ALL OTHER WARRANTIES OR REMEDIES,
EXPRESS, STATUTORY, OR IMPLIED, INCLUDING
WITHOUT LIMITATION THE IMPLIED WARRANTIES
OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. THE DISCLAIMERS AND
EXCLUSIONS IN THIS ATTACHMENT 7 SHALL APPLY
EVEN IF THE EXPRESS WARRANTIES AND LIMITED
REMEDIES SET FORTH IN THIS ATTACHMENT 7
FAIL OF THEIR ESSENTIAL PURPOSE. IN ANY
EVENT, THE WARRANTIES PROVIDED UNDER THIS
AGREEMENT ARE SUBJECT TO THE LIMITATIONS OF LIABILITY SET FORTH IN THE AGREEMENT.

4.2 BECAUSE OF THE CONTINUOUS EVOLUTION
OF THE SOPHISTICATION OF NETWORK THREATS
AND INFRASTRUCTURE TECHNOLOGIES, CISCO
DOES NOT MAKE, AND IT IS ACKNOWLEDGED THAT
CISCO CANNOT MAKE ANY WARRANTY OR
REPRESENTATION THAT ANY SYSTEM ATTACK OR
IMPACTING INCIDENT WILL BE DETECTED OR
PREVENTED.

4.3 INTEGRATOR ACKNOWLEDGES THAT THE
SERVICES ARE NOT DESIGNED OR INTENDED BY
CISCO FOR USE OR RESALE IN, OR FOR
INCORPORATION INTO PRODUCTS OR SERVICES
USED IN HIGH RISK ACTIVITIES. CISCO
SPECIFICALLY DISCLAIMS ANY EXPRESS OR
IMPLIED WARRANTY OF ANY KIND WITH RESPECT
TO THE USE OF THE SERVICES IN CONNECTION
WITH ANY HIGH RISK ACTIVITY.

-End of Attachment 7-

Page 17 of 17exv10w2

 

Exhibit 10.2

THE FASHION HOUSE, INC.

FINANCIAL STATEMENTS

For The Six Months Ended June 30, 2005 and 2004 and

The Years Ended December 31, 2004 and 2003

with

INDEPENDENT AUDITORS’ REPORT THEREON

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors of

The Fashion House, Inc.

We have audited the accompanying balance sheet of The Fashion House, Inc. (the “Company”) as of
December 31, 2004, and the related statements of operations, stockholders’ deficit and cash flows
for each of the two years in the period ended December 31, 2004. These financial statements are the
responsibility of the management of the Company. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United
States of America. 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.

In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of The Fashion House, Inc. as of December 31, 2004, and the
results of its operations and its cash flows for each of the two years in the period ended December
31, 2004 in conformity with accounting principles generally accepted in the United States of
America.

The accompanying financial statements have been prepared assuming that the Company will continue as
a going concern. As discussed in Note 1 to the financial statements, the Company incurred operating
losses and had negative cash flows from operations for the years ended December 31, 2004 and 2003,
and has as an accumulated deficit of $1,285,410 and a working capital deficit of $960,275 at
December 31, 2004. These factors, among others, raise substantial doubt about the Company’s ability
to continue as a going concern. Management’s plans in regard to these matters are described in Note
1. The financial statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.

/s/ CORBIN & COMPANY, LLP

Irvine, California

December 19, 2005

 

 

THE FASHION HOUSE, INC.

BALANCE SHEETS

	 	 	 	 	 	 	 	 	 
	 	 	June 30, 2005	 	 		 
	 	 	(Unaudited)	 	 	December 31, 2004	 
	ASSETS
	 	 	 	 	 	 	 	 
	 
	Current assets:
	 	 	 	 	 	 	 	 
	Cash
	 	$	2,985	 	 	$	171,849	 
	Accounts receivable, net of allowance of $0 and $12,667 at
June 30, 2005 and December 31, 2004, respectively
	 	 	36,669	 	 	 	203,892	 
	Prepaid offering costs
	 	 	152,683	 	 	 	—	 
	Prepaid royalties
	 	 	109,375	 	 	 	14,164	 
	Other prepaid expenses
	 	 	62,197	 	 	 	9,000	 
	Total current assets
	 	 	363,909	 	 	 	398,905	 
	Property and equipment, net
	 	 	196,852	 	 	 	148,149	 
	Deposits
	 	 	19,352	 	 	 	13,352	 
	 
	 	$	580,113	 	 	$	560,406	 
	 
	 	 	 	 	 	 	 	 
	LIABILITIES AND STOCKHOLDERS’ DEFICIT
	 	 	 	 	 	 	 	 
	Current liabilities:
	 	 	 	 	 	 	 	 
	Accounts payable and accrued expenses
	 	$	707,095	 	 	$	208,933	 
	Accrued payroll and related
	 	 	324,961	 	 	 	282,961	 
	Settlement payable
	 	 	85,000	 	 	 	135,000	 
	Due to factor
	 	 	36,488	 	 	 	101,826	 
	Accrued interest
	 	 	119,374	 	 	 	74,296	 
	Convertible notes payable, net of debt discount of $138,128
	 	 	861,872	 	 	 	—	 
	Note payable to stockholder
	 	 	851,000	 	 	 	542,000	 
	Warrant liability
	 	 	218,000	 	 	 	—	 
	Total current liabilities
	 	 	3,203,790	 	 	 	1,345,016	 
	Commitments and Contingencies
Stockholders’ deficit:
	 	 	 	 	 	 	 	 
	Common stock, $0.01 par value; 10,000 shares authorized;
10,000 shares issued and outstanding
	 	 	100	 	 	 	100	 
	Additional paid-in capital
	 	 	969,700	 	 	 	500,700	 
	Accumulated deficit
	 	 	(3,593,477	)	 	 	(1,285,410	)
	Total stockholders’ deficit
	 	 	(2,623,677	)	 	 	(784,610	)
	 
	 	$	580,113	 	 	$	560,406	 

See independent auditors’ report and accompanying notes to these financial statements.

2

 

THE FASHION HOUSE, INC.

STATEMENTS OF OPERATIONS

	 	 	 	 	 	 	 	 	 
	 	 	Years Ended December 31,	 
	 	 	2004	 	 	2003	 
	Net sales
	 	$	4,676,528	 	 	$	971,721	 
	 
	 	 	 	 	 	 	 	 
	Cost of sales
	 	 	2,710,165	 	 	 	818,199	 
	Gross profit
	 	 	1,966,363	 	 	 	153,522	 
	Operating expenses:
	 	 	 	 	 	 	 	 
	Selling, general and administrative
	 	 	2,140,602	 	 	 	1,263,320	 
	Payroll and related
	 	 	416,570	 	 	 	219,911	 
	Royalties
	 	 	367,014	 	 	 	157,500	 
	Total operating expenses
	 	 	2,924,186	 	 	 	1,640,731	 
	Loss from operations
	 	 	(957,823	)	 	 	(1,487,209	)
	Other income (expense):
	 	 	 	 	 	 	 	 
	Gain on sale of license
	 	 	1,350,000	 	 	 	—	 
	Interest expense
	 	 	(84,406	)	 	 	(20,808	)
	Total other income (expense), net
	 	 	1,265,594	 	 	 	(20,808	)
	Income (loss) before income taxes
	 	 	307,771	 	 	 	(1,508,017	)
	Income taxes
	 	 	800	 	 	 	800	 
	Net income (loss)
	 	$	306,971	 	 	$	(1,508,817	)

See independent auditors’ report and accompanying notes to these financial statements.

3

 

THE FASHION HOUSE, INC.

STATEMENTS OF OPERATIONS

	 	 	 	 	 	 	 	 	 
	 	 	Six Months Ended June 30,	 
	 	 	2005	 	 	2004	 
	 	 	(Unaudited)	 	 	(Unaudited)	 
	Net sales
	 	$	746,325	 	 	$	2,954,242	 
	 
	 	 	 	 	 	 	 	 
	Cost of sales
	 	 	753,942	 	 	 	2,007,377	 
	Gross (loss) profit
	 	 	(7,617	)	 	 	946,865	 
	Operating expenses:
	 	 	 	 	 	 	 	 
	Selling, general and administrative
	 	 	928,588	 	 	 	727,208	 
	Payroll and related
	 	 	422,548	 	 	 	122,599	 
	Royalties
	 	 	346,875	 	 	 	203,889	 
	Total operating expenses
	 	 	1,698,011	 	 	 	1,053,696	 
	Loss from operations
	 	 	(1,705,628	)	 	 	(106,831	)
	Other expense:
	 	 	 	 	 	 	 	 
	Interest expense
	 	 	(601,639	)	 	 	(46,744	)
	Total other expense
	 	 	(601,639	)	 	 	(46,744	)
	Loss before income taxes
	 	 	(2,307,267	)	 	 	(153,575	)
	Income taxes
	 	 	800	 	 	 	800	 
	Net loss
	 	$	(2,308,067	)	 	$	(154,375	)

See accompanying notes to these financial statements.

4

 

THE FASHION HOUSE, INC.

STATEMENT OF STOCKHOLDERS’ DEFICIT

SIX MONTH ENDED JUNE 30, 2005 (UNAUDITED) AND YEARS ENDED DECEMBER 31, 2004 AND 2003

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Common Stock	 	 	Additional	 	 	Accumulated	 	 	 	 
	 	 	Shares	 	 	Amount	 	 	Paid-in Capital	 	 	Deficit	 	 	Total	 
	Balance at December 31, 2002
	 	 	9,200	 	 	$	92	 	 	$	149,908	 	 	$	(83,564	)	 	$	66,436	 
	 
	Capital contributions
	 	 	—	 	 	 	—	 	 	 	350,000	 	 	 	—	 	 	 	350,000	 
	Net loss
	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(1,508,817	)	 	 	(1,508,817	)
	Balance at December 31, 2003
	 	 	9,200	 	 	 	92	 	 	 	499,908	 	 	 	(1,592,381	)	 	 	(1,092,381	)
	Issuance of common stock
for services
	 	 	800	 	 	 	8	 	 	 	792	 	 	 	—	 	 	 	800	 
	Net income
	 	 	—	 	 	 	—	 	 	 	—	 	 	 	306,971	 	 	 	306,971	 
	Balance at December 31, 2004
	 	 	10,000	 	 	 	100	 	 	 	500,700	 	 	 	(1,285,410	)	 	 	(784,610	)
	Estimated fair value of
beneficial conversion
feature (unaudited)
	 	 	—	 	 	 	—	 	 	 	469,000	 	 	 	—	 	 	 	469,000	 
	Net loss (unaudited)
	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(2,308,067	)	 	 	(2,308,067	)
	Balance at June 30, 2005
(unaudited)
	 	 	10,000	 	 	$	100	 	 	$	969,700	 	 	$	(3,593,477	)	 	$	(2,623,677	)

See independent auditors’ report and accompanying notes to these financial statements.

5

 

THE FASHION HOUSE, INC.

STATEMENT OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2004 AND 2003

	 	 	 	 	 	 	 	 	 
	 	 	December 31, 2004	 	 	December 31, 2003	 
	CASH FLOWS FROM OPERATING ACTIVITIES:
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Net income (loss)
	 	$	306,971	 	 	$	(1,508,817	)
	Adjustments to reconcile net income (loss) to net
cash used in operating activities:
	 	 	 	 	 	 	 	 
	Depreciation and amortization
	 	 	32,892	 	 	 	9,448	 
	Gain on sale of license
	 	 	(1,350,000	)	 	 	—	 
	Estimated fair value of stock issued for services
	 	 	800	 	 	 	—	 
	Changes in operating assets and liabilities

	 	 	 	 	 	 	 	 
	
Accounts receivable
	 	 	(203,892	)	 	 	—	 
	Prepaid royalties and expenses
	 	 	(23,164	)	 	 	58,000	 
	Deposits
	 	 	(12,602	)	 	 	(750	)
	Accounts payable and accrued expenses
	 	 	91,020	 	 	 	117,322	 
	Accrued payroll and related
	 	 	62,808	 	 	 	178,153	 
	Settlement payable
	 	 	135,000	 	 	 	—	 
	Accrued interest
	 	 	74,296	 	 	 	—	 
	Net cash used in operating activities
	 	 	(885,871	)	 	 	(1,146,644	)
	CASH FLOWS FROM INVESTMENT ACTIVITIES:
	 	 	 	 	 	 	 	 
	Purchases of property and equipment
	 	 	(129,446	)	 	 	(47,341	)
	Proceeds from sale of license
	 	 	1,350,000	 	 	 	—	 
	Net cash provided by (used in) investing activities
	 	 	1,220,554	 	 	 	(47,341	)
	CASH FLOWS FROM FINANCING ACTIVITIES:
	 	 	 	 	 	 	 	 
	Proceeds from note payable to stockholder
	 	 	100,000	 	 	 	685,000	 
	Repayments of notes payable to stockholder
	 	 	(243,000	)	 	 	—	 
	Advances from factor
	 	 	1,124,631	 	 	 	331,878	 
	Payments to factor
	 	 	(1,155,104	)	 	 	(199,578	)
	Proceeds from capital contributions
	 	 	—	 	 	 	350,000	 
	Net cash (used in) provided by financing activities
	 	 	(173,473	)	 	 	1,167,299	 
	Net increase (decrease) in cash
	 	 	161,210	 	 	 	(26,686	)
	Cash, beginning of the period
	 	 	10,639	 	 	 	37,325	 
	Cash, end of the period
	 	$	171,849	 	 	$	10,639	 
	SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
	 	 	 	 	 	 	 	 
	Cash paid during the period for interest
	 	$	10,110	 	 	$	—	 
	Cash paid during the period for income taxes
	 	$	800	 	 	$	800	 

See independent auditors’ report and accompanying notes to these financial statements.

6

 

THE FASHION HOUSE, INC.

STATEMENT OF CASH FLOWS

SIX MONTH ENDED JUNE 30, 2005

	 	 	 	 	 	 	 	 	 
	 	 	June 30, 2005	 	 	June 30, 2004	 
	 	 	(Unaudited)	 	 	(Unaudited)	 
	CASH FLOWS FROM OPERATING ACTIVITIES:
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Net loss
	 	$	(2,308,067	)	 	$	(154,375	)
	Adjustments to reconcile net loss to net cash used in operating activities:
	 	 	 	 	 	 	 	 
	Depreciation and amortization
	 	 	22,403	 	 	 	12,970	 
	Amortization of estimated fair value of beneficial conversion features
	 	 	349,205	 	 	 	—	 
	Amortization of estimated fair value of warrants
	 	 	199,667	 	 	 	—	 
	Changes in operating assets and liabilities

	 	 	 	 	 	 	 	 
	
Accounts receivable
	 	 	167,223	 	 	 	—	 
	Prepaid royalties and expenses
	 	 	(148,408	)	 	 	(181,290	)
	Deposits
	 	 	(6,000	)	 	 	750	 
	Accounts payable and accrued expenses
	 	 	498,162	 	 	 	62,444	 
	Accrued payroll and related
	 	 	42,000	 	 	 	68,827	 
	Settlement payable
	 	 	(50,000	)	 	 	—	 
	Accrued interest
	 	 	45,078	 	 	 	48,206	 
	Net cash used in operating activities
	 	 	(1,188,737	)	 	 	(142,468	)
	CASH FLOWS FROM INVESTMENT ACTIVITIES:
	 	 	 	 	 	 	 	 
	Purchases of property and equipment
	 	 	(71,106	)	 	 	—	 
	Net cash used in investing activities
	 	 	(71,106	)	 	 	—	 
	CASH FLOWS FROM FINANCING ACTIVITIES:
	 	 	 	 	 	 	 	 
	Proceeds from note payable to stockholder
	 	 	370,000	 	 	 	—	 
	Repayments of notes payable to stockholder
	 	 	(61,000	)	 	 	—	 
	Proceeds from convertible notes payable
	 	 	1,000,000	 	 	 	—	 
	Advances from factor
	 	 	728,862	 	 	 	909,739	 
	Payments to factor
	 	 	(794,200	)	 	 	(776,860	)
	Prepaid offering costs
	 	 	(152,683	)	 	 	—	 
	Net cash provided by financing activities
	 	 	1,090,979	 	 	 	132,879	 
	Net decrease in cash
	 	 	(168,864	)	 	 	(9,589	)
	Cash, beginning of the period
	 	 	171,849	 	 	 	10,639	 
	Cash, end of the period
	 	$	2,985	 	 	$	1,050	 
	SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
	 	 	 	 	 	 	 	 
	Cash paid during the period for interest
	 	$	32,517	 	 	$	—	 
	Cash paid during the period for income taxes
	 	$	—	 	 	$	—	 
	SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
	 	 	 	 	 	 	 	 
	Estimated fair value of beneficial conversion features
	 	$	469,000	 	 	$	—	 
	Estimated fair value of warrants issued with convertible notes payable
	 	$	218,000	 	 	$	—	 

See independent auditors’ report and accompanying notes to these financial statements.

7

 

THE FASHION HOUSE, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2004 and 2003

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

Organization and Nature of Operations

The Fashion House, Inc. (the “Company”) was incorporated under the laws of the State of Delaware on
April 11, 2002. The Company designs, develops and markets women’s dress footwear with an emphasis
on celebrity appeal, style, quality and fit. The Company targets the moderate to premium-priced
categories of the women’s footwear industry and implements its business model by licensing
recognized brand names throughout the United States of America.

Basis of Presentation

The financial statements have been prepared 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 judgments that affect the
reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses during the reporting
periods. Significant estimates made by management include, among others, collectibility of
receivables, recoverability of long-lived assets and valuation of warrants to purchase common stock
and deferred tax assets. Actual results may differ from these estimates under different assumptions
or conditions.

Going Concern

The financial statements have been prepared on a going concern basis which contemplates the
realization of assets and the satisfaction of liabilities in the normal course of business. The
Company incurred operating losses and had negative cash flows from operations for the years ended
December 31, 2004 and 2003, and has as an accumulated deficit of $1,285,410 and a working capital
deficit of $960,275 at December 31, 2004.

8

 

THE FASHION HOUSE, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2004 and 2003

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued 

The Company’s success is dependent upon numerous items, among which are the Company’s successful
growth of revenues from its products, its ability to obtain new customers in order to achieve
levels of revenues adequate to support the Company’s current and future cost structure, and its
ability to obtain financing for operations, for which there is no assurance. Unanticipated
problems, expenses, and delays are frequently encountered in establishing and maintaining
profitable operations. These include, but are not limited to, competition, the need to develop
customer support capabilities and market expertise, setbacks in product development, technical
difficulties, market acceptance and sales and marketing. The failure of the Company to meet any of
these conditions could have a materially adverse effect on the Company and may force the Company to
reduce or curtail operations. No assurance can be given that the Company can achieve or maintain
profitable operations.

The Company believes it will have adequate cash to sustain operations until it achieves sustained
profitability. However, until the Company has a history of maintaining revenue levels sufficient to
support its operations and repay its working capital deficit, the Company requires additional
financing. Subsequent to year end, the Company entered into a private placement agreement to sell a
maximum of 4,600,000 shares of its common stock at $1.00 per share (see Note 7) for which it has
obtained approximately $2,400,000. There can be no assurance that additional funding will be
adequate or will enable the Company to achieve or sustain profitable operations.

These factors, among others, raise substantial doubt about the Company’s ability to continue as a
going concern. The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the classification of
liabilities that might result from the outcome of these uncertainties.

Risks and Uncertainties

Credit Risk

The Company maintains its cash accounts in financial institutions. Accounts at these institutions
are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000. At December 31,
2004, the Company has cash balances which exceeded the insured limit by $87,360.

The Company assigns the majority of its trade accounts receivable to a factor (see Note 2);
however, the Company maintains the credit risk with respect to collection of these amounts. The
Company makes sales to customers not approved by its factor at its own risk and monitors the
outstanding receivable balance. At December 31, 2004, the Company established an allowance for
doubtful accounts of $12,267.

9

 

THE FASHION HOUSE, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2004 and 2003

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued 

The Company operates in an industry that is subject to intense competition. The Company’s
operations are subject to significant risks and uncertainties including financial, operational,
technological, regulatory and other risks associated with an operating business, including the
potential risk of business failure.

Merchandise Risk

The Company’s success is largely dependent upon its ability to gauge the market trends and the
tastes of its targeted consumers and provide merchandise that satisfies consumer demand. Any
inability to provide appropriate merchandise in sufficient quantities in a timely manner could have
a material adverse effect on the Company’s business, operating results and financial condition.

The Company purchases substantially all of its products from two vendors. The loss of either of
these vendors could have a material adverse effect on the Company’s cash flow and financial
position.

Inventories

Inventories will consist of returned merchandise from customers or unsold goods held by the
trading company at a public warehouse in excess of sixty days. As noted below, the Company has no
inventory on hand at June 30, 2005 and December 31, 2004.

Property and Equipment

Property and equipment are stated at cost. Depreciation of equipment is provided for by using the
straight-line method over the estimated useful lives of the related assets, which are five years
for machinery and equipment and seven years for furniture and fixtures. Expenditures for
maintenance and repairs are charged to expense as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the respective accounts, and any gain or loss is included
in operations.

Long-Lived Assets

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company evaluates the carrying value of long-lived
assets for impairment whenever events or change in circumstances indicate that such carrying values
may not be recoverable. The Company estimates the future undiscounted cash flows derived from an
asset to assess whether or not a potential impairment exists when events or circumstances indicate
the carrying value of a long-lived asset may not be recoverable. An impairment loss is recognized
when the undiscounted future cash flows are less than its carrying amount. If assets are considered
to be impaired, the impairment to be recognized is measured by the amount by which the carrying
amount exceeds the fair value of the assets. At December 31, 2004, the Company’s management
believes there is no impairment of its long-lived assets. There can be no assurance, however, that
market conditions will not change or demand for the Company’s products or services will continue,
which could result in additional future impairment of long-lived assets.

10

 

THE FASHION HOUSE, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2004 and 2003

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued 

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash, accounts receivable, accounts payable and
accrued expenses, accrued payroll and related, settlement payable, due to factor, accrued interest,
and note payable to stockholder. The carrying value for all such instruments approximates fair
value due either to the short-term nature of the instruments or the fact that prevailing interest
rates are not substantially different from the Company’s borrowing rates at June 30, 2005 and
December 31, 2004. The fair value of convertible notes payable is not determinable because of the
nature of the instruments and lack of comparability with similar types of instruments.

Derivative Financial Instruments

In connection with the issuance of warrants with convertible notes payable in 2005 (see Notes 6 and
9), the Company was required to file a registration statement by November 2, 2005 and have such
registration statement declared effective no later than February 15, 2006 (the “Effectiveness
Deadline”). The Company will be required to issue the holders of convertible notes 123,750 warrants
for each subsequent 30-day period that such registration statement has not been filed. Also, the
Company will be required to issue the holders of convertible notes 123,750 warrants for each 30-day
period the registration statement is not declared effective beyond the Effectiveness Deadline. In
addition, the Company is required to include the warrants issued to the placement agent for the
private placement in such registration statement (see Note 7). The Company determined that the
registration rights are an embedded derivative instrument pursuant to SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities , as amended and the provisions of the Emerging
Issues Task Force (“EITF”) Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own Stock. The accounting treatment of these derivative
financial instruments requires that the Company record the derivatives at their fair values as of
the inception date of the note agreements and at fair value as of each subsequent balance sheet
date. Any change in fair value will be recorded as non-operating, non-cash income or expense at
each balance sheet date. If the fair value of the derivatives is higher at the subsequent balance
sheet date, the Company will record a non-operating, non-cash charge. If the fair value of the
derivatives is lower at the subsequent balance sheet date, the Company will record non-operating,
non-cash income.

At June 30, 2005, there are derivative liabilities of $218,000 related to the warrants with
registration rights. Due to the close proximity of the balance sheet date to the issuance date of
the warrants, there was no change in valuation of the related derivatives. There were no such
liabilities at December 31, 2004.

Warrant-related derivatives were valued using the Black-Scholes Option Pricing Model with the
following assumptions during the six months ended June 30, 2005: dividend yield of 0%; annual
volatility of 62%; and risk free interest rate of 3.0%.

11

 

THE FASHION HOUSE, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2004 and 2003

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued 

Beneficial Conversion Feature

The convertible feature of certain conventional convertible notes payable (see Note 6) provides for
a rate of conversion that is below market value. Such feature is normally characterized as a
“beneficial conversion feature” (“BCF”). Pursuant to EITF Issue No. 98-5 (“EITF 98-5”), Accounting
For Convertible Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratio and EITF Issue No. 00-27, Application of EITF Issue No. 98-5 To Certain
Convertible Instruments, the fair values of the BCFs have been recorded as a discount from the face
amount of the respective debt instrument. The Company is amortizing the discount using the
effective interest method through maturity of such instruments. The Company will record the
corresponding unamortized debt discount related to the BCF and warrants as interest expense when
the related instrument is converted into the Company’s common stock.

Revenue Recognition

Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) 101, Revenue Recognition , as
amended by SAB 104, outlines the basic criteria that must be met to recognize revenue and provide
guidance for presentation of revenue and for disclosure related to revenue recognition policies in
financial statements filed with the Securities and Exchange Commission. Management believes that
the Company’s revenue recognition policy conforms to SAB 104.

We evaluate the criteria of the Financial Accounting Standards Board (“FASB”) EITF Issue No. 99-19,
Reporting Revenue Gross as a Principal Versus Net as an Agent, in determining whether it is
appropriate to record the gross amount of revenue and related costs or the net amount earned as
commissions. The Company is the primary obligor, is subject to inventory risk, has latitude in
establishing prices and selecting suppliers, establishes product specifications, and has the risk
of loss as it relates to the ultimate collection of accounts receivable and cargo losses.
Accordingly, the Company’s revenue is recorded on a gross basis.

12

 

THE FASHION HOUSE, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2004 and 2003

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued 

The Company utilizes a trading company (see Note 2) to provide trade finance and factoring services
in connection with the manufacture, distribution and sale of the Company’s products (referred to
hereinafter as the “Goods”) to customers. The trading company issues letters of credit in favor of
the manufacturers at the request of the Company, and in accordance with the information provided in
such requests. The trading company imports and delivers Goods, as instructed by the Company, to a
public warehouse and pays the manufacturers for the cost of Goods and the related costs covered by
the requests.

Goods are held by the Company at a public warehouse on a consignment basis. The Company arranges
and maintains the Goods while in its possession at its expense. The trading company has title to
the Goods when shipped from the manufacturer and in the public warehouse. The trading Company is
paid for the Goods upon their sales and shipment to the Company’s customers. Goods that remain
unsold in the public warehouse on or after sixty days from receipt are billed by the trading
company and title to the Goods is transferred to the Company. For all Goods purchased, the Company
is charged cost plus 4% by the trading company. There were no unsold Goods billed by the trading
company and purchased by the Company during the years ended December 31, 2004 and 2003.

Revenue is recognized upon shipment of Goods from the public warehouse to the customers, which is
when title transfers to the customers. The trading company approves credit to the customers and
factors the sale. The trading company charges the Company 2.5% of the sales which are factored. For
sales that are not factor approved, the Company purchases Goods from the trading company and sells
the Goods directly to the customers.

The Company has title to all Goods returned by customers to the public warehouse. At December 31,
2004, returned inventory was not material to the overall financial statements.

Shipping and handling costs billed to the customers are recorded in sales. Shipping and handling
costs as incurred by the Company are recorded in cost of sales.

Advertising

The Company expenses advertising costs, consisting primarily of placement in multiple publications,
along with design and printing costs of sales materials, when incurred. Advertising expense for the
years ended December 31, 2004 and 2003 amounted to $72,738 and $59,563, respectively.

13

 

THE FASHION HOUSE, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2004 and 2003

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued 

Income Taxes

The Company determines its income taxes under the asset and liability method in accordance with the
SFAS No. 109, Accounting for Income Taxes . Under the asset and liability approach, deferred income
tax assets and liabilities are calculated and recorded based upon the future tax consequences of
temporary differences by applying enacted statutory tax rates applicable to future periods for
differences between the financial statements carrying amounts and the tax basis of existing assets
and liabilities. Generally, deferred income taxes are classified as current or non-current in
accordance with the classification of the related asset or liability. Those not related to an asset
or liability are classified as current or non-current depending on the periods in which the
temporary differences are expected to reverse. Valuation allowances are provided for significant
deferred income tax assets when it is more likely than not that some or all of the deferred tax
assets will not be realized.

Stock-Based Compensation

In December 2004, the FASB issued SFAS No. 123 (revised 2004) (“SFAS 123(R)”), Share-Based Payment
        , to provide investors and other users of financial statements with more complete and neutral
financial information by requiring that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. SFAS 123(R) covers a wide range of share-based
compensation arrangements including share options, restricted share plans, performance-based
awards, share appreciation rights, and employee share purchase plans. SFAS 123(R) replaces SFAS No.
123, and supersedes Accounting Principles Board (“APB”) No. 25. SFAS No. 123, as originally issued
in 1995, established as preferable a fair-value-based method of accounting for share-based payment
transactions with employees. However, that Statement permitted entities the option of continuing to
apply the guidance in APB No. 25, as long as the footnotes to financial statements disclosed what
net income (loss) would have been had the preferable fair-value-based method been used. Small
business issuers will be required to apply SFAS 123(R) as of the first interim or annual reporting
period that begins after December 15, 2005. The Company will apply SFAS 123(R) to all stock-based
employee compensation arrangements. There have been no options issued to employees as of December
31, 2004.

Stock-based awards to non-employees are accounted for using the fair value method in accordance
with SFAS No. 123 and EITF Issue No. 96-18, Accounting For Equity Instruments That Are Issued To
Other Than Employees For Acquiring, Or In Conjunction With Selling Goods Or Services . All
transactions in which goods or services are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the consideration received or the fair
value of the equity instrument issued, whichever is more reliably measurable. The measurement date
used to determine the fair value of the equity instrument issued is the earlier of the date on
which the third-party performance is complete or the date on which it is probable that performance
will occur.

14

 

THE FASHION HOUSE, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2004 and 2003

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued 

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of
APB No. 29, Accounting for Nonmonetary Transactions . This Statement’s amendments are based on the
principle that exchanges of nonmonetary assets should be measured based on the fair value of the
assets exchanged. Further, SFAS No. 153 eliminates the narrow exception for nonmonetary exchanges
of similar productive assets and replaces it with a broader exception for exchanges of nonmonetary
assets that do not have commercial substance. Provisions of this statement are effective for fiscal
periods beginning after June 15, 2005. The adoption of this statement is not expected to have a
material impact on the financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154
replaces APB No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements and establishes retrospective application as the required method for reporting
a change in accounting principle. SFAS No. 154 provides guidance for determining whether
retrospective application of a change in accounting principle is impracticable and for reporting a
change when retrospective application is impracticable. The reporting of a correction of an error
by restating previously issued financial statements is also addressed. SFAS No. 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning after December 15,
2005. The Company does not expect the adoption of this statement to have a material impact on the
financial statements.

Other recent accounting pronouncements issued by the FASB (including the EITF) and the American
Institute of Certified Public Accountants did not or are not believed by management to have a
material impact on the Company’s present or future financial statements.

NOTE 2 — ACCOUNTS RECEIVABLE FACTORING 

On February 1, 2003, the Company signed a factoring agreement with Madison Administrative Services,
Inc. (“MAS”), a New York corporation. Under the factoring agreement, MAS charged the Company a
factoring fee of 1% of the gross invoice amount of each account receivable, subject to a minimum
annual fee of $9,000. MAS, to the extent of any financing provided, held a security interest in all
assets of the Company over the term of the factoring agreement. During the years ended December 31,
2004 and 2003, factoring fees charged by MAS totaled $48,995 and $10,004, respectively.

In November 2004, the Company terminated its factoring activities with MAS and signed a conditional
mutual release with MAS on April 6, 2005, whereby the Company agreed to pay MAS $135,000, of which
$50,000 was due upon signing and $85,000 due in June 2005. The Company remitted the $85,000 balance
in July 2005.

15

 

THE FASHION HOUSE, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2004 and 2003

NOTE 2 — ACCOUNTS RECEIVABLE FACTORING, continued 

On November 14, 2004, the Company signed a factoring agreement with Itochu International, Inc.
(“Itochu”), a New York corporation. Under the factoring agreement, the Company is charged a
factoring fee of 1.5% of the gross invoice amount, with no minimum annual fee, and all invoices are
subject to approval by Itochu. Itochu, to the extent of any financing provided, holds a security
interest in all assets of the Company over the term of the factoring agreement. Either party may
terminate the factoring agreement by providing 60 days written notice. In accordance with the
agreement, Itochu will advance the invoice amount, but at no time will the outstanding balance of
advances exceed $500,000.

The following summarizes the Company’s accounts receivable and related balances:

	 	 	 	 	 	 	 	 	 
	 	 	(Unaudited)	 	 	 	 
	 	 	June 30, 2005	 	 	December 31, 2005	 
	Receivables assigned to factor
	 	$	1,854	 	 	$	170,344	 
	Advances from factor
	 	 	(36,488	)	 	 	(101,826	)
	 
	 	 	 	 	 	 
	Amounts due (to) from factor
	 	 	(34,634	)	 	 	68,518	 
	Unfactored accounts receivable
	 	 	34,815	 	 	 	45,815	 
	Allowances for returns and allowances
	 	 	—	 	 	 	(12,267	)
	 
	 	 	 	 	 	 
	 
	 	$	181	 	 	$	102,066	 
	 
	 	 	 	 	 	 

NOTE 3 — PROPERTY AND EQUIPMENT 

Property and equipment consists of the following at December 31, 2004:

	 	 	 	 	 
	Office and computer equipment
	 	$	99,394	 
	 
	 	 	 	 
	Furniture and fixtures
	 	 	91,096	 
	 
	 	 	190,490	 
	Less accumulated depreciation
	 	 	(42,341	)
	 
	 	$	148,149	 

Depreciation expense for the years ended December 31, 2004 and 2003 amounted to $32,892 and $9,448,
respectively.

NOTE 4 — NOTE PAYABLE — STOCKHOLDER 

From time to time, the Company borrows funds from a founding stockholder for working capital
purposes, which bear interest at 8% per annum and are due in January 2006. As of December 31, 2004
and June 30, 2005, outstanding borrowings totaled $542,000 and $851,000, and accrued interest
totaled $74,296 and $102,776, respectively. Interest expense for the years ended December 31, 2004
and 2003 approximated $53,000 and $21,000, respectively. Interest expense for the six months ended
June 30, 2005 and 2004 was $28,000 and $27,000, respectively.

16

 

THE FASHION HOUSE, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2004 and 2003

NOTE 5 — INCOME TAXES 

Income tax expense consisted of current state income tax expense of $800 for the years ended
December 31, 2004 and 2003.

Reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as
follows:

	 	 	 	 	 	 	 	 	 
	 	 	2004	 	 	2003	 
	Statutory federal income tax rate
	 	 	34.0	%	 	 	34.0	%
	 
	State income taxes, net of federal benefit
	 	 	0.2	%	 	 	—	 
	Change in valuation allowance
	 	 	(34.5	)%	 	 	(33.9	)%
	Other
	 	 	0.6	%	 	 	(0.1	)%
	Total
	 	 	0.3	%	 	 	—	 

The following is a summary of the significant components of the Company’s deferred income tax
liability as of December 31, 2004:

	 	 	 	 	 
	Non-current deferred income tax asset:
	 	 	 	 
	 
	 	 	 	 
	Net operating loss carryforwards
	 	$	624,000	 
	Less valuation allowance
	 	 	(624,000	)
	 
	 	$	—	 

At December 31, 2004, the Company had net operating loss carryforwards of approximately $1,456,000
and $1,455,000 available to offset future federal and state income taxes, respectively, and which
will begin to expire in year 2022 and 2012, respectively. SFAS 109 requires that the tax benefit of
such net operating losses be recorded using current tax rates as an asset to the extent management
assesses the utilization of such net operating losses to be more likely than not. Based upon the
Company’s short term historical operating performance, the Company provided a full valuation
allowance against the deferred tax asset in 2004 and 2003.

17

 

THE FASHION HOUSE, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2004 and 2003

NOTE 6 — CONVERTIBLE NOTES PAYABLE 

In April and May 2005, the Company issued convertible notes payable totaling $625,000, bearing
interest at 11 percent per annum (the “11% Notes”). The notes and accrued interest were due through
August 2005, as amended. In addition, the principal and accrued interest on the 11% Notes were
convertible into shares of the Company’s common stock at a conversion price equal to $0.80 per
share. The Company recorded a BCF of $375,250 in connection with the conversion feature of the
notes payable during the six months ended June 30, 2005 and amortized $345,500 to interest expense
in the accompanying statement of operations during such period. In connection with the issuance of
the 11% Notes, the Company issued warrants to purchase an aggregate of 625,000 shares of the
Company’s common stock. In August 2005, the Company repaid such amounts, including accrued interest
of $35,392. The holder of the 11% Notes has the right to purchase up to 50% of any equity security,
including convertible debt, to be issued by the Company on the same terms as such securities are
offered to other parties through May 2008. At June 30, 2005, the balance of the 11% Notes is
$576,917, net of unamortized debt discounts of $29,750 and $18,333 related to the BCF and warrants,
respectively.

In June 2005, the Company issued convertible notes payable totaling $375,000, bearing interest at 6
percent per annum (the “6% Notes”). The notes and accrued interest were due at the earlier of the
closing of the Company’s private placement (see Note 9) or June 2006. In addition, the principal
and accrued interest on the 6% Notes are convertible into shares of the Company’s common stock at a
conversion price equal to $0.80 per share. The Company recorded a BCF of $93,750 in connection with
the conversion feature of the notes payable during the six months ended June 30, 2005 and amortized
$3,705 to interest expense in the accompanying statement of operations during such period. In
conjunction with the initial closing of the Company’s reorganization (see Note 9), the entire
balance of $375,000 of the 6% Notes, and $3,713 of accrued interest, was converted into 472,463
shares of the Company’s common stock in accordance with the related agreements. At June 30, 2005,
the balance of the 6% Notes is $284,955, net of unamortized debt discounts of $90,045 related to
the BCF.

NOTE 7 — EQUITY TRANSACTIONS 

Contributions

During the year ended December 31, 2003, the Company received contributions totaling $350,000 from
a founding stockholder of the Company.

18

 

THE FASHION HOUSE, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2004 and 2003

NOTE 7 — EQUITY TRANSACTIONS, continued 

Common Stock

During the year ended December 31, 2004, the Company issued 800 shares of common stock to a
founding stockholder for services rendered with an estimated value of $800 (based on the per share
price of the Company’s subsequent private placement, see below).

On June 1, 2005, the Company entered into an agreement with Brookstreet Securities Corporation
(“BSC”), a NASD member investment banker based in Irvine, California, as its placement agent and
financial consultant to sell newly issued common stock at $1.00 per share for a total offering from
a minimum of 2,500,000 shares to a maximum of 4,600,000 shares, in order to raise minimum capital
of $2,175,000 to maximum capital of $4,002,000, net of expenses (the “PPM”). The Company agreed to
pay BSC an 8% retail sales commission, a 2% non-accountable marketing allowance and a 3%
non-accountable expense allowance. BSC also received warrants to purchase 433,313 shares of the
Company’s common stock at an exercise price of $1.00 per share (see Note 9).

Warrants

During the six months ended June 30, 2005, the Company issued warrants to purchase 625,000 shares
of the Company’s common stock in connection with the issuance of the 11% Notes (see Note 6), with
fair values totaling $218,000, as determined using the Black Scholes Option Pricing Model. These
warrants vested upon grant, have exercise prices of $0.15 and expire through August 2015. The
Company was required to file a registration statement by November 2, 2005 and have such
registration statement declared effective no later than February 15, 2006, (the “Effectiveness
Deadline”). The Company is required to issue the holders of the 11% Notes 68,750 warrants for each
subsequent 30-day period that such registration statement has not been filed. Also, the Company
will be required to issue the holders of the 11% Notes 68,750 warrants for each 30-day period the
registration statement is not declared effective beyond Effectiveness Deadline (“11% Penalty
Warrants”). The Company has recorded the estimated fair value of the warrants as a liability (see
Note 1). As of December 19, 2005, the Company has issued 11% Penalty Warrants to purchase an
aggregate of 137,500 shares of the Company’s common stock, which vested upon grant, have exercise
prices of $1.00, mature through August 2015 and have estimated fair values of $109,000, as
determined under SFAS 123.

19

 

THE FASHION HOUSE, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2004 and 2003

NOTE 8 — COMMITMENTS AND CONTINGENCIES 

Licensing Agreements

For the rights to use trademarks, the Company has entered into licensing agreements with various
licensors. The agreements enable the Company to sell products using the name of the licensor in
return for a licensing fee based upon sales of the product using the licensor’s name.

The Company acquired rights to use four trademarks as evidenced by licensing agreements entered
into with Nicole Miller, Richard Tyler, Tyler and Oscar by Oscar de la Renta (acquired in January
2005), which expire on March 3, 2009, November 26, 2007, November 26, 2007 and June 30, 2010,
respectively. Under these licensing agreements, the Company agreed to pay the greater of between 3%
and 8% of net sales of the licensed products or guaranteed minimums ranging from $54,600 to
$210,000 per annum. The licensor may terminate the licensing agreements upon event of default, as
defined.

In 2004, the Company sold the rights to use the Nicole Miller trademark under its licensing
agreement through March 2009 to an unrelated third party for $1,350,000 and realized a gain of
$1,350,000.

Minimum annual guaranteed royalty payments on the above licenses are as follows:

	 	 	 	 	 
	Years ending December 31,	 	 	 	 
	 
	2005
	 	$	429,000	 
	2006
	 	 	593,000	 
	2007
	 	 	832,000	 
	2008
	 	 	1,007,000	 
	2009
	 	 	1,384,000	 
	Thereafter
	 	 	510,000	 
	 
	 	$	4,755,000	 

20

 

THE FASHION HOUSE, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2004 and 2003

NOTE 8 — COMMITMENTS AND CONTINGENCIES, continued 

Indemnities and Guarantees

The Company has made certain indemnities and guarantees, under which it may be required to make
payments to a guaranteed or indemnified party, in relation to certain actions or transactions. The
Company indemnifies its directors, officers, employees and agents, as permitted under the laws of
the State of Delaware. In connection with its facility leases, the Company has indemnified its
lessors for certain claims arising from the use of the facilities. Additionally, the Company
indemnifies its factor and licensors under the factoring and license agreements, respectively,
against certain claims as a result of the violation of any law. The duration of the guarantees and
indemnities varies, and is generally tied to the life of the agreement. These guarantees and
indemnities do not provide for any limitation of the maximum potential future payments the Company
could be obligated to make. Historically, the Company has not been obligated nor incurred any
payments for these obligations and, therefore, no liabilities have been recorded for these
indemnities and guarantees in the accompanying balance sheet.

Litigation

The Company is, from time to time, involved in various legal and other proceedings which arise in
the ordinary course of operating its business. In the opinion of management, the amount of ultimate
liability, if any, with respect to these actions will not materially affect the financial position
or results of operations of the Company.

NOTE 9 — SUBSEQUENT EVENTS 

Licensing Agreement

On January 24, 2005, the Company entered into a licensing agreement for the trademark, Oscar by
Oscar de la Renta, which expires on June 30, 2010 (see Note 8).

Reorganization

On August 19, 2005, TDI Holding Corporation (“TDI”) entered into an agreement of Plan of
Reorganization (“Merger”) with the Company in a tax free share exchange under Section 368(a)(1)(B)
of the Internal Revenue Code of 1986, as amended. Immediately prior to the Merger, TDI had
1,006,344 shares of common stock issued and outstanding and no preferred stock issued and
outstanding (post 21.8 to 1 reverse stock split). Pursuant to the Merger, all of the outstanding
shares of the Company’s common stock were exchanged into 14,114,200 shares of TDI common stock.
Immediately after the Merger, TDI had 15,120,544 shares of common stock issued and outstanding and
no shares of preferred stock issued and outstanding. In addition, pursuant to the Merger, the
Company paid $325,000, which was distributed to the TDI shareholders, which the Company has
expensed as acquisition costs during the year ending December 31, 2005.

21

 

THE FASHION HOUSE, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2004 and 2003

NOTE 9 — SUBSEQUENT EVENTS, continued 

Immediately after the Merger, the officers and directors of TDI resigned and the management of the
Company controlled such positions; therefore, effecting a change of control. As a result, the
transaction was recorded as a “reverse merger” whereby the Company was considered to be the
accounting acquirer as it retained control of TDI after the Merger. Simultaneously with the merger,
TDI changed its name to The Fashion House Holdings, Inc.

Since TDI’s continuing operations and balance sheet are insignificant, a pro forma balance sheet
and statement of operations are not presented.

Convertible Notes Payable

In July 2005, the Company issued a convertible note payable totaling $550,000, bearing interest at
11 percent per annum (the “July 11% Note”). The July 11% Note and accrued interest are due in
January 2006. In addition, the principal and accrued interest on the July 11% Note are convertible
into shares of the Company’s common stock at a conversion price equal to $0.80 per share. The
Company recorded a BCF of $269,000 in connection with the conversion feature of the July 11% Note
upon issuance. In connection with the issuance of the July 11% Note, the Company issued warrants to
purchase an aggregate of 550,000 shares of the Company’s common stock, with fair values of
$281,000, as determined under SFAS No. 123. These warrants vested upon grant, are exercisable at
$0.80 per share and expire through August 2008. The Company was required to file a registration
statement by November 2, 2005 and have such registration statement declared effective no later than
February 15, 2006 (the “Effectiveness Deadline”). The Company is required to issue the holders of
convertible notes 55,000 warrants for each subsequent 30-day period that such registration
statement has not been filed. Also, the Company will be required to issue the holder of the July
11% Note 55,000 warrants for each 30-day period the registration statement is not declared
effective beyond the Effectiveness Deadline (the “July Penalty Warrants”). The Company has recorded
the estimated fair value of the warrants as a liability (see Note 1). As of December 19, 2005, the
Company has issued July Penalty Warrants to purchase an aggregate of 110,000 shares of the
Company’s common stock, which vested upon grant, have exercise prices of $1.00, mature through
August 2015 and have estimated fair values of $87,000, as determined under SFAS 123.

In August 2005, the Company issued convertible notes payable totaling $200,000, bearing interest at
6 percent per annum (the “Additional 6% Notes”). The notes and accrued interest were due at the
earlier of the initial closing of the Company’s private placement (see below) or June 2006. In
addition, the principal and accrued interest on the Additional 6% Notes were convertible into
shares of the Company’s common stock at a conversion price equal to $0.80 per share. The Company
recorded a BCF of $50,000 in connection with the conversion feature of the notes payable upon
issuance. In conjunction with the initial closing of the Company’s reorganization (see above), the
entire balance of $200,000 of Additional 6% Notes, and $1,584 of accrued interest, was converted
into 251,980 shares of the Company’s common stock in accordance with the related agreements.

22

 

THE FASHION HOUSE, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2004 and 2003

NOTE 9 — SUBSEQUENT EVENTS, continued 

Equity Transactions

PPM

On August 19, and September 7, 2005, The Company completed the initial closings of the minimum
amount of its private placement through BSC with the sale of an aggregate of 2,888,750 shares of
its common stock receiving proceeds of $2,402,540, net of commissions, fees and expenses of
$486,210. The Company has recorded $152,683 of such expenses as prepaid offering costs in the
accompanying balance sheet at June 30, 2005.

Warrants

In July 2005, the Company issued warrants to purchase an aggregate of 62,500 shares of the
Company’s common stock to the holders of the 11% Notes in connection with an extension of the
maturity date of such notes to August 2005. The warrants vested upon grant, are exercisable at
$0.80 per share and expire through August 2015. The estimated fair value of the warrants was
$22,000, as determined under SFAS No. 123.

In August and September 2005, the Company issued warrants to purchase an aggregate of 433,313
shares of the Company’s common stock to BSC in connection with the initial closings of the
Company’s PPM (see above), with fair values totaling $190,000 as determined under SFAS No. 123.
These warrants vested upon grant, have exercise prices of $1.00 per share and expire through
September 2010. The Company is required to register the underlying shares and maintain the
effectiveness of the related registration statement of a period of two years following the final
closing of the private placement. The fair value of the warrants totaling $191,000 will be
classified as a liability due to the related registration rights and an offset to the proceeds
received in the private placement.

23

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