Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

		June 30,				September 30,
		2008				2007
rounded in thousands, except par value		(unaudited)
Assets
Current Assets:
Cash		$	860,000			$	2,388,000
Investments			1,000,000				—
Accounts receivable, net			1,278,000				305,000
Inventories			1,769,000				2,635,000
Other current assets			370,000				365,000
Total Current Assets			5,277,000				5,693,000
Equipment, furniture and fixtures at cost, less accumulated depreciation of $148,000 and $108,000			175,000				215,000
Total Assets		$	5,452,000			$	5,908,000
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable		$	423,000			$	892,000
Accrued expenses			188,000				123,000
Accrued payroll and related taxes			51,000				151,000
Total Current Liabilities			662,000				1,166,000
Commitments and Contingencies (Note 10)
Shareholders’ Equity:
Preferred shares, $0.001 par value, 5,000,000 shares authorized, 0 shares issued and outstanding			—				—
Common shares, $0.001 par value, 50,000,000 shares authorized as of June 30, 2008 and September 30, 2007; 20,064,000 shares issued as of June 30, 2008 and 19,952,000 issued as of September 30, 2007; 19,951,000 shares outstanding as of June 30, 2008 and 19,839,000 outstanding as of September 30, 2007			20,000				20,000
Additional paid-in capital			23,638,000				23,341,000
Accumulated deficit			(18,562,000	)			(18,313,000	)
			5,096,000				5,048,000
Less treasury stock, at cost, 113,000 shares as of June 30, 2008 and September 30, 2007			(306,000	)			(306,000	)
Total Shareholders’ Equity			4,790,000				4,742,000
Total Liabilities and Shareholders’ Equity		$	5,452,000			$	5,908,000

     See notes to unaudited condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

		Three months ended								Nine months ended
		June 30,								June 30,
		2008				2007				2008				2007
rounded in thousands, except per share amounts		(unaudited)								(unaudited)
Revenues		$	1,892,000			$	1,023,000			$	9,074,000			$	3,585,000
Cost of goods sold			1,244,000				668,000				4,995,000				1,209,000
Gross profit			648,000				355,000				4,079,000				2,376,000
Selling, general and administrative			1,149,000				2,158,000				3,735,000				4,483,000
Engineering, research and development			289,000				175,000				630,000				486,000
Income (loss) from operations			(790,000	)			(1,978,000	)			(286,000	)			(2,593,000	)
Other income/(expense):
Interest income			7,000				26,000				39,000				62,000
Interest expense			—				—				—				(1,000	)
Income (loss) before provision for income taxes			(783,000	)			(1,952,000	)			(247,000	)			(2,532,000	)
Income tax provision							—				2,000				2,000
Net income (loss)		$	(783,000	)		$	(1,952,000	)		$	(249,000	)		$	(2,534,000	)
Net income (loss) per share:
Basic		$	(0.04	)			($0.11	)		$	(0.01	)			($0.14	)
Diluted		$	(0.04	)			($0.11	)		$	(0.01	)			($0.14	)
Weighted average shares outstanding:
Basic			19,871,000				18,434,000				19,900,000				17,734,000
Diluted			19,871,000				18,434,000				19,900,000				17,734,000

     See notes to unaudited condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine months ended
		June 30,
		2008				2007
Rounded in thousands		(unaudited)
Cash flows from operating activities:
Net income (loss)		$	(249,000	)		$	(2,534,000	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization			40,000				25,000
Provision for bad debts			(42,000	)			—
Non-cash compensation to employees and directors			225,000				972,000
Non-cash compensation to consultants			2,000				48,000
Inventory reserves			—				(1,158,000	)
Changes in operating assets and liabilities:
Accounts receivable			(931,000	)			1,418,000
Inventories			866,000				(1,174,000	)
Other current assets			(5,000	)			(394,000	)
Accounts payable			(469,000	)			943,000
Accrued expenses			(100,000	)			(2,000	)
Accrued payroll and related taxes			65,000				58,000
Net cash used in operating activities			(598,000	)			(1,798,000	)
Cash flows from investing activities:
Purchases of investments in marketable securities			(1,000,000	)			—
Purchases of equipment, furniture and fixtures			—				(208,000	)
Net cash used in investing activities			(1,000,000	)			(208,000	)
Cash flows from financing activities:
Net proceeds from issuance of common stock, net of expenses			—				1,975,000
Proceeds in connection with the exercises of warrants			70,000				499,000
Proceeds in connection with stock subscription			—				650,000
Net cash provided by financing activities			70,000				3,124,000
Net increase (decrease) in cash			(1,528,000	)			1,118,000
Cash, beginning of period			2,388,000				99,000
Cash, end of period		$	860,000			$	1,217,000
Supplemental cash flow information:
Cash paid during the period for income taxes		$	2,000			$	2,000
Cash paid during the period for interest		$	—			$	1,000

     See notes to unaudited condensed consolidated financial statements.

NOTES TO UNAUDITED 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. RECENTLY ADOPTED AND ISSUED ACCOUNTING PRONOUNCEMENTS

          Recently Adopted:

          In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined in FIN 48 as a tax position, that based solely on its technical merits is more likely than not to be sustained upon examination by the applicable taxing authority. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. FIN 48 must be applied to all existing tax positions upon initial adoption. The cumulative effect of applying FIN 48 at adoption, if any, is to be reported as an adjustment to opening retained earnings for the year of adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006, although early adoption is permitted. The adoption of FIN 48 did not have a material impact on the Company’s results of operations and financial position.

          Recently Issued:

     In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (SFAS 141(R)). The objective of SFAS 141 (R) is to improve reporting by creating greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable and relevant information for investors and other users of financial statements. SFAS 141 (R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS 141 (R) includes both core principles and pertinent application guidance, eliminating the need for numerous EITF issues and other interpretative guidance, thereby reducing the complexity of existing GAAP. SFAS 141 (R) is effective as of the start of fiscal years beginning after December 15, 2008. Early adoption is not allowed. We are in the process of evaluating this standard and have not yet determined the impact that the adoption of SFAS 141 (R) will have on our financial position, results of operations or cash flows.

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which provides a single definition of fair value, a framework for measuring fair value, and expanded disclosures concerning fair value. Previously, different definitions of fair value were contained in various accounting pronouncements creating inconsistencies in measurement and disclosures. SFAS No. 157 applies under those previously issued pronouncements that prescribe fair value as the relevant measure of value, except Statement No. 123(R) and related interpretations and pronouncements that require or permit measurement similar to fair value but are not intended to measure fair value. This pronouncement is effective for fiscal years beginning after November 15, 2007. Management does not expect the adoption of SFAS No. 157 to have a material impact on the Company’s consolidated financial statements.

     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Assets and Liabilities — Including an Amendment of FASB Statement No. 115. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in SFAS No. 159 are elective; however, the amendment to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. The fair value option established by SFAS No. 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Management does not expect the adoption of SFAS No. 159 to have a material impact on the Company’s consolidated financial statements.

     In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements (SFAS 160). SFAS 160 improves the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report non-controlling (minority) interests in subsidiaries in the same way—as equity in the consolidated financial statements. Moreover, SFAS 160 eliminates the diversity that currently exists in accounting for transactions between an entity and non-controlling interests by requiring they be treated as equity transactions. SFAS 160 is effective as of the start of fiscal years beginning after December 15, 2008. Early adoption is not allowed. We are in the process of evaluating this standard and have not yet determined the impact that the adoption of SFAS 160 will have on our financial position, results of operations or cash flows.

     In March 2008, FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” which establishes the disclosure requirements for derivative instruments and for hedging activities. This Statement amends and expands the disclosure requirements of Statement 133 with the intent to provide users of financial statements with an enhanced understanding of derivative instruments and hedging activities. SFAS 61 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. We do not expect adoption of SFAS 161 to have a material impact on the Company’s financial statements.

3. ACCOUNTING POLICY FOR INVESTMENTS IN MARKETABLE SECURITIES

          The Company accounts for its investments in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” This statement requires investment securities to be classified as held to maturity, available for sale, or trading securities. Investments classified as trading and available for sale are valued at their fair value, while investment securities classified as held to maturity are valued at amortized cost. Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Unrealized gains or losses are reported as increases or decreases in comprehensive income, net of related deferred tax effect.

          As of June 30, 2008 the Company has invested in four $250,000 bonds which are Auction Rate Securities. These bonds each have interest rates that are reset every 28 days at auction or at a stated interest rate should the bonds fail the auction process. Beginning in March 2008, each of these bonds failed at auction. Management has performed a fair value assessment of the bonds as of June 30, 2008 and believes that the Company’s current book basis approximates fair market value and that there is neither a temporary nor permanent impairment of value as a result of the auction process failure. Management continues to monitor the market for these bonds for indications of impairment.

          While the principal of these bonds is not required for operations in the short term, the Company has established a bank line of credit for 75% of the principal balances, using these bonds as the collateral for the line. As of June 30, 2008 the Company had no borrowings under this line of credit.

4. REVENUE RECOGNITION

          The Company recognizes revenue net of discounts upon shipment and transfer of title 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.

5. LOSS PER SHARE

          Loss per share is computed by dividing the loss available to common shareholders by the weighted average number of common shares outstanding. For the three and nine months ended June 30, 2008 and 2007, diluted loss per share does 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. The numbers of options and warrants excluded from the diluted computations for the three and nine months ended June 30, 2008 were 906,000 and 1,008,000, respectively. For the three and nine months ended June 30, 2007 the numbers were 1,681,000 and 1,678,000, respectively.

6. INVENTORIES

Inventories were comprised of :

		June 30,				September 30,
		2008				2007
		(unaudited)
Raw materials		$	936,000			$	805,000
Work in process			268,000				228,000
Finished goods			565,000				1,602,000
		$	1,769,000			$	2,635,000

7. 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.

8. 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 the Black-Scholes valuation model. The following assumptions were used for options granted in the nine months ended June 30, 2008 and 2007:

		For the Nine Months
		Ended June 30,
		2008				2007
Risk-free interest rate			3.02% - 4.16%				4.60% - 4.87%
Expected life (in years)			4				4
Dividend yield			0.0%				0.0%
Expected volatility			100% - 105%				98% - 111%
Weighted-average volatility			102%				104%

     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. 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 June 30, 2008, and changes during the nine months then ended is presented below:

										Weighted
						Weighted				Average
		Stock				Average				Contractual				Aggregate
		Options				Exercise Price				Term (years)				Intrinsic Value *
Outstanding at October 1, 2007			1,988,000			$	2.52				3.75
Granted			75,000			$	1.75				4.93
Exercised			—				—				—
Forfeited or Expired			(25,000	)		$	2.02				—
Outstanding at June 30, 2008			2,038,000			$	2.50				3.04			$	159,000
Exercisable at June 30, 2008			1,543,000			$	2.56				2.68			$	159,000

          A summary of the status of the Company’s non-vested stock options as of June 30, 2008, and changes during the nine months ended June 30, 2008, is presented below:

						Weighted Average
						Grant-Date
		Stock Options				Fair Value
Non-vested at October 1, 2007			699,000			$	1.72
Granted			75,000			$	1.25
Forfeited or Expired			(25,000	)		$	1.47
Vested			(254,000	)		$	1.69
Non-vested at June 30, 2008			495,000			$	1.27

          As of June 30, 2008, there was $46,000 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 0.78 years. The total fair value of options vested during the nine months ended June 30, 2008 was $429,000.

          Total compensation expense related to outstanding options for the three months ended June 30, 2008 and 2007 was $59,000 and $564,000, respectively. For the nine months ended June 30, 2008 and 2007 compensation expense was $225,000 and $972,000, 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 the number of warrants, their exercise price and other terms became certain.

     At June 30, 2008 and 2007, 3,578,000 and 3,077,000 warrants were outstanding and 2,641,000 and 2,472,000 warrants were vested, respectively.

     There was no compensation expense related to outstanding warrants for the three months ended June 30, 2008. For the nine months ended June 30, 2008 the total compensation expense was $2,000. For the three and nine months ended June 30, 2007 total compensation expense was $7,000 and $48,000, respectively.

9. 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 June 30, 2008. As of June 30, 2008, 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.

          During the current year, the Company utilized their net operating loss carry-forwards to reduce taxable income. In addition, permanent and temporary differences were realized reducing taxable income and the related income tax liability. Deferred tax assets and liabilities relating to inventory, compensation and depreciation recovery are the primary sources of these differences. Because management is uncertain about the Company’s ability to utilize its net deferred tax asset, it has recorded a 100% valuation allowance on these assets. As a result of the Company utilizing deferred tax assets that previously carried a valuation allowance, the Company recognized no income tax expense in the current period.

10. COMMITMENTS AND CONTINGENCIES

          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.

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 June 30, 2008 compared to the three months ended June 30, 2007

          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: Revenues for the quarter ended June 30, 2008 were $1,892,000 compared to revenues of $1,023,000 for the quarter ended June 30, 2007. In the third quarter of 2008, 78% of revenue was from sales of our NightHunter products to the military (U.S. Army, U.S. Marines and military distributors). This compares to 58% of revenue to the military market in the same quarter of the prior year when initial shipments of the Company’s new SuperVision product were made.

     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 34% and 35% for the quarter ended June 30, 2008 and 2007, respectively. The gross profit percentage was positively impacted in the third quarter of 2007 by sales of the NightHunter II product from inventory that was identified as excess inventory in fiscal year 2005. The reduction in the 2007 quarter of the excess inventory reserve related to the sale of NightHunter II product was $127,000. 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 decreased by $1,009,000 to $1,149,000 for the quarter ended June 30, 2008 as compared to $2,158,000 for the quarter ended June 30, 2007. The decrease is primarily attributed to lower non-cash compensation expenses for stock options and warrants of $511,000, legal expenses of $174,000, advertising expenses of $190,000 and salaries and temporary labor of $137,000.

     Engineering, Research & Development: Engineering, research and development expenses were $289,000 for the quarter ended June 30, 2008 compared to $175,000 for the quarter ended June 30, 2007. The increase is attributed to spending for the development of new products, including our new NightHunter 3 ultra high intensity illumination system.

     Net Income (Loss): Significantly higher sales and lower selling, general and administrative expenses in the current quarter accounted for the lower net loss of $783,000 when compared to a net loss of $1,952,000 for the prior year quarter.

Nine months ended June 30, 2008 compared to the nine months ended June 30, 2007

     Revenues: Revenues for the nine months ended June 30, 2008 were $9,074,000 compared to revenues of $3,585,000 for the nine months ended June 30, 2007. In the nine months ended June 30, 2008, 87% of revenue was from sales of our NightHunter products to the military (U.S. Army, U.S. Marines and military distributors). This compares to 80% of revenue to the military market in the same nine month period 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 45% and 66% for the nine months ended June 30, 2008 and 2007, respectively. The gross profit percentage was positively impacted during the nine months ended June 30, 2007 by sales of the NightHunter II product from inventory that was identified as excess inventory in fiscal year 2005. The reduction in the 2007 nine month period of the excess inventory reserve related to the sale of NightHunter II product was $1,158,000. 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 decreased by $748,000 to $3,735,000 for the nine months ended June 30, 2008 as compared to $4,483,000 for the nine months ended June 30, 2007. The decrease is primarily attributed to lower non-cash compensation expenses for stock options and warrants of $792,000 and legal expenses of $319,000 offset by increases in trade show, advertising, marketing and travel expenses of $269,000 and consulting and commission expenses of $93,000.

     Engineering, Research & Development: Engineering, research and development expenses were $630,000 for the nine months ended June 30, 2008 compared to $486,000 for the nine months ended June 30, 2007. The increase is attributed to spending for the development of new products, including our new NightHunter 3 ultra high intensity illumination system.

     Net Income (Loss): Significantly higher sales and lower selling, general and administrative expenses in the current nine month period accounted for the lower net loss of $249,000 when compared to a net loss of $2,534,000 for the prior year nine month period.

     Liquidity and Capital Resources

     As of June 30, 2008, the Company had working capital of $4,615,000 and a current ratio of 8.0 to 1 as compared to working capital of $4,527,000 and a current ratio of 4.9 to 1 as of September 30, 2007.

     Higher sales for the nine months ended June 30, 2008 positively impacted cash. These sales also increased accounts receivable by $931,000 and decreased inventories by $866,000. The majority of the receivables were collected after June 30, 2008. Non-cash compensation expense for options to employees and issuance of warrants to consultants during the first nine months of the current fiscal year were $227,000. Cash used by operating activities totaled $598,000 for the nine months ended June 30, 2008. Cash flows from investing activities during the current nine month period were $1,000,000 as the result of purchases of marketable securities and from financing activities were $70,000 as the result of exercises of warrants.

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.” Management has taken steps to correct these material weaknesses through changes in procedures and personnel.

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.

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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     On June 4, 2008, we held our Annual Meeting of Shareholders at the Hilton Garden Inn located at 6450 Carlsbad Boulevard, Carlsbad, CA 92011. At the meeting the holders of our outstanding common stock acted on the following matters:

(1)

The shareholders voted on a cumulative basis for 4 directors, each to serve for a term of one year. Each nominee received the following votes:

Name of Nominee		Votes For				Votes Against				Abstain
Alan Magerman			15,910,430				961,899				307,875
Jeffrey Kennedy			15,859,280				1,013,049				307,875
Robert Petersen			15,209,546				1,662,783				307,875
Robert Buie			15,838,780				1,033,549				307,875

(2)

The shareholders voted for the ratification of the appointment of Singer Lewak Greenbaum & Goldstein LLP as our independent auditors for our fiscal year ending September 30, 2008. Votes cast were as follows:

Votes For			16,792,528
Votes Against			161,616
Abstain			226,058

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.