Item 1. FINANCIAL STATEMENTS

XA, Inc. and Subsidiary      
CONSOLIDATED BALANCE SHEETS      
September 30, 2007 and September 30, 2006      
   
   
 
ASSETS
            
Current Assets
            
Cash
   $
283,779
     $
734,605
  
Accounts receivable
    
1,231,977
      
911,503
  
Work in process at cost
    
378,843
      
684,739
  
Prepaid expenses
    
76,986
      
623,892
  
Prepaid interest
    
143,994
      
200,555
  
Prepaid employment contract
    
-
      
-
  
     Total Current Assets
    
2,115,579
      
3,155,294
  
Fixed Assets
                
Equipment
    
244,736
      
244,736
  
Furniture and fixtures
    
66,177
      
62,433
  
Leasehold improvements
    
1,006,745
      
857,717
  
     
1,317,657
      
1,164,886
  
Less accumulated depreciation
     (263,841 )     (195,127 )
     
1,053,817
      
969,759
  
Other Assets
                
Deferred taxes
    
-
      
540,000
  
Prepaid interest
    
398,866
      
66,336
  
Deposits
    
71,939
      
70,439
  
Goodwill
    
865,309
      
865,309
  
     
1,336,114
      
1,542,084
  
    $
4,505,509
     $
5,667,137
  
LIABILITIES AND STOCKHOLDERS' EQUITY
          
           
Current Liabilities
                
Accounts payable
   $
585,379
     $
473,695
  
Accrued payroll
    
-
      
5,750
  
Interest payable
    
283,005
      
41,215
  
Withheld and accrued taxes
    
1,753
      
2,787
  
Unearned revenues
    
527,485
      
1,270,498
  
Line of credit
    
837,904
      
800,000
  
Current portion of long term debt
    
3,150,000
      
1,012,500
  
                 
     Total Current Liabilities
    
5,385,526
      
3,606,445
  
Long-term Debt
                
    Note Payable
    
-
      
1,250,000
  
Derivative Liability
    
429,789
      
638,219
  
Stockholders' Equity
                
    Warranty liability
    
-
      
208,131
  
    Series A preferred stock
    
-
      
-
  
    Common stock
    
3,977
      
3,852
  
    Additional paid in capital
    
2,297,996
      
2,256,121
  
    Accumulated other comprehensive income
    
328,830
          
    Retained income
     (3,940,609 )     (2,295,631 )
    Subscription receivable
    
-
      
-
  
      (1,309,806 )    
172,473
  
    $
4,505,509
     $
5,667,137
  
See accompanying notes to financial statements.        



XA, Inc. and Subsidiary            
CONSOLIDATED INCOME STATEMENT          
For the Quarters Ended September 30, 2007 and 2006          
                         
   
3rd Quarter
    
Year-to-date
    
3rd Quarter
    
Year-to-date
  
   
   
   
   
 
                         
Revenues
                        
Sales
   $
2,005,175
     $
6,845,654
     $
2,022,086
     $
7,492,035
  
                                 
Cost of goods sold
                                
Direct production costs
    
787,049
      
3,300,758
      
1,084,219
      
4,315,899
  
                                 
Gross profit
    
1,218,126
      
3,544,897
      
937,867
      
3,176,136
  
                                 
Administrative expense