XA, Inc. - Indicate by check mark whether the registrant is a shell...

XA, Inc. - Recent Material Event

Item 405 of Regulation S-B not contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]

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

The issuer's revenues for the most recent fiscal year ended December 31, 2007 were $8,433,848.

The aggregate market value of the issuer's voting and non-voting common equity held by non-affiliates computed by reference to the average bid and ask price of such common equity as of April 14, 2008, was approximately $305,645.

As of April 11, 2008 the issuer had 3,977,252 shares of common stock, $.001 par value per share outstanding ("Common Stock").

Documents Incorporated by Reference: NONE

Transitional Small Business Disclosure Format: Yes [ ] No [X]

XA, INC.

FORM 10-KSB

YEAR ENDED

December 31, 2007

INDEX

Part I

Item 1	Description of Business

Item 2.	Description of Property

Item 3.	Legal Proceedings

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

Part II

Item 5.	Market for Common Equity and Related Stockholder Matters

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

Item 7.	Financial Statements	F-1

Item 8.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 8A.	Controls and Procedures

Item 8B	Other Information

Part III

Item 9.	Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act

Item 10.	Executive Compensation

Item 11.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 12.	Certain Relationships and Related Transactions

Item 13.	Exhibits and Reports on Form 8-K

Item 14.	Principal Accountant Fees and Services Signatures

PART I

ITEM 1. DESCRIPTION OF BUSINESS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

CERTAIN STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-KSB (THIS "FORM 10 KSB"), INCLUDING STATEMENTS UNDER "ITEM 1. DESCRIPTION OF BUSINESS," AND "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS", CONSTITUTE "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1934, AS AMENDED, AND THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (COLLECTIVELY, THE "REFORM ACT"). CERTAIN, BUT NOT NECESSARILY ALL, OF SUCH FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES", "EXPECTS", "MAY", "SHOULD", OR "ANTICIPATES", OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY THAT INVOLVE RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF XA, INC., AND/OR ITS WHOLLY OWNED SUBSIDIARIES, THE EXPERIENTIAL AGENCY, INC., AN ILLINOIS CORPORATION AND FIORI XA, INC., XA SCENES, INC. AND XA INTERACTIVE, INC., NEVADA CORPORATIONS (COLLECTIVELY "XA", "THE COMPANY", "WE", "US" OR "OUR") TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-KSB, UNLESS ANOTHER DATE IS STATED, ARE TO DECEMBER 31, 2007.

BUSINESS HISTORY

XA, Inc. was originally incorporated in Nevada as Synreal Services Corp. ("Synreal") on August 28, 2000. The Company's business plan was to engage in the business of providing due diligence and administrative services for real estate syndications. Prior to entering into an Exchange Agreement, discussed below, and the consummation of the transactions thereunder, the Company was considered a development stage enterprise, as defined in Financial Accounting Standards Board No. 7. Our principal executive offices are located at 875 North Michigan Avenue, Suite 2626, Chicago, Illinois 60611. Our telephone number is (312) 397-9100 and our fax number is (312) 573-1515.

On December 4, 2003, Synreal, The Experiential Agency, Inc., formerly G/M Productions, Inc., an Illinois corporation ("Experiential") and the former Experiential shareholders entered into an Exchange Agreement (the "Exchange" or "Acquisition") whereby Experiential became a wholly-owned subsidiary of the Company and control of the Company shifted to the former Experiential shareholders. In addition, Frank Goldstin, the Company's former Chief Executive Officer and a former director of the Company, entered into a stock purchase agreement with the Company's former officers and directors, Brian Chelin and Jennifer Wallace. Synreal was considered a "shell" at the time of the Acquisition; therefore, the transaction was treated as a reverse merger.

Effective February 2, 2004, the Company declared a 13 to 1 forward stock split. Effective December 9, 2004, the Company declared a 1 for 20 reverse stock split. The effects of the stock splits have been retroactively reflected in this Form 10-QSB unless otherwise stated.

In June 2004, the Company entered into a Subscription Agreement with Alpha Capital Aktiengesellschaft, Stonestreet Limited Partnership, Whalehaven Funds Limited, Greenwich Growth Fund Limited and Genesis Microcap Inc. (collectively the "6% Note Purchasers") to purchase convertible promissory notes having an aggregate principal amount of $2,500,000, $1,250,000 of which was sold on June 30, 2006 (the "First Tranche" and $1,250,000 which was sold on September 13, 2006 (the "Second Tranche"), which had a 6% annual interest rate, and a conversion price of $0.25 per share (the " 6% Notes"). Following the reverse stock split on December 9, 2004, the conversion price of the 6% Notes would have been $5.00 per share, however, the Company agreed to change the conversion price of the 6% Notes to $2.00 per share. The Subscription Agreement also provided for the issuance of warrants to purchase up to an aggregate of 250,000 shares of Common Stock, with an exercise price of $9.60 per share (the "Class A Warrants"), and warrants to purchase up to an aggregate of 500,000 shares of Common Stock, with an exercise price of $5.00 per share (the "Class B Warrants"). The Company did not agree to change the exercise price of the Class A Warrants or the exercise price of the Class B Warrants. The Class A Warrants expire Four (4) years from the date they were issued. The Class B Warrants have expired and no Class B Warrants were ever exercised by the 6% Note Purchasers. The Class A Warrants were automatically re-priced in connection with the Follow On Funding, described below, and as such currently have an exercise price of $0.30 per share.

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Of the $2,500,000 in Convertible 6% Notes issued to the Note Holders, $467,500 in principal and $4,555.67 in interest were converted into a total of 94,412 post split shares, leaving $2,032,500 (not including any accrued interest) of principal remaining under the 6% Notes as of June 30, 2006, when the First Tranche was due. We used $1,047,000 of the funds raised through the August 2006 Funding (as defined below) to repay the First Tranche and used $1,030,575 of the funds raised through the September and October 2006 Fundings (as defined below) to repay the amount we owed under the Second Tranche. As such, as of the date of this filing, we have repaid all of the amounts due to the 6% Note Purchasers under the 6% Notes.

On August 8, 2006 (the "Closing"), we entered into a Securities Purchase Agreement (the "Purchase Agreement") with Sands Brothers Venture Capital LLC, Sands Brothers Venture Capital II LLC, Sands Brothers Venture Capital III LLC, Sands Brothers Venture Capital IV LLC, and Katie & Adam Bridge Partners, L.P. (each a "The Sands Brothers Purchasers"), pursuant to which we sold the Sands Brothers Purchasers 11% Senior Subordinated Secured Convertible Promissory Notes in the aggregate principal amount of $1,250,000 (collectively the "Senior Notes") and five (5) year warrants to purchase an aggregate of one hundred and seventy-five thousand (175,000) shares of our common stock at an exercise price of $1.10 per share (the "Warrants" and collectively with the Senior Notes, the "Securities" and the entire transaction is defined herein as the "August 2006 Funding").

On September 13, 2006, we entered into a Waiver of Rights Agreement (the "Second Waiver Agreement"), with the 6% Note Purchasers, whereby the 6% Note Purchasers agreed to extend the due date of the Second Tranche and agreed to waive all reset, anti-dilution and re-pricing rights they may have had in connection with the September and October Fundings (as defined below), as well as certain shares and warrants contained in the August 2006 Funding Waiver Agreement.

On September 26, 2006, we entered into Securities Purchase Agreements with G. Chris Andersen and Paul M. Higbee, two individuals ("Andersen" and "Higbee"). Pursuant to the Securities Purchase Agreements, we sold each of Andersen and Higbee $100,000 in fifteen month, 11% Senior Subordinated Secured Convertible Promissory Notes (the "Andersen and Higbee Notes"), and granted each of them fifteen thousand (15,000) five year warrants to purchase shares of our common stock at an exercise price of $1.10 per share (the "Andersen and Higbee Warrants," and collectively the entire September 26, 2006 funding transaction, the "September 2006 Funding").

On October 23, 2006, we entered into a Securities Purchase Agreement with Vision Opportunity Master Fund, Ltd. ("Vision," and collectively with Andersen and Higbee, the "Second Funding Purchasers"). Pursuant to the Securities Purchase Agreement with Vision (collectively with the Andersen and Higbee Securities Purchase Agreements, the "Second Funding Purchase Agreements"), we sold Vision $1,250,000 in fifteen month, 11% Senior Subordinated Secured Convertible Promissory Notes (the "Vision Notes," and collectively with the Andersen and Higbee Notes, the "Second Funding Notes" or the "Second Funding Senior Notes") and granted Vision one hundred thousand (100,000) five year warrants to purchase shares of our common stock at $0.30 per share, and one hundred and eighty seven thousand five hundred (187,500) five year warrants to purchase shares of our common stock at an exercise price of $1.10 per share (collectively the "Vision Warrants" and with the Andersen and Higbee Warrants, the "Second Funding Warrants"). Collectively referred to herein as the "October 2006 Funding," and collectively with the September 2006 Funding, the "September and October 2006 Fundings".

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Although as originally executed, the Higbee and Andersen Notes had similar provisions to the August 2006 Funding Notes (which did not have an Optional Conversion Right as defined and described below, among other less material differences not discussed herein), we later agreed to conform both the Higbee and Andersen closing documents to the Vision Notes and documents described herein and may conform the closing documents for the August 2006 Funding Notes in the future. As such, the Higbee Notes and the Andersen Notes have substantially similar terms as those described below (other than the dates contained therein and the amount of each Purchaser's investment).

In addition to the Warrants we granted to Vision in connection with the funding, Mastodon Ventures, Inc. ("MVI"), which was issued 666,667 warrants to purchase shares of our common stock at $0.30 per share, assigned 100,000 of such warrants to Vision, and the August 2006 Second Funding Purchasers, who were granted an aggregate of 333,333 warrants to purchase shares of our common stock at $0.30 per share, assigned 133,000 of such warrants to Vision.

Follow On Funding

On or about June 11, 2007, we entered into Securities Purchase Agreements with Andersen and Higbee (the “Follow On Andersen and Higbee Purchase Agreements”), two individuals ("Andersen" and "Higbee"). Pursuant to the Andersen and Higbee Securities Purchase Agreements, we sold Andersen and Higbee $25,000 in twelve (12) month, 11% Senior Subordinated Secured Convertible Promissory Notes each (the "Follow On Andersen and Higbee Notes"), and granted each of them twenty-five thousand (25,000) five year warrants to purchase shares of our common stock at an exercise price of $0.30 per share (the "Follow On Andersen and Higbee Warrants," and collectively the “Andersen and Higbee Follow On Funding”).

On or about June 22, 2007, we entered into a Securities Purchase Agreement (the "Follow On Sands Brothers Purchase Agreement") with The Sands Brothers Purchasers, pursuant to which we sold such Sands Brothers Purchasers twelve (12) month, 11% Senior Subordinated Secured Convertible Promissory Notes in the aggregate principal amount of $200,000 (collectively the "Follow On Sands Brothers Notes") and five (5) year warrants to purchase an aggregate of two hundred thousand (200,000) shares of our common stock at an exercise price of $0.30 per share (the "The Follow On Sands Brothers Warrants," and collectively the “Sands Brothers Follow On Funding”).

On or about June 29, 2007, we entered into a Securities Purchase Agreement with Vision, and collectively with Andersen and Higbee and the Sands Brothers Purchasers, the "Purchasers”. Pursuant to the Securities Purchase Agreement with Vision (collectively with the Andersen and Higbee Purchase Agreements and the Sands Brothers Purchase Agreement, the "Follow On Funding Purchase Agreements"), we sold Vision $200,000 in twelve (12) month, 11% Senior Subordinated Secured Convertible Promissory Notes (the "Follow On Vision Note," and collectively with the Follow On Andersen and Higbee Notes and the Follow On Sands Brothers Notes, the "Follow On Notes") and granted Vision two hundred thousand (200,000) five year warrants to purchase shares of our common stock at $0.30 per share (the “Follow On Visions Warrants,” and collectively the Follow On Andersen and Higbee Warrants, and the Follow On Sands Brothers Warrants, the “Follow On Warrants,” and the “Follow On Vision Funding,” and collectively with the Andersen and Higbee Follow On Funding and the Sands Brothers Follow On Funding, the “Follow On Funding”).

Although as originally executed, the Andersen and Higbee Follow On Funding agreements had slightly different terms and provisions than the Sands Brothers Follow On Funding and the Vision Follow On Funding documents, we subsequently agreed to conform the Andersen and Higbee Follow On Funding documents to the Sands Brothers Follow On Funding and Vision Follow On Funding documents, as described herein, and as a result, Andersen and Higbee, the Sands Brothers Purchasers and Vision all are parties to substantially identical Follow On Funding documents, varying only in connection with the dates of such documents and the accompanying Maturity Date of such Follow On Notes.

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The Senior Notes, Second Funding Senior Notes, Follow On Notes, Warrants, Second Funding Warrants (as well as the MVI and Venture Warrants), and the Follow On Notes contain certain anti-dilution provisions, which provide that if we issue or sell any additional shares of common stock (including convertible shares of common stock and/or options or warrants to purchase shares of common stock) other than as a dividend or other distribution (a "Dilutive Issuance") at less than the Conversion Price or Exercise Price then in effect, the Conversion Price or Exercise Price shall be automatically reduced to the lower Effective Price (as defined in the Senior Notes, Second Funding Senior Notes, Follow On Notes, Warrants, Second Funding Warrants and Follow On Warrants) of the issuance and/or sale. However, Purchasers have agreed to waive such anti-dilution provision in connection with the issuance of up to 250,000 shares for professional services, which have been fully issued to date ( the "Excepted Issuances"). As a result, we have used up all of the Excepted Issuances. However, because the issuance of the Follow On Warrants were not included in the Excepted Issuances as provided in the Prior $1.10 Warrants, the exercise price of such Prior $1.10 Warrants was automatically reset to $0.30 in connection with the grant of the Follow On Warrants (the “Purchaser Re-pricing”). Additionally, because the issuance of the Follow On Warrants was not waived by the holders of our Class A Warrants, exercisable for $9.60 per share, which were granted on June 30, 2004 in connection with a sale of 6% Convertible Notes on that date, such Class A Warrants were automatically re-priced, pursuant to their anti-dilution provisions to $0.30 per share (the “Class A Re-pricing” and collectively with the Purchaser Re-pricing, the “Re-pricings”).

Our repayment of the Senior Notes, Second Funding Senior Notes and Follow On Notes and any accrued interest thereon is secured by a security interest in substantially all of our assets, which we granted to the Purchasers pursuant to a Security Agreement (the "Security Agreement"), which we entered into with the Purchasers, Second Funding Purchasers and Follow On Funding Purchasers at the closings. Additionally in September 2006, the Sands Brothers Purchasers entered into an Acknowledgment of Rights Agreement with us, whereby they agreed that their security interest rights in our assets would be pari passu with the rights of Higbee, Andersen and Vision.

We also granted the Purchasers, Venture and MVI (as defined below) registration rights in connection with the shares of common stock issuable in connection with the conversion of the Senior Notes, Second Funding Senior Notes, and Follow On Notes and the exercise of the Warrants, the Second Funding Warrants, the MVI Warrants, the Venture Warrants (as defined below), and the Follow On Warrants collectively the "Underlying Shares"), pursuant to our entry into Registration Rights Agreements, which we entered into at the closings, which were later superseded by Registration Rights agreements entered into with the Purchasers in June 2007 (the "Registration Rights Agreements").

Furthermore, pursuant to the Purchase Agreement, we agreed to grant the Purchasers the right to appoint one Director to our Board of Directors (or a Board Advisory Seat to observe at all board meetings). In the event such purchasers desire to exercise such right to appoint a Director, our Board of Directors will be increased to five (5) members.

Prior to our entry into the Purchase Agreement and the Second Funding Purchase Agreements, and the consummation of the funding, we received waivers from LaSalle Bank National Association to approve the fundings and a construction loan with LaSalle Bank National Association, as described below. Additionally, we received the waiver of the 6% Note Purchasers, ,who purchased the 6% Convertible Notes in June and September 2004, to approve the funding and waive our previous default under the 6% Convertible Notes (described in greater detail below) pursuant to our entry into a Waiver of Rights Agreement with the 6% Note Purchasers on July 17, 2006, with an effective date of June 30, 2006, which Waiver of Rights Agreement was later extended by the 6% Note Purchasers until August 9, 2006 in connection with the August 2006 Funding, and our entry into two additional Waiver of Rights Agreements with the 6% Note Purchasers, the Second Waiver Agreement and the Third Waiver Agreement (as described herein). However, the 6% Note Purchasers did not consent to the issuance of convertible notes and warrants in connection with the Follow On Funding, and as such, the exercise price of the Class A Warrants held by the 6% Note Purchasers has automatically reset to $0.30 per share in connection with the issuance of the Follow On Warrants.

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We also agreed to issue an aggregate of 333,333 warrants to purchase shares of our common stock at an exercise price of $0.30 per share to Sands Brothers Venture Capital Funds ("Venture" and the "Venture Warrants") and 666,667 warrants to purchase shares of our common stock at an exercise price of $0.30 per share to MVI Ventures, Inc. ("MVI" and the "MVI Warrants") in consulting fees in connection with the August 2006 Funding. Both the Venture Warrants and the MVI Warrants are exercisable for five (5) years from the date of the August 2006 Closing.

The Senior Notes, warrants, closing and related agreements are described in greater detail in our Form 8-K filing, which we filed with the Commission on August 15, 2006, and the Second Funding Senior Notes, Second Funding Warrants and related agreements are described in greater detail in our Form 8-K filing, which we filed with the Commission on November 1, 2006. The Follow On Notes are described in greater detail in our Form 8-K filing which we filed with the Commission on July 12, 2007.

In connection with each of the Follow On Funding transactions, we entered into Registration Rights Agreements with each of the Purchasers, which replaced and superseded the prior Registration Rights Agreements entered into between the Purchasers and us in August, September and October 2006. The Registration Rights Agreements were subsequently replaced and superseded by the Registration Rights Agreements entered into with the Purchasers in connection with the Second Follow on Funding, described below.

Waiver of Rights Agreement

We entered into a Waiver of Rights Agreement with the Purchasers, Mastodon Ventures, Inc. and its assigns, dated on or around June 22, 2007, pursuant to which we and the Purchasers agreed to the Re-pricings; agreed that the Conversion Price of the Prior Notes (as defined therein) would be equal to the Conversion Price of the Follow On Notes; and the Purchasers agreed to waive any defaults which may have occurred in connection with our failure to meet the required date of effectiveness of our registration statement filing, as was required under the prior Rights Agreements, which have since been superseded and replaced in their entirety by the Follow On Rights Agreements.

First Amendments to Prior Notes

A required term of the Follow On Funding was that each of the Purchasers agree that the maturity date of the Prior Notes (the August, September and October 2006 notes) which they hold would be extended to the maturity dates of the Follow On Notes which they hold. The amendment and extension to each of the Purchaser’s Prior Notes was accomplished by each of the Purchasers entry into a First Amendment to the 11% Senior Secured Convertible Promissory Notes with us, on or around the date of their purchases of the Follow On Notes (and in the case of Andersen and Higbee, on or around the date they entered into conforming documents with us, as described above, (the “Note Amendments”)). Pursuant to the Note Amendments, each of the Purchasers agreed that the maturity date of the Prior Notes which they hold would be extended to the maturity date of their respective Follow On Notes. For example, the maturity date of Vision’s Prior Note in the amount of $1,250,000, was extended until the maturity date of the Follow On Vision Note, June 29, 2008.

LaSalle Bank Loans

The Company has a line of credit agreement which it entered into on August 12, 2004, with LaSalle Bank National Association ("LaSalle") in the amount of $750,000. The line of credit was originally due August 12, 2005, and the interest varied at 0.25% over the prime rate. The Company's assets secure the line of credit. Prior to the expiration of the line of credit, the line of credit was renewed for another year and increased to $800,000. On or around June 30, 2007, the Company entered into a promissory note evidencing amounts owed under the line of credit, in the amount of $600,000, which promissory note accrued interest at the rate of 2.25% above the prime rate then in affect, which line of credit was later amended and replaced by the Line of Credit, defined and described below.

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On June 1, 2006, we entered into a business loan for a loan of up to $750,000 with LaSalle, which loan accrued interest at the prime rate plus 0.25% until paid in full. The loan was originally due on June 30, 2007, but was extended by the parties entry into a separate promissory note on or around June 30, 2007, which increased the interest rate to the prime rate then in effect, plus an additional 2.25% per annum, which provided for $66,666 to be paid on July 31, 2007; a payment of accrued interest under the promissory note on July 31, 2007; and one payment of principal and interest of approximately $200,064 on July 31, 2007. We failed to make the required payments due under the promissory note pursuant to the payment schedule above, and as such, the interest rate of the funds due under the promissory note increased by 2%; however, this promissory note was subsequently amended and replaced by the LaSalle Line of Credit defined and described below.

On or about August 27, 2007, we entered into a promissory note with LaSalle, evidencing a line of credit (the “LaSalle Line of Credit”), which evidenced and aggregated the amounts previously outstanding under the line of credit and promissory note described above, in an amount equal to $867,000. The LaSalle Line of Credit bears interest at the rate of 2.25% above the prime rate then in effect, which was equal to 10.5% per annum as of August 27, 2007, adjustable as provided in the LaSalle Line of Credit, until paid. We were required to make monthly payments of interest under the LaSalle Line of Credit, with the full outstanding balance of the LaSalle Line of Credit due on December 1, 2007. The agreement provides that, in the event of default, the interest rate of the LaSalle Line of Credit will increase by 2% over the interest rate then in effect.

We failed to make the required payment due under the promissory note on December 1, 2007, which promissory note had a remaining balance of $844,485.03 as of December 11, 2007. This unpaid balance consists of $837,904.00 in principle and $6,581.03 in accrued and unpaid interest. On December 3, 2007, LaSalle notified the Company by letter that the promissory note was in default, and beginning on December 4, 2007, interest will accrue on the unpaid balance of the promissory note (and any accrued and unpaid interest thereon) at the default annual rate of 11.75% (the prime rate plus 4.25% per year), based on the bank’s prime rate of 7.5%. Pursuant to LaSalle’s letter as of December 4, 2007, the Company had until December 31, 2007 to repay the remaining balance of the promissory note, or LaSalle would seek alternatives to payment.

Second Follow On Funding

On or about December 21, 2007, the Company entered into a Securities Purchase Agreement (the "Sands Brothers Purchase Agreement") with Sands Brothers Venture Capital III LLC (the “Sands Brothers III”), pursuant to which we sold Sands Brothers III a twelve (12) month, 11% Senior Subordinated Secured Convertible Promissory Note in the aggregate principal amount of $200,000 (the "Second Follow On Sands Brothers Note") and five (5) year warrants to purchase an aggregate of two hundred thousand (200,000) shares of our common stock at an exercise price of $0.30 per share (the "Sands Brothers Warrants," and collectively the “Sands Brothers Second Follow On Funding”).

On or about December 21, 2007, we entered into a Securities Purchase Agreement with Vision Opportunity Master Fund, Ltd. ("Vision," and collectively with Sands Brothers, the "Second Follow On Purchasers”). Pursuant to the Securities Purchase Agreement with Vision (collectively with the Sands Brothers Purchase Agreement, the "Second Follow On Funding Purchase Agreements"), we sold Vision a $200,000 twelve (12) month, 11% Senior Subordinated Secured Convertible Promissory Note (the "Second Follow On Vision Note," and collectively with the Second Follow On Sands Brothers Notes, the "Second Follow On Notes") and granted Vision two hundred thousand (200,000) five year warrants to purchase shares of our common stock at $0.30 per share (the “Second Follow On Vision Warrants,” and collectively with the Second Follow On Sands Brothers Warrants, the “Second Follow On Warrants,” and the “Second Follow On Vision Funding,” and collectively with the Sands Brothers Second Follow On Funding, the “Second Follow On Funding”).

The Company paid $100,000 from the Second Follow On Funding to LaSalle, to repay a portion of the principal and interest owed to LaSalle through the LaSalle Line of Credit and entered into a Forbearance Agreement with LaSalle, pursuant to which LaSalle will forbear enforcement of its rights and remedies against us and Experiential until June 1, 2008, conditioned on performance of certain terms and conditions. These terms and conditions include entering into a new note in the amount of $738,000 with continuing interest and principal payments of $10,000 due on March 1, 2008, April 1, 2008, and May 1, 2008. Furthermore, the Forbearance Agreement requires the Company, the Second Follow On Purchasers and the other junior lenders to enter into Subordination Agreements and a General Release for the benefit of LaSalle (the “Subordination Agreements”), as well as requiring us to agree to pay all legal fees and expenses incurred by LaSalle in connection with the defaults and the Forbearance Agreement.

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Second Follow On Funding Notes

The $400,000 in Second Follow On Notes bear interest at the rate of 11% per annum until paid, and have a maturity date of the earlier of (i) December 21, 2008; or upon the consummation by us of a merger, combination or sale of substantially all of our assets or the purchase by a single entity or person or group of affiliated entities or persons of more than fifty (50%) percent of our voting stock, of which there are no current plans (a “Combination Event”).

Interest on the Second Follow On Notes is payable upon maturity, repayment or upon conversion of the Notes into shares of our common stock as described below. The Second Follow On Notes may not be prepaid prior to their maturity date. Any amount not paid under the Notes when due will bear interest at the rate of eighteen percent (18%) per annum until paid in full (the "Default Interest").

The Second Follow On Notes are convertible, at the option of each of the Second Follow On Purchasers, at any time, into shares of our common stock at a conversion price equal to the lesser of $0.50 or 50% of the effective price per share of shares of common stock sold in a Private Offering (as defined below, provided that such conversion price will never be less than $0.25 per share (unless the Private Offering price is less than $0.25 per share, in which case the Conversion Price will be equal to such Private Offering price due to the anti-dilution provisions of the notes as described below), the "Conversion Price") if we complete a private offering of our securities in which we receive gross proceeds of not less than $3,000,000 (the "Private Offering").

Our repayment of the Second Follow On Notes and any accrued interest thereon is secured by a security interest in substantially all of our assets, which the Second Follow On Purchasers share pari passu, which we granted to the Second Follow On Purchasers pursuant to Security Agreements (the "Security Agreements"), which we entered into with the Second Follow On Purchasers at the various closings.

Pursuant to the Second Follow On Notes, we agreed that we would not undertake certain events, including those described below, without the prior written consent of all of the Second Follow On Purchasers:

o	liquidate or dissolve, consolidate with, or merge into or with, any other corporation or other entity, except that any wholly-owned subsidiary may merge with another wholly-owned subsidiary or with us;

o	will not sell, transfer, lease or otherwise dispose of, or grant options, warrants or other rights with respect to, all or a substantial part of our properties or assets to any person or entity outside of the ordinary course of business, unless specifically excluded in the Purchase Agreement;

o	will not redeem or repurchase any of our outstanding securities; and

o	will not create, incur or assume any indebtedness other than in the ordinary course of business, and/or in connection with the Subsequent Funding.

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"Events of Default" under the Second Follow On Notes include but are not limited to the following:

o	our failure to pay any amounts due under the Second Follow On Notes when due, and such failure continues for five (5) days;

o	our failure to comply with any covenants we made pursuant to the Purchase Agreements and such failure continues for a period of five (5) business days in connection with our affirmative covenants and two (2) business days in connection with our negative covenants;

o	our entry into bankruptcy or insolvency;
o	our default in the payment of any other obligation in connection with money borrowed in excess of $50,000, which default continues for three (3) business days;

o	if a judgment is rendered against us or any of our subsidiaries which exceeds in aggregate $50,000, which judgment is not vacated or satisfied within twenty (20) days; or

o	our violation of any material representation of any of the documents entered into in connection with the Funding.

If an Event of Default occurs under the Second Follow On Notes, the Second Follow On Purchasers may seek specific performance of any covenant or agreement contained in the Second Follow On Notes and/or enforce their security interest over substantially all of our assets.

Furthermore, pursuant to the Second Follow On Purchase Agreement, we agreed to grant the Second Follow On Purchasers the right to appoint one Director to our Board of Directors (or a Board Advisory Seat to observe at all board meetings). In the event such Second Follow On Purchasers desire to exercise such right to appoint a Director, our Board of Directors will be increased to five (5) members.

Pursuant to the Second Follow On Notes, we agreed to provide the Second Follow On Purchasers a right of first refusal to invest pro rata in any and all of our future financings on identical terms as those offered to other potential investors. Furthermore, we agreed to not create or incur, contingently or otherwise, any indebtedness (other than indebtedness incurred in our historic business and in the ordinary course of our business), which is not expressly subordinated in right of payment and otherwise to the Second Follow On Notes.

Second Follow On Funding Warrants

The Second Follow On Funding Warrants are exercisable at an exercise price of $0.30 per share (subject to adjustment in the Second Follow On Warrants), at any time prior to 5:00 P.M. EST on: December 21, 2012.

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The Second Follow On Warrants are exercisable in connection with the payment of cash, or if such Second Follow On Warrants are exercised on a date when a registration statement covering the shares underlying the Second Follow On Warrants has not been declared effective with the Securities and Exchange Commission or such registration statement is no longer in effect, the Second Follow On Warrants include a cashless feature, whereby if the exercise price of the warrants is equal to or greater than the Fair Market Value of our common stock (as defined in the Second Follow On Warrants), the number of shares of common stock issuable to the Second Follow On Purchasers in connection with any exercise is equal to the product of the number of shares to which the Second Follow On Warrants are being exercised multiplied by a fraction, the numerator of which is the exercise price then in effect and the denominator of which is the Fair Market Value of our common stock.

Additionally, in connection with the Second Follow On Funding, the terms of all of the prior warrants issued to Sands Brothers and Vision in 2006 and 2007, in connection with prior fundings were amended to extend the exercise date of such warrants to five (5) years from the date of the Second Following On Funding.

Second Follow On Funding Registration Rights Agreements

In connection with each of the Second Follow On Funding transactions, we entered into Registration Rights Agreements with each of the Second Follow On Purchasers and Mastodon Ventures, Inc., which replaced and superseded the prior Registration Rights Agreements entered into between the Second Follow On Purchasers and us in August 2006, October 2006, and June 2007, in connection with the previous sale of $3,150,000 in 11% Senior Secured Convertible Notes (the “Prior Funding” and the “Prior Notes”) to such Second Follow On Purchasers and additional purchasers not defined above, and the grant of an aggregate of 1,942,500 warrants to purchase shares of our common stock at an exercise price of $0.30 per share (the “Prior Warrants”), to all such purchasers and Mastodon Ventures, Inc. (“Mastodon”), as a consultant to us and the Second Follow On Purchasers in connection with the Prior Funding (the “Second Follow On Rights Agreements”). The Second Follow On Rights Agreements provided the Second Follow On Purchasers and Mastodon and its assigns, registration rights in connection with the shares that the Prior Notes and the Second Follow On Notes are convertible into, as well as an additional 350,000 warrants with identical terms as the Second Follow On Warrants which were issued to Mastodon in connection with the Second Follow On Funding, and which the Second Follow On Warrants and Prior Warrants are exercisable for (the “Registrable Securities”).

Pursuant to the Second Follow On Rights Agreements, we agreed to register the Registrable Securities on a registration statement with the Securities and Exchange Commission (the "Commission" and the "Registration Statement") pursuant to the deadlines discussed below. We agreed that in the event that the Private Offering has not occurred within six (6) months of the date of the Second Follow On Funding closing, December 21, 2007, which date is June 21, 2008, we would file the Registration Statement with the Commission within forty-five days of such six (6) month anniversary, August 5, 2008, and that we would obtain effectiveness of the Registration Statement no more than ninety (90) days after the date we are required to file such Registration Statement, or November 3, 2008 (the "Initial Registration Deadlines").

In the event that we are unable to register all of the Registrable Securities in one Registration Statement because of the applicability of Rule 415, the Second Follow On Purchasers, as well as Mastodon (collectively the “Registration Rights Holders”), have agreed that the number of shares we can register at any one time will be allocated pro rata to each of the Registration Rights Holders.

We and the Second Follow On Purchasers also agreed pursuant to the Second Follow On Rights Agreement, that in the event that we are not able to register all of the Registrable Securities, that we would use our best efforts to file additional Registration Statements to register the Registrable Securities that were not registered in any initial Registration Statement as promptly as possible and in a manner permitted by the Commission (each an “Additional Registration Statement”). We agreed to file any Additional Registration Statement within the earlier of (i) sixty (60) days following the sale of substantially all of the Registrable Securities included in the initial Registration Statement or any Additional Registration Statement and (ii) six (6) months following the effective date of the initial Registration Statement or any Additional Registration Statement, or such earlier date as permitted by the Commission. We also agreed that if we are required to file any Additional Registration Statement, that we would file such Additional Registration Statement within thirty (30) days and use our best efforts to obtain effectiveness of such Additional Registration Statement within ninety (90) days of such filing date (the “Additional Registration Deadlines,” and collectively with the Initial Registration Deadlines, the “Registration Deadlines”).

If we fail to obtain effectiveness of any required Registration Statement by the applicable Registration Deadlines, or after such effectiveness the Second Follow On Purchasers are unable to sell the Registrable Securities, due to any reason other than the Commission’s application of Rule 415, we are obligated, pursuant to the Second Follow On Rights Agreements, to pay the Second Follow On Purchasers an amount in cash equal to two (2%) of the total principal amount of the Prior Notes and the Second Follow On Notes ($71,000), for each thirty (30) day period which the Registration Deadlines are not met or the Second Follow On Purchasers are unable to sell the Underlying Shares. If we fail to pay such damages within five (5) days of the date payable, we are required to pay interest on the amount payable at the rate of eighteen percent (18%) per annum, accruing daily until such amounts are paid in full.

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Subsequent Events:

Sands Brothers Line of Credit

On or about February 29, 2008, the Company and Experiential Agency, Inc., the Company’s wholly owned subsidiary (“Experiential”) entered into a Revolving Line of Credit Agreement (the “Sands Brothers Line of Credit”) with Sands Brothers Venture Capital III LLC (“Sands Brothers”), pursuant to which Sands Brothers extended a revolving line of credit to the Company for a period extending to June 29, 2008 in the principal amount of up to two hundred thousand dollars ($200,000). Any funds advanced to the Company through the Sands Brothers Line of Credit will be used for operating expenses in connection with the operations of Experiential, and will be immediately transferred to Experiential as a capital contribution. Such operating expenses may include but are not limited to legal fees, vendor expenses, auditor fees, payroll, rents, and financing expenses.

In connection with the Sands Brothers Line of Credit, the Company received an initial advance on or around February 29, 2008, of one hundred thousand dollars ($100,000) and executed and delivered to Sands Brothers a Promissory Note (the “First Advance Note”) in the initial amount of one hundred thousand dollars ($100,000), evidencing such advance. Further, on March 27, 2008, the Company received a second advance of one hundred thousand dollars ($100,000) and executed and delivered to Sands Brothers a Promissory Note (the “Second Advance Note”) in the amount of one hundred thousand dollars ($100,000), evidencing such advance. The second advance exhausted the funding Sands Brothers has agreed to provide pursuant to the Sands Brothers Line of Credit. The First Advance Note and the Second Advance Note bear interest until paid in full at the rate of twelve percent (12%) per annum, with the interest on such notes payable monthly in arrears commencing on April 1, 2008. In the event any payment is not made within three (3) days of the date such payment is due under either note, both outstanding notes will bear interest at the rate of fifteen percent (15%) per annum, and such failure to pay the required payment is defined as an “Acceleration Event.” Any Acceleration Event or Event of Default gives Sands Brothers the right to provide for the entire amount of unpaid principal and interest on the outstanding notes to be immediately due and payable with fifteen days prior notice in the event of an Acceleration Event and without prior notice if an Event of Default occurs. The principal and any unpaid interest on the both notes is due and payable on June 29, 2008.

Business Operations:

We, referred to herein as “XA,” through our wholly-owned subsidiaries, The Experiential Agency, Inc., an Illinois corporation (“Experiential”), XA Scenes, Inc., Fiori XA, Inc. and XA Interactive, Inc., Nevada corporations are a comprehensive event marketing, design and production services agency. With full-service offices in Chicago and New York City as well as a sales office in Los Angeles, and a venue in New York City, XA is a leading provider of event services on an outsourced basis for corporations, associations and other organizations in the United States and abroad. XA provides its clients with a single source to their business communications and event planning needs.

In the third quarter of 2005, XA formed a wholly owned Nevada subsidiary, XA Scenes, Inc. ("XA Scenes"). XA Scenes was formed as a special events venue management firm. XA’s senior management team believes that there is a significant opportunity for XA Scenes to capitalize on the synergies that exist between XA’s event marketing agency, Experiential, and selected joint venture partners.

For eighteen (18) years, XA has worked with clients around the globe to design and produce strategic multidimensional, highly stylized and integrated event programs. During the year ended December 31, 2007, XA planned more than one hundred events which were attended by more than 100,000 people, for clients including Sports Illustrated, Moet Hennessey, McDonald's Corporation (NYSE:MCD), Cookie Magazine, National Geographic, McGraw Hill, Walt Disney Company (NYSE:DIS), Pepsi (NSYE:PBG), UNICEF, NBC Universal, Heitman, Jet Airways, Audi, LXR, New Yorker Magazine and Guinness Beer.

In January 2007, XA was awarded Special Event Magazine’s Gala Award in the category of “Best Event Marketing Campaign” for Real Simple’s Holiday Solutions. The annual award competition recognizes achievement in all areas of special events and design. The winners are selected after 5 rounds of judging by members of Special Event Magazine's Advisory Board. The award winning event produced and designed by XA helped to recreate Real Simple magazine with a Holiday Solutions five-week mall tour that targeted female consumers. To implement the vision, the XA event team designed and constructed living rooms in high-traffic malls. The rooms created an experience, idea or amenity to guests, while allowing advertisers direct interaction with readers. Over 100,000 consumers visited the events in addition to 330,000 TV viewers.

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In March 2007, XA was awarded two BiZBash Event Style Awards in the categories of “Best Lighting Design” and “Best Corporate Event Concept” both for the Sopranos cast and crew screening after party. The BiZBash Event Style Awards of 2007 honored the people behind New York's most innovative events of 2006. XA won the Best Corporate Event Concept Award for an "innovative and effective theme for an event planned by or for a corporation." The award winning event produced and designed by XA celebrated the premiere of the 6th and final season of the HBO show the Sopranos. The overall concept was inspired by a traditional Italian Street Festival and XA successfully transformed a large ballroom into an intimate affair for 1,000 members of the Soprano's extended family. A comprehensive lighting design concept combined advanced technology such as intelligent lighting with basic tools including 4,000 Italian string lights.

XA focuses on strategic growth that includes, among other things, the acquisition and development of targeted business communications and event management companies in key regions throughout the United States. XA has developed a vertically integrated infrastructure that it believes will enhance its ability to continue to provide event services on a national basis. In order to provide its clients with a single source solution to their event planning needs, XA offers a wide range of services that encompass the event planning process including general management, concept creation, content creation and execution. XA believes that its vertically integrated organization, creative talent, technological leadership and its willingness to commit capital to acquire or develop proprietary exhibitions and special events are competitive advantages in a fragmented industry in which most vendors provide a limited set of services on a local basis.

Industry and Market Overview

The events industry in the United States is highly fragmented with several local and regional vendors that provide a limited range of services in two main segments: 1) business communications and event management; and 2) meeting, conferences and trade shows. The industry also consists of specialized vendors such as production companies, meeting planning companies, and destination logistics companies that may offer their services outside of the events industry.

According to an event marketing study conducted by PROMO Magazine ("PROMO") in 2005, and published in its April 1, 2006 edition, marketers spent $171 billion in event marketing in 2005, up 3% from the previous year. Additionally, according to The George P. Johnson Co.'s annual survey, EventView '05/'06, as reported by PROMO, 96% of marketing executives use events in their marketing mix. Because of these trends, XA believes it is well positioned to gain a greater share of the market for event production services and grow its operations moving forward.

Principal Products and Services

XA offers a wide range of services that encompass the event planning process including general management, concept creation, content creation, and execution. XA earns most of its revenue from event services fees that it charges clients regarding the following general service areas:

*	Event Marketing;
*	Design and production;
*	Meetings, Conferences and Trade Shows;
*	Entertainment and Show Production;
*	Business Theater & General Sessions;
*	Mobile Marketing;
*	Audio/Visual Production;
*	Public Relations;
*	Destination Management;
*	XA Interactive (Digital Marking); and
*	Venue Management.

XA earns a management fee when it provides general management services. XA earns fees on a fee-for-services basis when it undertakes event marketing and business communications projects.

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General Management Services

XA offers general management services that provide its clients with centralized coordination and execution of the overall event. In connection with providing general management services, XA utilizes an executive producer responsible for overseeing the production of an event or exhibition. The executive producer coordinates the services that XA provides for the client. XA provides the following general management services:

*	Project oversight;
*	Budget oversight;
*	Quality assurance and control;
*	Project funding and sponsorship development;
*	Project control and accountability;
*	Event promotion and marketing creation;
*	Schedule management; and
*	Fulfillment provider management.

Concept Creation

XA works with a client to craft the client's message, identify the best means of communicating that message, and develop cost-effective creative solutions. XA provides the following concept creation services:

*	Joint determination of client needs and goals;
*	Market research to support message creation and communication;
*	Message content design;
*	Media selection; and