Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

		December 31,				September 30,
		2007				2007
rounded in thousands, except par value		(unaudited)
Assets
Current Assets:
Cash		$	334,000			$	2,388,000
Accounts receivable, net			3,326,000				305,000
Inventories			1,924,000				2,635,000
Other current assets			409,000				365,000
Total Current Assets			5,993,000				5,693,000
Equipment, furniture and fixtures at cost, less accumulated depreciation of $121,000 and $108,000			202,000				215,000
Total Assets		$	6,195,000			$	5,908,000
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable		$	772,000			$	892,000
Accrued expenses			105,000				123,000
Accrued payroll and related taxes			178,000				151,000
Total Current Liabilities			1,055,000				1,166,000
Commitments and contingencies (Note 8)
Shareholders’ Equity:
Preferred shares, $0.001 par value, 5,000 shares authorized, 0 shares issued and outstanding			—				—
Common shares, $0.001 par value, 50,000 shares authorized as of December 31, 2007 and September 30, 2007; 19,952,000 shares issued as of December 31, 2007 and September 30, 2007; 19,839,000 shares outstanding as of December 31, 2007 and September 30, 2007			20,000				20,000
Additional paid-in capital			23,427,000				23,341,000
Accumulated deficit			(18,001,000	)			(18,313,000	)
			5,446,000				5,048,000
Less treasury stock, at cost, 113,000 shares as of December 31, 2007 and September 30, 2007			(306,000	)			(306,000	)
Total Shareholders’ Equity			5,140,000				4,742,000
Total Liabilities and Shareholders’ Equity		$	6,195,000			$	5,908,000

See notes to unaudited condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Three months ended
		December 31,
		2007				2006
rounded in thousands, except per share amounts		(unaudited)
Revenues		$	3,561,000			$	916,000
Cost of goods sold			1,806,000				202,000
Gross profit			1,755,000				714,000
Selling, general and administrative			1,317,000				974,000
Engineering, research and development			139,000				159,000
Income (loss) from operations			299,000				(419,000	)
Other income/(expense):
Interest income			13,000				14,000
Interest expense			—				(1,000	)
Income (loss) before provision for income taxes			312,000				(406,000	)
Income tax provision			—				—
Net income (loss)		$	312,000			$	(406,000	)
Net income (loss) per share:
Basic		$	0.02			$	(0.02	)
Fully-diluted		$	0.01			$	(0.02	)
Weighted average shares outstanding:
Basic			19,839,000				16,875,000
Fully-diluted			20,997,000				16,875,000

See notes to unaudited condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three months ended
		December 31,
		2007				2006
Rounded in thousands		(unaudited)
Cash flows from operating activities:
Net income (loss)		$	312,000			$	(406,000	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			13,000				4,000
Provision for bad debts			(21,000	)			—
Non-cash compensation to employees and directors			84,000				248,000
Non-cash compensation to consultants			2,000				33,000
Changes in operating assets and liabilities:
Accounts receivable			(3,000,000	)			1,522,000
Inventories, net			711,000				(82,000	)
Other current assets			(44,000	)			(266,000	)
Accounts payable			(120,000	)			(139,000	)
Accrued expenses			(18,000	)			(1,000	)
Accrued payroll and related taxes			27,000				53,000
Net cash provided by (used in) operating activities			(2,054,000	)			952,000
Cash flows from investing activities:
Purchases of equipment, furniture and fixtures			—				(34,000	)
Net cash used in investing activities			—				(34,000	)
Cash flows from financing activities:
Proceeds in connection with the exercise of warrants			—				196,000
Proceeds in connection with stock subscription			—				650,000
Net cash provided by financing activities			—				846,000
Net increase (decrease) in cash			(2,054,000	)			1,778,000
Cash, beginning of period			2,388,000				99,000
Cash, end of period		$	334,000			$	1,877,000
Supplemental cash flow information:
Cash paid during the period for income taxes		$	—			$	—
Cash paid during the period for interest		$	—			$	1,000

See notes to unaudited condensed consolidated financial statements.

NOTES TO UNUADITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(rounded in thousands)

1. BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto for the year ended September 30, 2007 included in the Xenonics Holdings, Inc. (“Holdings”) Form 10-KSB filing. The results for the interim period are not necessarily indicative of the results for the full fiscal year.

     The condensed consolidated financial statements include the accounts of Holdings and its subsidiary Xenonics, Inc. (“Xenonics”), collectively, the “Company”. On December 14, 2004, one warrant holder of Xenonics exercised his warrant to purchase 125,000 shares of Xenonics, Inc. As a result, Holdings currently owns 98.6% of the issued and outstanding capital stock of Xenonics. All significant inter-company items have been eliminated upon consolidation.

2. REVENUE RECOGNITION

     The Company recognizes revenue net of discounts upon shipment and when it has evidence that arrangements exist, the price to the buyer is fixed through signed contracts or purchase orders and collection is reasonably assured. Customers do not have the right to return product unless it is damaged or defective.

3. EARNINGS PER SHARE

     Earnings per share is computed by dividing the income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share is computed similarly to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential additional common shares that were dilutive had been issued. Common share equivalents are excluded from the computation if their effect is anti-dilutive. The Company’s common share equivalents consist of stock options and warrants.

     The following table represents a reconciliation of the shares used to calculate basic and diluted earnings per share for the respective periods indicated:

		Three Months Ended
		December 31, 2007
Numerator: Net income		$	312,000
Denominator:
Denominator for basic earnings per share — weighted average shares			19,839,000
Effect of dilutive securities
Effect of dilutive securities
Employee stock options			1,158,000
Denominator for diluted earnings per share — adjusted weighted average shares and assumed conversion			20,997,000
Basic earnings per share		$	0.02
Diluted earnings per share		$	0.01

     For the three months ended December 31, 2006, the fully diluted loss per share did not include the dilutive effect, if any, from the potential exercise of stock options and warrants using the treasury stock method, because the effect would have been anti-dilutive.

     Common shares from exercise of certain options and warrants have been excluded from the computation of diluted earnings per share because their exercise prices are greater than the Company’s weighted-average stock price for the period. For the three months ended December 31, 2007, the number of shares excluded was 3,432,000.

     Since their effect would have been, anti-dilutive, 1,495,000, stock options and warrants to purchase shares of common stock have been excluded from the computation of diluted net loss per share for the three months ended December 31, 2006.

4. INVENTORIES

Inventories were comprised of :

		December 31,				September 30,
		2007				2007
		(unaudited)
Raw materials		$	904,000			$	805,000
Work in process			231,000				228,000
Finished goods			789,000				1,602,000
		$	1,924,000			$	2,635,000

5. USE OF ESTIMATES

     The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

6. STOCK BASED COMPENSATION

     Stock Options — On October 1, 2006 the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R). SFAS 123R replaced SFAS No. 123 and supercedes APB Opinion No. 25. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Prior to October 1, 2006, the Company used the fair value based method of accounting for share-based compensation provided to employees in accordance with SFAS No. 123, Accounting for Stock-Based Compensation, therefore adoption of SFAS 123R had no effect on the financial statements.

     In July 2003, the Company’s board of directors adopted a stock option plan. Under the 2003 option plan, options to purchase up to 1,500,000 shares of common stock are available for employees, directors, and outside consultants.

     In December 2004, the Company’s board of directors adopted a 2004 stock incentive plan. The Company may issue up to 1,500,000 shares of common stock under the 2004 plan and no person may be granted awards during any twelve-month period that cover more than 300 shares of common stock.

     The fair value of each option award is estimated on the date of grant using a Black-Scholes valuation model. The following assumptions were used for options granted in the three months ended December 31, 2007 and 2006:

		For the Three Months
		Ended December 31,
		2007				2006
Risk-free interest rate			4.16	%			4.60	%
Expected life (in years)			4				4
Dividend yield			0.0	%			0.0	%
Expected volatility			105	%			99	%
Weighted-average volatility			105	%			99	%

     Expected volatility is determined based on historical volatility. Expected life is determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards and vesting schedules. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Share-based compensation expense recognized is based on the options ultimately expected to vest, reduced by estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary in subsequent periods if actual forfeitures differ from those estimated. Forfeitures were estimated based on the Company’s historical experiences.

     A summary of the Company’s stock option activity as of December 31, 2007, and changes during the three months then ended is presented below:

										Weighted
						Weighted				Average
		Stock				Average				Contractual				Aggregate
		Options				Exercise Price				Term				Intrinsic Value *
Outstanding at October 1, 2007			1,988,000			$	2.52				3.75
Granted			25,000			$	2.02				4.76
Exercised			—				—				—
Forfeited or Expired			—				—				—
Outstanding at December 31, 2007			2,013,000			$	2.52				3.51			$	716,000
Exercisable at December 31, 2007			1,352,000			$	2.48				3.16			$	714,000

     A summary of the status of the Company’s non-vested stock options as of December 31, 2007, and changes during the three months ended December 31, 2007, is presented below:

						Weighted Average
						Grant-Date
		Stock Options				Fair Value
Non-vested at October 1, 2007			699,000			$	1.72
Granted			25,000			$	1.47
Forfeited or Expired			—				—
Vested			(63,000	)		$	1.60
Non-vested at December 31, 2007			661,000			$	1.73

     As of December 31, 2007, there was $158,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the stock options plans. That cost is expected to be recognized over a weighted-average period of 0.57 years. The total fair value of shares vested during the three months ended December 31, 2007 was $100,000.

     Total compensation expense related to outstanding options for the three months ended December 31, 2007 and 2006 was $84,000 and $248,000, respectively. Such amounts are included in selling, general and administrative expenses in the accompanying Statements of Operations.

Stock warrants — The Company recognizes the value of stock warrants issued based upon an option-pricing model at their fair value as an expense over the period in which the grants vest from the measurement date, which is the date when number of warrants, their exercise price and other terms became certain.

     At December 31, 2007 and 2006, 3,691,000 and 2,722,000 warrants were outstanding and 2,754,000 and 2,447,000 warrants were vested, respectively.

     Total compensation expense related to outstanding warrants for the three months ended December 31, 2007 was $2,000. For the three months ended December 31, 2006 compensation expense was $33,000.

7. INCOME TAXES

     The Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” (FIN 48), on October 1, 2007. As a result of the implementation of FIN 48, the Company made a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards established by FIN 48. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of this review, the Company concluded that at this time there are no uncertain tax positions. As a result of applying the provisions of FIN 48, there was no cumulative effect on retained earnings at December 31, 2007. As of December 31, 2007, the Company does not expect any material changes to unrecognized tax positions within the next twelve months.

     SFAS No. 109, “Accounting for Income Taxes,” establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could materially impact our financial position or our results of operations.

8. CONTINGENCIES AND OTHER MATTERS

     The Company is occasionally subject to legal proceedings and claims that arise in the ordinary course of business. It is impossible for us to predict with any certainty the outcome of pending disputes, and we cannot predict whether any liability arising from pending claims and litigation will be material in relation to our consolidated financial position or results of operations.

9. SUBSEQUENT EVENT

     On January 25, 2008, the Company and Bryant Park Capital (“BPC”) entered into a letter agreement pursuant to which the Company engaged BPC to act as its exclusive financial advisor and consultant in connection with a possible merger, acquisition or other similar transaction. The agreement may be terminated by BPC or the Company after four months upon prior written notice of at least thirty days. A principal of BPC is the son of Alan Magerman, the Company’s Chairman of the Board of Directors.

     Under the agreement, the Company will pay BPC a monthly fee of $10,000. If the Company enters into a transaction of the type specified in the agreement, the Company will be obligated to pay BPC a transaction fee that will be determined based upon the size of the transaction, provided that the minimum transaction fee will be $100,000 and provided that up to $40,000 of monthly fees previously paid by the Company will be offset against the transaction fee owed by the Company.

ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations (rounded in thousands)

     The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and accompanying notes filed as part of this report.

Forward-Looking Statements

     The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as information contained elsewhere in this report, contain statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements include statements regarding the intent, belief or current expectations of us, our directors or our officers with respect to, among other things: anticipated financial or operating results, financial projections, business prospects, future product performance and other matters that are not historical facts. The success of our business operations is dependent on factors such as the impact of competitive products, product development, commercialization and technology difficulties, the results of financing efforts and the effectiveness of our marketing strategies, general competitive and economic conditions. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements as a result of various factors.

Results of Operations

Three-months ended December 31, 2007 compared to the three-months ended December 31, 2006

     Revenues: We operate in the security lighting systems and night vision industries, and the majority of our revenues are derived from sales of our illumination products and our new SuperVision night vision product to various customers.

     Revenues for the quarter ended December 31, 2007 were $3,561,000 compared to revenues of $916,000 for the quarter ended December 31, 2006. In the 2007 quarter, 92% of revenue was from sales of our NightHunter products to the military (U.S. Army, U.S. Marines and military distributors). This compares to 83% of revenue to the military market in the same quarter of the prior year.

     Cost of Goods and Gross Profit: Cost of goods consist of the cost of manufacturing our NightHunter One and SuperVision products and the price that we pay to PerkinElmer for NightHunter II products that PerkinElmer manufactures for us under a manufacturing agreement.

     The gross profit percentage was 49% and 78% for the quarter ended December 31, 2007 and 2006, respectively. The gross profit percentage was positively impacted in the 2006 quarter by sales of the NightHunter II product from inventory that was identified as excess inventory in fiscal year 2005. The reduction in the 2006 quarter of the excess inventory reserve related to the sale of NightHunter II product was $358,000. As of June 30, 2007 all of the excess inventory of the NightHunter II products had been shipped to customers.

     Selling, General and Administrative: Selling, general and administrative expenses increased by $343,000 to $1,317,000 for the quarter ended December 31, 2007 as compared to $974,000 for the quarter ended December 31, 2006. The increase is primarily attributed by increases in compensation from hiring new sales personnel and consulting costs of $102,000; $389,000 for trade show, advertising, marketing and travel expenses offset by a decrease in non-cash compensation expenses for stock options and warrants of $195,000.

     Engineering, Research & Development: Engineering, research and development expenses were $139,000 for the quarter ended December 31, 2007 compared to $159,000 for the quarter ended December 31, 2006. Higher outside engineering expenses were offset by lower compensation costs and legal expenses for patent filings.

     Net Income (Loss): Significantly higher sales in the current quarter accounted for net income of $312,000 compared to a net loss of $406,000 for the prior year quarter.

     Liquidity and Capital Resources

     As of December 31, 2007, the Company had working capital of $4,939,000 and a current ratio of 5.7 to 1 as compared to working capital of $4,527,000 and a current ratio of 4.88 to 1 as of September 30, 2007.

     Our net income of $312,000 for the three months ended December 31, 2007 positively impacted cash. Higher sales in the quarter increased accounts receivable by $3,000,000 and decreased inventories by $711,000. The majority of the receivables were collected after the end of the quarter. Non-cash compensation expense for options to employees and issuance of warrants to consultants during the first three months of the current fiscal year were $86,000. Cash used by operating activities totaled $2,054,000 for the three months ended December 31, 2007. There were no cash flows from investing and financing activities during the current quarter.

ITEM 3.		CONTROLS AND PROCEDURES

     We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file with, or submit to, the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate, to allow for timely decisions regarding required disclosure. As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive and financial officers, of the effectiveness of the design and operation of’ our disclosure controls and procedures as of the end of the most recent fiscal quarter covered by this report.

Based upon the evaluation conducted by management in connection with the audit of the Company’s financial statements for the year ended September 30, 2007, the Company identified material weaknesses in our internal control over financial reporting. A material weakness is “a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected by the Company in a timely manner.”

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Management has taken steps to correct these material weaknesses through changes in procedures and personnel.

PART II. OTHER INFORMATION

ITEM 1.		Legal Proceedings

     The Company is involved in legal actions arising in the normal course of business. After taking into consideration legal counsel’s evaluation of such actions, management is of the opinion that their outcome will not have a significant effect on the Company’s financial position or results of operations.

ITEM 5.		Other Information

     None.

ITEM 6.		Exhibits

Exhibit
Number		Description
31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
32.1		Certifications pursuant to Section 906 of the Sarbanes-Oxley Act

SIGNATURES

     In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.