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  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549**** ****FORM 10-KSB**** **   þ **ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934******For the fiscal year ended September 30, 2008****   o **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934******For the transition period from                      to**                    **.******Commission file number: 001-32469****XENONICS HOLDINGS, INC.**(Name of small business issuer in its charter)   **Nevada** **84-1433854**(State or other jurisdiction of (I.R.S. Employerincorporation or organization) Identification Number)   **2236 Rutherford Road, Suite 123**  **Carlsbad, California** **92008-7297**(Address of principal executive offices) (Zip code)Issuer’s telephone number: **(760) 448-9700**     Securities registered under Section 12(b) of the Act:   Title of each class Name of each exchange on which registered   Common Stock, $.001 par value NYSE Alternext USSecurities registered under Section 12(g) of the Act: NoneCheck whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of theExchange Act. oCheck whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that the issuer was required tofile such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ    No oCheck if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-Bcontained in this form, and no disclosure will be contained, to the best of the registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part III ofthis Form 10-KSB or any amendment to this Form 10-KSB. oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act): Yes o    No þIssuer’s revenues for its fiscal year ended September 30, 2008: $10,168,000.Aggregate market value of the common stock held by non-affiliates of the Issuer as of December 4,2008 was approximately $14,613,000There were 20,183,968 shares of the Company’s common stock outstanding on December 4, 2008.Transitional Small Business Disclosure Format: Yes o    No þDocuments Incorporated by Reference: Certain portions of the issuer’s Proxy Statement for the 2009annual meeting of shareholders to be filed with the Securities and Exchange Commission pursuant toRegulation 14A, not later than 120 days after the close of the issuer’s fiscal year, areincorporated by reference under Part III of this Form 10-KSB.  
 

 
**TABLE OF CONTENTS**     **PART I**     ITEM 1. DESCRIPTION OF BUSINESS  4      ITEM 2. DESCRIPTION OF PROPERTY  9      ITEM 3. LEGAL PROCEEDINGS  9      ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  9      **PART II**     ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS ANDSMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES  10      ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION  11      ITEM 7. FINANCIAL STATEMENTS  F-1      ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND FINANCIAL DISCLOSURE  22      ITEM 8A. CONTROLS AND PROCEDURES  22      ITEM 8B. OTHER INFORMATION  23      **PART III**     ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT  24      ITEM 10. EXECUTIVE COMPENSATION  24      ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND RELATED SHAREHOLDER MATTERS  24      ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS  24      ITEM 13. EXHIBITS  25      ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES  27  EX-10.1 EX-23.1 EX-31.1 EX-31.2 EX-32.1 EX-32.2
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**Introductory Comment**     Throughout this annual report on Form 10-KSB, the terms “we,” “us,” “our,” and “our company”refer to Xenonics Holdings, Inc., a Nevada corporation formerly known as Digital Home TheaterSystems, Inc., and, unless the context indicates otherwise, also includes our subsidiary, Xenonics,Inc., a Delaware corporation.**Forward-Looking Statements**     This annual report contains forward-looking statements, which reflect the views of ourmanagement with respect to future events and financial performance. These forward-lookingstatements are subject to a number of uncertainties and other factors that could cause actualresults to differ materially from such statements. Forward-looking statements are identified bywords such as “anticipates,” “believes,” “estimates,” “expects,” “plans,” “projects,” “targets” andsimilar expressions. Readers are cautioned not to place undue reliance on these forward-lookingstatements, which are based on the information available to management at this time and which speakonly as of this date. Our actual results may differ materially from results anticipated in theseforward-looking statements. We undertake no obligation to update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise. For a discussion ofsome of the factors that may cause actual results to differ materially from those suggested by theforward-looking statements, please read carefully the information under “Risk Factors.”
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**PART I****ITEM 1. DESCRIPTION OF BUSINESS****Overview**     We design, manufacture and market high-end, high-intensity portable illumination products andlow light viewing systems (night vision). Our core product line consists of lightweight,long-range, ultra-high intensity illumination products used in a wide variety of applications bythe military, law enforcement, security, search and rescue and, to a lesser extent, in commercialmarkets. The Night Vision system is used across the entire spectrum from commercial to themilitary. We hold several patents for our technology platform, which applies high efficiencydimmable electronic ballast circuitry and precision optics to xenon light to produce anillumination device that delivers improved performance over current technologies, and additionalpatents to the integration of the night vision system.     We are largely dependent upon government orders for our revenues. While the night visionproducts will expand our sales into the commercial market, the government market, particularly lawenforcement, will continue to be a large part of the night vision sales. Existing customers includeall branches of the United States Armed Forces and federal law enforcement. Starting late in FY2007 sales expanded into the commercial, state and local government, and international markets.     We market our illumination products under the NightHunter brand name and Night Vision underthe SuperVision brand. The NightHunter series of products is produced in a variety ofconfigurations to suit specific customer needs. These include compact hand-held systems forfoot-borne personnel and stabilized systems for airborne, vehicular and shipboard use. TheseNightHunter illumination systems are used for reconnaissance, surveillance, search and rescue,physical security, target identification, navigation, and non-lethal deterrence. The systems allowthe user to illuminate an area, an object or a target with visible or non-visible light, and toimprove visibility through many types of obscurants such as smoke, haze and most types of fog.     The SuperVision product was launched in June 2007 and brings a new category to night visionusing a high resolution HDTV display with an ultra-sensitive infrared (IR)/visible sensor and aproprietary Digital Signal Processor (DSP). This all digital format brings capabilities comparableto high end military analog systems at less than half the price. In addition the digital formatallows for zoom capability. The price and capability opens the market to law enforcement and thegeneral consumer, whether in the maritime environment, hunting, camping, security, or any otheractivity done in a low light situation.**Our Products**     The NightHunter ultra-high intensity series of products currently consists of four versatilecompact illumination systems — NightHunter One, NightHunter II, NightHunter ext, and NightHunter3. In fiscal year 2008 we introduced a tactical line of NightHunter systems to include the pocketsized Snyper series, Modular Weapons Light (MWL), and the Tactical IR illuminator designed to workdirectly with SuperVision. Our products are lightweight, ruggedized for operation in harshenvironments, and allow users to illuminate objects with visible or infrared (IR) light atdistances of more than one mile. With our infrared filter accessory in place, the NightHunterproducts emit non-visible infrared light. When used with night vision devices or low-light cameras,our NightHunter products can illuminate a target without the target knowing that it is beingilluminated. We have also developed an ultraviolet filter which enables our product to fluorescematerials from great distances for applications including forensics and special lighting effects.Each NightHunter product incorporates a mechanical focusing design that enables the user to varythe flood spread of the beam. For example, the systems can be focused at a 0.5° spread that resultsin only a 60-90 foot footprint at one mile, or at a 10° spread that results in a 900 foot footprintat one mile. Unlike other high intensity lighting systems (and traditional flashlights), theNightHunter products do not have a “black hole” at the center of the light beam that obstructs thefield of view (that is, there is no “blind spot” in the beam), allowing the user to keep theillumination centered on the target area. Our NightHunter One, NightHunter II and NightHunter 3products all have an internal rechargeable battery and built-in charger. In addition, theNightHunter One, NightHunter ext and NightHunter 3 can be operated from external power sources.Depending on the functionality and accessories of the product, the prices for our ultra-highintensity products range from $2,700 to $4,000 per unit and the Tactical series from $100 to $500per unit.     The SuperVision high resolution HDTV display with an ultra-sensitive IR/visible sensor, zoomcapability, and a proprietary Digital Signal Processor (DSP) brings capability to a wide variety ofcustomers. Operating in both the visible and IR spectrum SuperVision allows you to operate fromdusk to dark. SuperVision can operate with or without an illuminator and with its extended IRspectrum in excess of 1000 nanometers it can operate well past the range of a conventional analogtube system. With a retail price ofjust $1,499 it is affordable at the local law enforcement level as well as with commercialcustomers. In 2008 we added two products to the SuperVision line, the SuperVision Tactical Packageand the SuperVision Long Range Surveillance System. The Tactical Package was specifically designedfor the law enforcement community and packages the SuperVision with a Tactical IR and Snypertactical light all in a waterproof case. The Long Range Surveillance System expands the SuperVisioncapability out to 100x zoom giving law enforcement facial identification out past half a mile.
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     Our currently available products and their respective features are listed below.     **NightHunter One**The NightHunter One system is a lightweight (9.7 lbs.) illumination systemthat can be readily adapted to a variety of uses and platforms, from handheld to fixed mounted useon vehicles, boats, and helicopters. The NightHunter can be powered from its internal rechargeablebattery or from any 12-32 VDC power source.     **NightHunter II**The NightHunter II is a self-contained, durable, waterproof and lightweight(4.4 lbs) unit. The unit has an extended battery life (1.5 hrs on a single charge) and can rechargein 1.5 hours. The NightHunter II is manufactured for us by PerkinElmer Electronics, Inc.     **NightHunter ext**The NightHunter ext is a durable and lightweight (5.5 lbs) illumination systemthat is designed for fixed mounted applications and for use on stationary platforms or vehicles,boats, or helicopters. The NightHunter ext has the same range as the NightHunter One, but with anincreased field-of-view. The NightHunter ext can be equipped with an optional pistol grip andutilized as a powerful spotlight.     **NightHunter 3**The NightHunter 3 was designed to give better than NightHunter II capabilitiesin a light weight weapons mountable system. Utilizing Xenonics proprietary technology and lessonslearned NightHunter 3 is a 2.5 pound illuminator that exceeds the range of the NightHunter II whileat the same time incorporating an integrated filter assembly, new battery technology, and off boardcontrol. We began testing NightHunter 3 in our fiscal year ended September 30, 2007 and productionby PerkinElmer Electronics, Inc. began in our fiscal year ended September 30, 2008. This productwill open up a new market for the NightHunter technology.     **NightHunter Snyper**The Snyper is a pocket sized handheld or weapon mountable tactical light.This type of light is used by all military organizations and law enforcement personnel. Weighingless than 5 ounces and less than 5 inches in length, but delivering over 150 lumens for over 2hours, the Snyper is a premium quality tactical light. The Snyper is also packaged in a weaponsmountable modular kit — MWL.     **NightHunter Tactical IR**The Tactical IR was designed to attach and work with SuperVision.The Tactical IR adds non-visible IR energy in situations where there is limited ambient energy suchas caves, inside ships, and enclosed warehouse. It can also be used to highlight targets forbetter identification.     **SuperVision**SuperVision will allow the user to see in the dark with greater clarity thanconventional night vision, and with a zoom capability. The product is a small hand held device andweighs only 20 ounces. SuperVision retails for significantly less than the high-end night visionproducts.     **SuperVision Tactical Package**The package was designed to meet the need of law enforcementprofessionals. It puts together SuperVision with the Tactical IR and mount, a Snyper tacticallight, extra batteries and a portable waterproof case. This has become the primary purchase itemfor the law enforcement market.     **SuperVision Long Range Surveillance System**The system adds a long range lens, the requiredadapters, and a tactical case allowing the law enforcement professional the ability to view itemsof interest at a much great distance. This product was made available at the end of the year andthe Columbia South American government was one of the first customers.
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**The Markets**     The actual and potential markets for our products consist of the following.     ***Military Forces, of the United States and Foreign Allies***          Military forces in the United States currently represent the primary target market for ourNightHunter products. Through September 30, 2008, we have sold more than $30,000,000 of NightHunterbrand illumination systems into this market. Our customers include the U.S. Army, the U.S. AirForce, the U.S. Navy and the U.S. Marine Corps.     According to the International Institute for Strategic Studies and the U.S. Department ofDefense, there are nearly 5,000,000 active troops, over 8,000,000 reserve troops, approximately600 warships, and 900 amphibious, major mine, and support ships, 26,000 heavy tanks, and 63,000armored infantry vehicles in the armed forces of the United States and its key allies. Given thelarge number of applications for NightHunter products, we believe that this represents asubstantial market opportunity for the NightHunter product line.     SuperVision has application to the US Military though it was not optimized for militaryoperations. It is listed on the GSA schedule and is also sold through the military exchangenetwork. With the high performance and quality of SuperVision and no export restrictions, we see agood market in the international militaries.     ***U.S. Department of Homeland Security***          The agencies of the U.S. Department of Homeland Security represent another key market forNightHunter and SuperVision products. These agencies include the U.S. Customs and BorderProtection, Federal Emergency Management Agency, the Transportation Security Administration, theU.S. Secret Service and the U.S. Coast Guard. Our NightHunter products have been tested anddeployed in key strategic locations for port, waterway, coastline, airport and border security. Webelieve that the increased concern about homeland security and the higher amounts budgeted for newsecurity products may make homeland security a potentially significant market for both of ourproduct lines. Our goal is for agencies within the United States Department of Homeland Security touse discretionary funding to purchase our products, and we believe that in the future we mayachieve specific line items in the budget similar to our experience with the defense budget.     ***Law Enforcement and Fire, Search & Rescue***     We have been actively pursuing additional opportunities for sales of NightHunter illuminationsystems and SuperVision to law enforcement and fire, search and rescue organizations. During 2008we have seen significant traction in this market and we currently have over 100 U.S. local, state,or federal government agencies that have purchased and are using SuperVision. Law enforcement andfire, search and rescue represent a large market opportunity. Approximately 700,000 law enforcementpersonnel are estimated to be employed in the United States and there are approximately 30,000fire, search & rescue departments in the United States. In addition the international marketopportunity remains large, primarily with the SuperVision product line. We have already soldSuperVision into Europe, South America, Mexico, and Asia and we have ongoing tests in all of thoseareas.          ***Commercial Markets***     SuperVision was designed to be a high performance but affordable night vision system. Becauseof this, we have an excellent opportunity in several commercial markets. Initially we focused onthe hunting market, but have slowed our push in this area to focus more on the law enforcementmarket. However, Bass Pro Shops remains a key and steady customer in the commercial market place.There has also been interest from several industrial customers which we will continue to pursue in2009.**Sales & Marketing**     We generate most of our revenue from the direct sale of our products to customers. To date,most of our sales have been to the United States military. In the past we have depended upon topdown funding through Congress matched with communication directly to end users to drive the demand.We have attended customer specific tradeshows to also communicate the capabilities of theNightHunter product line and SuperVision.
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     In 2008 we added significant experience in the night vision market. Larry Curfiss the formerhead of ITT night vision business development joined Xenonics as chairman of our advisory board.Since then, we have added other ITT people with experience in night vision for law enforcementsales, a federal grants writer, and a key federal agency sales manager. We continue to reevaluateour independent representative group structure and have used senior management’s relationships withkey customers. In 2007 we hired a professional advertising agency with a primary focus onSuperVision. In 2008 they started working on the NightHunter 3 program. We have also increased ourpresence at key tradeshows, opened up the international market place and maintained ourCongressional contact either through our lobbyist or directly by our officers and directors.     We currently have eight persons engaged on a full-time basis in sales and marketing. Inaddition, our senior executives actively assist in our marketing efforts by initiating andmaintaining customer relationships and interacting with external consultants who assist us with ourmarketing activities.     In the future, we may consider partnering with others to generate additional sales thoughdistributorships and/or licenses and may utilize such models to expand our sales capabilities incertain domestic and international markets.**Manufacturing**     We conduct manufacturing and final assembly operations on the NightHunter One, NightHunterext, Snyper, Tactical IR, and SuperVision at our headquarters in Carlsbad, California, and own allof the equipment required to manufacture and assemble these finished products. In addition, we alsoown all molds, schematics, and prototypes utilized by our vendors in the production of thecomponents and sub-assemblies used in our products. We can expand our production capabilities byadding additional personnel with negligible new investment in tooling and equipment.     We currently purchase both commodity off-the-shelf components and custom-designed fabricatedparts and sub-assemblies for use in our products from a number of qualified local, national andinternational suppliers. Although we currently obtain these components from many single sourcesuppliers, we believe we could obtain components from alternative suppliers without incurringsignificant production delays. We acquire all of our components on a purchase order basis and donot have long-term contracts with suppliers.     In January 2003, we entered into a three-year agreement with PerkinElmer Electronics, Inc. forthe manufacturing of our NightHunter II product. This agreement renews automatically for anadditional 12 month term unless otherwise terminated by either party. PerkinElmer, a publiclytraded company (NYSE: PKI), is a leader in the life sciences, fluid sciences and optoelectronicsindustries. Under the terms of this agreement, PerkinElmer will manufacture all NightHunter IIproducts exclusively for Xenonics, on a fixed price basis. In return, we have agreed not topurchase any NightHunter II products from any other manufacturer or to manufacture any NightHunterII products ourselves. In addition, PerkinElmer agreed not to produce, market, or sell NightHunterII products to any entity except Xenonics. PerkinElmer further agreed that all intellectualproperty relating to the NightHunter II products is solely owned by Xenonics. In 2008 we extendedthis agreement to include NightHunter 3 and we have a fixed production price based on quantitiesbuilt with any cost saving shared equally.     PerkinElmer is responsible for the purchasing, production, and quality assurance of theNightHunter II and NightHunter 3 products. PerkinElmer provides the working capital required forinventory and manages the labor pool required to meet our delivery requirements without any cashinvestment by Xenonics. PerkinElmer has demonstrated the ability to increase production to meetgrowing demand. Despite this sole source relationship, Xenonics retains all documentation andknow-how to build the NightHunter II and NightHunter 3 products and owns all tooling required toproduce NightHunter II and NightHunter 3 products and related components. We believe we couldtransition to a second source if required without significant disruption.**Competition**     Other companies that offer high intensity, portable lighting products include SureFire andPeak Beam Systems, Inc. We believe that neither of these companies currently offers a product withthe features or range of applications of our NightHunter series. To our knowledge, only onecompany, Peak Beam Systems, supplies a short-arc xenon-based product. Peak Beam’s product also hasthe capability of utilizing infrared and ultraviolet filters, and provides a long-range light beam.However, unlike our products, Peak Beam’s products project a “black hole” and hence an obstructedfield-of-view, is not as durable, and is not a self contained unit with integrated charger andbattery.     With the introduction of the NightHunter 3, there is no company that has a competitiveproduct. Its light weight, long range, integrated battery, and weapons mount capability puts itinto a class of its own.
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     In addition to these suppliers of hand-held high intensity lighting products, we believe thatother companies that use first generation xenon technology, such as Spectrolab (helicoptersearchlights), Phoebus (entertainment spotlights), and Strong (entertainment spotlights) couldenter our market in the future. Our strategy is to remain the recognized market and technologyleader for hand held size systems thus not leaving an opening for the searchlight companies.     In the night vision market we have chosen an open spot in the market. We deliver in a highdefinition digital format, the capabilities of current analog Gen 3 systems, at about half to onethird the price. While our system retails at $1,499, analog Gen 3 systems are typically priced over$3,500. There are also significant lower performing products, usually analog Gen 1 or 2 systems, inthe sub $600 retail range. Since our performance well exceeds these systems, our real competitionis with the higher end product. We have patented our digital system, though we would expect othersto try and move into this space as sales grow for SuperVision.**Regulation**     We applied to the United States Department of Commerce, Bureau of Export Administration for anexport license for both SuperVision and NightHunter products. In response to our inquiry, thedepartment assigned an EAR classification of 99. We can export all our products without a licenseto all countries that are not on the restricted list IAW part 746 of the EAR. Xenonics isregistered with the Department of State for any restrictions under the ITAR rules. At this timethere are no restrictions on any of our products, however we have applied for a commodityjurisdiction for our weapon mounts. Until we receive the proper jurisdiction we are treating allweapon mounts as if they would require a license.**Intellectual Property**     NightHunter has eleven design and utility patents issued, allowed or pending, includingpatents for our technology platform, which applies high efficiency dimmable electronic ballastcircuitry and precision optics to xenon light. We continue to make advancements, and have recentlyfiled for an additional patent covering certain technologies that complement our NightHunterproduct technologies. In addition to the foregoing patents, we also rely on certain know-how andtrade secrets related to the design and manufacture of our products. We believe that the patents(both granted and pending) and our know-how and trade secrets provide protection to certain of ourcore technologies, and allow us to develop future products that can be scaled up or down (or todevelop alternative packages for the existing products). We are not aware of any infringement ofour patents or that we are infringing any patents owned by others.     SuperVision has one patent with 33 separate claims included in the patent. It includes theintegration of the entire systems as well as weapons mounting and future recording capability. Wethink that there are systems in the market that might be infringing on our patents and we arecurrently reviewing options with our attorneys on how we wish to proceed. We are not aware of anypatent infringement on our part.     Our “NightHunter”, “Xenonics” and “SuperVision” trademarks have been registered with theUnited States Patent and Trademark Office.**Research and Development**     We maintain a research and development program for the development andintroduction of new products and accessories and for the development of enhancements andimprovements to our existing products. In addition, we collaborate closely with certain of ourlargest customers in the design and improvement of our products to suit their respective needs. Assuch, we consider our research and development program to be an important element of our business,operations and future success.     Our research and development efforts currently are focused on (i) improving our currentproduct line, (ii) designing and developing product line extensions that employ our proprietaryillumination and electronics platforms, and (iii) designing and developing new productscomplementary to our existing products. We maintain an active research and development program atour facilities in Carlsbad, California, and as needed we retain outside consultants who can provideany necessary additional engineering or technological expertise. We also regularly work with ouroutside vendors and manufacturers to improve product performance and manufacturability, and toreduce manufacturing costs.     During the fiscal years ended September 30, 2008 and 2007, we spent $963,000 and $713,000,respectively, on research and development.
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**Employees**     As of September 30, 2008, we employed 25 persons. There are four members in our executivemanagement team, eleven persons are employed in operations, one person in engineering, five personsin sales and four persons in administrative support. We are not a party to any collectivebargaining agreements.**ITEM 2. DESCRIPTION OF PROPERTY**     Our principal operations and executive offices are located at 2236 Rutherford Road, Suite 123,Carlsbad, California 92008 and our telephone number is (760) 448-9700. The facility consists ofapproximately 9,200 square feet of leased office, warehouse and manufacturing space. The lease onthis facility expired on October 31, 2008 and the Company is now renting this facility on amonth-to-month basis, as it expects to move into new facilities in January 2009, under the terms ofa new lease that expires in 5 years and 2 months after the completion of construction improvements.These facilities are located at 3186 Lionshead Avenue, Suite 100, Carlsbad, California. This newfacility consists of approximately 13,200 square feet of leased office, warehouse and manufacturingspace.**ITEM 3. LEGAL PROCEEDINGS**     The Company received notice in February 2006 regarding a breach of contract action filed inthe Delaware Superior Court by Steven M. Mizel against Xenonics, Inc. (“Xenonics”), a 98.6% ownedsubsidiary of the Company. Plaintiff, a former holder of warrants of Xenonics, alleged that priorto the effective date of a transaction on or about July 23, 2003 between Digital Home TheatreSystems, Inc. (“DHTS”) and Xenonics, plaintiff was not allowed to exercise his warrants and thatXenonics wrongfully refused to permit him to purchase the Company’s shares at the exercise price inhis warrants for Xenonics shares. Effective December 10, 2008 the Company has agreed to repurchasethe minority interest pursuant to an Exchange Agreement between the Company and Mr. Mizel (the“Exchange Agreement”), whereby Mr. Mizel transferred to the Company 125,000 shares of common stockof Xenonics in exchange for 275,000 shares of common stock of the Company with a guaranteed marketvalue of $375,000 on December 10, 2009 (taking into account shares of common stock sold by Mr.Mizel before December 10, 2009). In connection with this exchange, Mr. Mizel dismissed withprejudice the action in the Delaware Superior Court. The Company now owns all of the issued andoutstanding capital stock of Xenonics.     We are occasionally subject to legal proceedings and claims that arise in the ordinary courseof our business. It is impossible for us to predict with any certainty the outcome of pendingdisputes, and we cannot predict whether any liability arising from pending claims and litigationwill be material in relation to our consolidated financial position or results of operations.**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**     None
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**PART II****ITEM 5. Market for Common Equity and Related Shareholder Matters and Small Business IssuerPurchases of Equity Securities**     Our common stock is currently traded under the symbol “XNN” on the NYSE Alternext US, whichwas known as the American Stock Exchange until October 1, 2008. The following table sets forth,for the periods indicated, the high and low sales prices per share of our common stock as reportedon the American Stock Exchange.         **Year ended September 30, 2008** **High** **Low**First Quarter $2.29  $1.48 Second Quarter $2.00  $1.41 Third Quarter $1.80  $1.00 Fourth Quarter $1.20  $0.72          **Year ended September 30, 2007** **High** **Low**First Quarter $4.05  $1.27 Second Quarter $3.09  $1.95 Third Quarter $3.07  $2.18 Fourth Quarter $2.58  $1.77      As of September 30, 2008, there were 20,184,000 common shares outstanding and approximately 59shareholders of record, not including holders who hold their stock in “street name”.**Dividends**     The Company has never paid any cash dividends on its common stock. The Company currentlyanticipates that it will retain all future earnings for use in its business. Consequently, it doesnot anticipate paying any cash dividends in the foreseeable future. The payment of dividends in thefuture will depend upon our results of operations, as well as our short-term and long-term cashavailability, working capital, working capital needs and other factors, as determined by our Boardof Directors. Currently, except as may be provided by applicable laws, there are no contractual orother restrictions on our ability to pay dividends if we were to decide to declare and pay them.**Repurchase of Securities**     We did not repurchase any shares of our common stock during the year ended September 30, 2008.**Recent Sales of Unregistered Securities**- Not applicable**Equity Compensation Plan Information**     The following table summarizes as of September 30, 2008, the number of securities to be issuedupon the exercise of outstanding derivative securities (options, warrants and rights); theweighted-average exercise price of the outstanding derivative securities; and the number ofsecurities remaining available for future issuance under our equity compensation plans.                        **Number of securities**     **Number of securities**  **to be issued upon** **Weighted-average** **remaining available for**  **exercise of** **exercise price of** **future issuance under**  **outstanding options,** **outstanding options,** **equity compensation plans****Plan Category** **warrants and rights** **warrants and rights** **(excluding column (a))**  **(a)** **(b)** **(c)**Equity compensation plans approved by security holders  1,443,000  $2.77   908,000 Equity compensation plans not approved by securityholders  500,000  $1.60   —    Totals  1,943,000  $2.47   908,000    
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     The equity compensation plans approved by the security holders are the 2003 Stock Option Planof Xenonics Holdings, Inc and the 2004 Stock Incentive Plan of Xenonics Holdings, Inc. Except asdescribed in the following paragraph, the Company has not adopted without the approval of securityholders any equity compensation plan under which securities of the issuer are authorized forissuance.     On September 5, 2006, the Company and a consultant entered into an agreement pursuant to whichthe consultant will provide consulting services relating to financial public relations enhancingthe Company’s visibility in the financial community and introducing the Company and its products topossible merger candidates, financial institutions and other members of the investment community;and assisting Company personnel in preparing presentation materials in connection with meetings andconferences involving the investment community. As part of this agreement the Company issued to theconsultant a five year Warrant, vested upon issuance to purchase 500,000 shares of the Company’scommon stock at $1.60 per share (which exceeded the fair market value of the common stock as ofAugust 31, 2006, the day before an oral agreement was made).**ITEM 6. Management’s Discussion and Analysis or Plan of Operation****Forward-Looking Statements**     The following Management’s Discussion and Analysis or Plan of Operation, as well asinformation contained elsewhere in this report, contain statements that constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of theSecurities Exchange Act of 1934. These statements include statements regarding the intent, beliefor current expectations of management, our directors or our officers with respect to, among otherthings: anticipated financial or operating results, financial projections, business prospects,future product performance and other matters that are not historical facts. The success of ourbusiness operations is dependent on factors such as the impact of competitive products, productdevelopment, commercialization and technology difficulties, the results of financing efforts andthe effectiveness of our marketing strategies, general competitive and economic conditions.Forward-looking statements are not guarantees of future performance and involve risks anduncertainties. Actual results may differ materially from those projected in the forward-lookingstatements as a result of various factors, including those described under “Risk Factors” below.**Overview**     We design, manufacture and market high-end, high-intensity portable illumination products andlow light viewing systems (night vision). Our core product line consists of lightweight,long-range, ultra-high intensity illumination products used in a wide variety of applications bythe military, law enforcement, security, search and rescue and, to a lesser extent, in commercialmarkets. The Night Vision system is used across the entire spectrum from commercial to themilitary. We hold several patents for our technology platform, which applies high efficiencydimmable electronic ballast circuitry and precision optics to xenon light to produce anillumination device that delivers improved performance over current technologies, and additionalpatents to the integration of the night vision system.     We are largely dependent upon government orders for our revenues. While the night visionproducts will expand our sales into the commercial market, the government market, particularly lawenforcement, will continue to be a large part of the night vision sales. Existing customers includeall branches of the United States Armed Forces and federal law enforcement. Starting late in FY2007 sales expanded into the commercial and international markets     We market our illumination products under the NightHunter brand name and Night Vision underthe SuperVision brand. The NightHunter series of products is produced in a variety ofconfigurations to suit specific customer needs. These include compact hand-held systems forfoot-borne personnel and stabilized systems for airborne, vehicular and shipboard use. TheseNightHunter illumination systems are used for reconnaissance, surveillance, search and rescue,physical security, target identification and navigation. The systems allow the user to illuminatean area, an object or a target with visible or non-visible light, and to improve visibility throughmany types of obscurants such as smoke, haze and most types of fog.     The SuperVision product was launched in June 2007 and brings a new category to night visionusing a high resolution HDTV display with an ultra-sensitive IR/visible sensor and a proprietaryDigital Signal Processor. This all digital format brings capabilities comparable to high endmilitary analog systems at less than half the price. In addition the digital format allows for zoomcapability. The price and capability opens the market to law enforcement and the general consumer,whether in the maritime environment, hunting, camping, security, or any other activity done in alow light situation.
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     We conduct all of our operations through our subsidiary, Xenonics, Inc. On July 23, 2003,Digital Home Theater Systems, Inc. acquired in a reorganization all of the issued and outstandingshares of Xenonics, Inc.’s common stock in exchange for 8,750,000 shares of our common stock, andwe changed our name from Digital Home Theater Systems, Inc. to Xenonics Holdings, Inc. Thetransaction was accounted for as a reorganization of Xenonics, Inc. with the issuance of stock forcash. For accounting purposes, Xenonics, Inc. was treated as the acquirer and, as such, itshistorical financial statements will continue and are incorporated by reference into this annualreport.     In addition, we exchanged all of the then-outstanding options to purchase stock in Xenonics,Inc. for options to purchase our stock (at the same price then in effect, but with differentterms), and exchanged 94% of the warrants to purchase stock in Xenonics, Inc. (warrants to purchase135,000 shares of Xenonics, Inc. common stock remained outstanding), for warrants to purchase ourstock (with modified terms and a higher exercise price). On December 14, 2004, the holder of theremaining warrants to purchase shares of Xenonics, Inc. partially exercised his warrants andpurchased 125,000 shares of Xenonics, Inc. Pursuant to an Exchange Agreement entered into onDecember 3, 2008, we acquired these 125,000 shares so that Xenonics, Inc. is now our wholly-ownedsubsidiary. The one remaining warrant for 10,000 shares of Xenonics, Inc. was not exercised andexpired on October 24, 2006.**How We Generate Revenue**     We generate most of our revenue from the direct sale of our products to customers. To date,most of our sales have been to the United States military. In the past we have depended upon topdown funding through Congress matched with communication directly to end users to drive the demand.     Starting late in our fiscal year ended September 30, 2007 we significantly increased our salesand marketing program. We hired a new Vice President of Sales and Marketing, who has experienceacross all of the SuperVision and NightHunter markets. He has been making additions to his staff tohave a professional inside and outside sales team. He has also reevaluated our independentrepresentative group.     We have also increased our presence at key tradeshows, began focusing on the internationalmarket place and maintained our Congressional contacts either through our lobbyist or directly byour officers and directors. In addition, we hired a professional advertising agency with a primaryfocus on SuperVision. They will also work on the NightHunter 3 program.     SuperVision was specifically introduced to three key market segments during our fiscal yearended September 30, 2007. Our initial targeted markets are law enforcement, hunting andinternational. Advertising, tradeshow, independent representative groups, and dedicated salespersonnel are focused on these markets. The number of markets will be expanded next year.     We currently have eight persons engaged on a full-time basis in sales and marketing. Inaddition, our senior executives actively assist in our marketing efforts by initiating andmaintaining customer relationships and interacting with external consultants who assist us withour marketing activities.     In the future, we may consider partnering with others to generate additional sales thoughdistributorships and/or licenses and may utilize such models to expand our sales capabilities incertain domestic and international markets.**Trends in Our Business**     The Company had revenue levels sufficient to generate net income in only one of the last fouryears. In the last three years revenue levels did not maintain traction. In order to improve ourrevenue levels, we are focusing on improving our current products, introducing new products,expanding our customer base and restructuring the sales and marketing approach and team. Welaunched SuperVision in fiscal year 2007 and are in the early stages of launching NightHunter 3. Wehave expanded our distribution channels that will best help us to reach a goal of an expandedcustomer base. In addition to an ongoing effort to improve revenue levels, we continually look tolower costs wherever possible to improve our operating margin.     Our current challenge is to supplement government sales with commercial sales of both ourcurrent products and new products. Risks include new competitors entering the market, decreases ingovernment budgets (particularly the defense budget) and our previous inability to penetrate othermarkets.
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**Critical Accounting Policies and Estimates**     The preparation of financial statements and related disclosures in conformity with accountingprinciples generally accepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the date of the financial statements and revenues and expensesduring the period reported. The following accounting policies involve a “critical accountingestimate” because they are particularly dependent on estimates and assumptions made by managementabout matters that are highly uncertain at the time the accounting estimates are made. In addition,while we have used our best estimates based on facts and circumstances available to us at the time,different estimates reasonably could have been used in the current period, and changes in theaccounting estimates we used are reasonably likely to occur from period to period which may have amaterial impact on the presentation of our financial condition and results of operations. We reviewthese estimates and assumptions periodically and reflect the effects of revisions in the periodthat they are determined to be necessary and reviewed by the audit committee.     ***Revenue Recognition and Accounts Receivable***— The Company recognizes revenue net of discountsupon shipment and transfer of title and when it has evidence that arrangements exist and the priceto the buyer is fixed through signed contracts or purchase orders. Collectibility is reasonablyassured through one or more of the following: government purchase, historical payment practices orreview of new customer credit. Customers do not have the right to return product unless it isdamaged or defective.     ***Allowancefor Doubtful Accounts***— Credit evaluations are undertaken for all major salestransactions before shipment is authorized. Normal terms require payment on a net 30 or 60-daybasis depending on the customer. On an ongoing basis, we analyze the payment history of customeraccounts, including recent purchases. We evaluate aged items in accounts receivable and providereserves for doubtful accounts. Customer creditworthiness and economic conditions may change,including increased risk of collectibility and sales returns, and may require additionalprovisions, which could negatively impact our operating results.     ***Investmentsin Marketable Securities***— The Company accounts for its investments in accordancewith Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for CertainInvestments in Debt and Equity Securities.” This statement requires investment securities to beclassified as held to maturity, available for sale, or trading securities. Investments classifiedas trading and available for sale are valued at their fair value, while investment securitiesclassified as held to maturity are valued at amortized cost. Securities classified as availablefor 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 decreasesin comprehensive income, net of related deferred tax effect.     As of September 30, 2008 the Company has invested in four $250,000 bonds which are AuctionRate Securities, all of which are securities collateralized by student loan portfolios guaranteedby the United States government. These bonds each have interest rates that are reset every 28 daysat auction or at a stated interest rate should the bonds fail the auction process. Due to eventsin credit markets, the auction rate securities held by the Company have experienced failed auctionsduring 2008. As such, quoted prices in active markets are not readily available at this time. TheCompany’s investment advisory firm as well as the original marketing bank (UBS) have contractuallycommitted to repurchasing the bonds, at par value, no later than June 2010. Due to theseliquidity issues, the Company performed a discounted cash flow analysis to determine the estimatedfair value of these investments and classified the investments as long term assets. The discountedcash flow analysis performed by the Company considered the timing of expected future payments, andthe creditworthiness of the issuer and guarantor, as well as commitments to repurchase thesecurities. In accordance with FSP FAS 115-1 and SAB Topic 5M, the Company considered the followingfactors in determining whether any impairment of its Auction Rate Securities wasother-than-temporary or temporary: (i) the nature of the investment; (ii) the cause and duration ofthe impairment; (iii) the financial condition and near-term prospects of the Company; (iv) theability to hold the security for a period of time sufficient to allow for any anticipated recoveryin fair value; and (v) the extent to which fair value was less than cost. As of September 30, 2008the Company reclassified these securities from current *Investments in marketable securities*tolong-term *Investments in marketable securities*on our Consolidated Balance Sheet as a result of thelack of liquidity due to current market conditions.     Additionally, as of September 30, 2008 the Company has established a non-recourse bank line ofcredit for 100% of the principal balances of the auction rate securities, using these bonds as thesole collateral for the line. As of September 30, 2008 the Company had no borrowings under thisline of credit. However, in October 2008, to ensure the 100% liquidity available at par value underthe terms of the bank line of credit, the Company borrowed the entire $1,000,000, which does notrequire any principal payments and the interest rate charged is limited to the interest earned onthe collateral bonds. The proceeds of the loan are now invested in certificates of deposit andmoney market accounts at various banks.
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     ***Tax Valuation Allowance***— A tax valuation allowance is established, as needed, to reduce netdeferred tax assets to the amount for which recovery is probable. We have established a fullvaluation allowance against our U.S. net deferred tax assets because of our history of losses. Inthe event it becomes more likely than not that some or all of the deferred tax assets will berealized, we will adjust our valuation allowance. Depending on the amount and timing of taxableincome we ultimately generate in the future, as well as other factors, we could recognize nobenefit from our deferred tax assets, in accordance with our current estimate, or we couldrecognize a portion of or their full value.     ***Inventory Valuation***— Inventories are stated at the lower of cost or market. Cost is computedusing weighted average cost, which approximates actual cost, on a first-in, first-out basis. The Companymay also provide inventory allowances based on excess and obsolete inventories determined primarilyby future demand forecasts.     A physical inventory is completed on a monthly basis, and adjustments are made based on suchinventories. If it is determined that our estimates of the valuation of inventories are incorrect,we may need to establish reserves, which would negatively affect any future earnings.**Results of Operations****Year ended September 30, 2008 compared to September 30, 2007**          We operate in the security lighting systems and night vision industries. Until we beganshipping our new SuperVision products in the year ended September 30, 2007, the majority of ourrevenues were derived from sales of our illumination products to various customers, primarily themilitary.          ***Revenues:***Revenues for the year ended September 30, 2008 were $10,168,000 compared torevenues of $4,984,000 for the year ended September 30, 2007. In the year ended September 30,2008, we sold $9,153,000 or 90% of our NightHunter products to the US Government, which includesboth direct sales to the military (U.S. Army and U.S. Marines) as well as military resellers. Thiscompares to $3,991,000 or 79% of revenue to the military market (U.S. Army, U.S. Marines andmilitary resellers) in 2007. Shipments to commercial customers of our new SuperVision productaccounted for 9% of revenues for the current year.          ***Cost of Goods and Gross Profit:***Cost of goods consist of our cost of manufacturing ourNightHunter and SuperVision products and the price that we pay to PerkinElmer for NightHunter IIand NightHunter 3 products that PerkinElmer manufactures for us under our manufacturing agreement.          The gross profit percentage on revenue was 44% and 53% for the years ended September 30, 2008and 2007, respectively. The gross profit percentage for 2007 was positively impacted by sales ofthe NightHunter II product from inventory that was identified as excess inventory during the fiscalyear ended September 30, 2005. The 2007 reduction of the excess inventory reserve related to thesales of the NightHunter II product was $1,156,000, which positively impacted the gross profitpercentage in 2007 by 23%. As of June 30, 2007, the entire excess inventory of the NightHunter IIproducts had been shipped to customers.          ***Selling, General and Administrative:***Selling, general and administrative expenses decreased by$1,081,000 to $4,926,000 for the year ended September 30, 2008 as compared to $6,007,000 for theyear ended September 30, 2007. The decrease is primarily attributed to lower non-cash compensationexpenses for stock options and warrants of $887,000, legal expenses of $313,000 and salaries andtemporary labor of $188,000, offset by higher trade show and demonstration unit expenses of$278,000.          ***Research & Development:***Research and development expenses increased by $250,000 for the yearended September 30, 2008 compared to the prior year. The increase is attributed to spending for thedevelopment of new products, including our new NightHunter 3 ultra high intensity illuminationsystem. Research and development spending levels are expected to continue to increase in thefuture as we develop new products and make improvements to our existing products.          ***Other Income / Expense:***For the year ended September 30, 2008, interest income was $60,000compared to $71,000 in the prior year.          ***Provision for Income Taxes:***For the years ended September 30, 2008 and 2007, the provision forincome tax was $2,000, which represent the minimum annual payments for state taxes.
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          ***Net Loss:***Significantly higher sales and lower selling, general and administrative expenses inthe current year accounted for the lower net loss of $1,391,000 when compared to a net loss of$4,034,000 for the prior year.**Year ended September 30, 2007 compared to September 30, 2006**          ***Revenues:***Revenues for the year ended September 30, 2007 were $4,984,000 compared to revenuesof $4,833,000 for the year ended September 30, 2006. In the year ended September 30, 2007, we sold$3,991,000 or 79% of our products to the US Government, which includes both direct sales to themilitary (U.S. Army and U.S. Marines) as well as military resellers. This compares to $4,619,000 or96% of revenue to the military market (U.S. Army, U.S. Marines and military resellers) in 2006.Initial shipments to commercial customers of our new SuperVision product began in the third quarterand accounted for 15% of revenues for the current year. International sales for the current yearrepresented approximately 3% of revenues.          ***Cost of Goods and Gross Profit:***Cost of goods consist of our cost of manufacturing ourNightHunter and SuperVision products and the price that we pay to PerkinElmer for NightHunter IIproducts that PerkinElmer manufactures for us under our manufacturing agreement.          The gross profit percentage on revenue was 53% and 58% for the years ended September 30, 2007and 2006, respectively. The gross profit percentage for both periods was positively impacted bysales of the NightHunter II product from inventory that was identified as excess inventory duringthe fiscal year ended September 30, 2005. The 2007 reduction of the excess inventory reserverelated to the sale of the NightHunter II product was $1,156,000, which positively impacted thegross profit percentage for the current year by 23%. As of June 30, 2007, the entire excessinventory of the NightHunter II products had been shipped to customers.          ***Selling, General and Administrative:***Selling, general and administrative expenses increased by$2,293,000 to $6,007,000 for the year ended September 30, 2007. The increase in expenses consistedof compensation and benefit costs of $634,000, primarily related to increased headcount for theSuperVision product, $823,000 in SuperVision advertising, trade show and other selling expenses,and $247,000 for legal expenses, with the remainder of the change attributable to increasedcorporate compliance costs.          ***Research& Development:***Research and development expenses increasedby $138,000 for the year ended September 30, 2007 compared to the prior year. The increase wasprimarily related to higher legal expenses for patents of $101,000 and higher compensation andconsulting expenses. Research and development spending levels are expected to continueto increase in the future as we develop new products and make improvements to our existingproducts.          ***Other Income / Expense:***For the year ended September 30, 2007, interest income was $71,000compared to $26,000 in the prior year. In the 2006 year, interest income was offset by $7,000 ofinterest expense.          ***Provision for Income Taxes:***For the years ended September 30, 2007 and 2006, the provision forincome tax was $2,000, which represent the minimum annual payments for state taxes.          ***Net Loss:***We incurred a net loss of $4,034,000 for the year ended September 30, 2007 comparedto a net loss of $1,488,000 for the year ended September 30, 2006. The current year was impactedby the initial roll-out costs of our new SuperVision product, including advertising and otherpromotional selling expenses needed to introduce the product and $1,128,000 of non-cash chargesrelated to stock options and warrants.**Liquidity and Capital Resources**     The accompanying financial statements have been prepared assuming that we will continue as agoing concern. As reflected in the accompanying financial statements, we have incurred losses forthe years ended September 30, 2008 and 2007 and have an accumulated deficit. Our continuedexistence is dependent on our ability to obtain orders for our products and/or additional equityand/or debt financing to support planned operations and satisfy obligations. There is no assurancethat we will be able to obtain enough orders for our products or additional financing to supportour current operations. The financial statements do not include any adjustments relating to therecoverability or classification of recorded asset amounts or the amount and classification ofliabilities that might be necessary as a result of this going-concern uncertainty.
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     As of September 30, 2008, the Company had working capital of $2,593,000 and a current ratio of4.2 to 1 as compared to working capital of $4,527,000 and a current ratio of 4.9 to 1 as ofSeptember 30, 2007. Cash on hand at the end of the year decreased by $2,063,000 from the amount ofcash on hand as of September 30, 2007.     Historically, we invested substantial resources in the development of our products and in theestablishment of our business, which negatively impacted our cost structure and created anaccumulated deficit of $19,704,000 as of September 30, 2008. Financing activities for the yearended September 30, 2008 included the proceeds of $162,000 from the exercises of stock options andwarrants to purchase 344,000 shares of common stock. Investing activities included purchases of$1,000,000 of marketable securities. As of September 30, 2008 the Company has invested in four$250,000 bonds which are Auction Rate Securities, all of which are securities collateralized bystudent loan portfolios guaranteed by the United States government. These bonds each have interestrates that are reset every 28 days at auction or at a stated interest rate should the bonds failthe auction process. Due to events in credit markets, the auction rate securities held by theCompany have experienced failed auctions during 2008. As such, quoted prices in active markets arenot readily available at this time. The Company’s investment advisory firm as well as the originalmarketing bank (UBS) have contractually committed to repurchasing the bonds, at par value, no laterthan June 2010. Due to these liquidity issues, the Company performed a discounted cash flowanalysis to determine the estimated fair value of these investments and classified the investmentsas long term assets. The discounted cash flow analysis performed by the Company considered thetiming of expected future payments, and the creditworthiness of the issuer and guarantor, as wellas commitments to repurchase the securities. In accordance with FSP FAS 115-1 and SAB Topic 5M, theCompany considered the following factors in determining whether any impairment of its Auction RateSecurities was other-than-temporary or temporary: (i) the nature of the investment; (ii) the causeand duration of the impairment; (iii) the financial condition and near-term prospects of theCompany; (iv) the ability to hold the security for a period of time sufficient to allow for anyanticipated recovery in fair value; and (v) the extent to which fair value was less than cost. Asof September 30, 2008 the Company reclassified these securities from current *Investments inmarketable securities*to long-term *Investments in marketable securities*on our Consolidated BalanceSheet as a result of the lack of liquidity due to current market conditions.     Additionally, as of September 30, 2008 the Company has established a non-recourse bank line ofcredit for 100% of the principal balances, using these bonds as the sole collateral for the line.As of September 30, 2008 the Company had no borrowings under this line of credit. However, inOctober 2008, to ensure the 100% liquidity available at par value under the terms of the bank lineof credit, the Company borrowed the entire $1,000,000, which does not require any principalpayments and the interest rate charged is limited to the interest earned on the collateral bonds.The proceeds of the loan are now invested in certificates of deposit and money market accounts atvarious banks.     While we significantly increased our sales and decreased our SG&A spending during the yearended September 30, 2008, we sustained a net loss. Our net loss of $1,391,000 for the year endedSeptember 30, 2008 negatively impacted our cash balance. During the year we used $1,225,000 of cashfor operations. An increase in accounts receivable of $588,000 was offset by a decrease ininventories of $890,000, non-cash stock option compensation of $239,000 and non-cash compensationof $2,000 for the granting of warrants for services.     During the current year we did not make any expenditures for equipment, furniture or fixturesand we did not have any material commitments for capital expenditures as of September 30, 2008.Currently we do not anticipate any material expenditures during the fiscal year ending September30, 2009.     We do not believe that inflation has had a material impact on our business or operations.     We are not a party to any off-balance sheet arrangements and do not engage in tradingactivities involving non-exchange traded contracts. In addition, we have no financial guarantees,debt or lease agreements or other arrangements that could trigger a requirement for an earlypayment or that could change the value of our assets.     Based on the amount of working capital that we had on hand on September 30, 2008 and theamount of unfilled orders we have pending, we are dependent on our ability to obtain sales ordersand/or additional equity or debt financing to continue to support planned operations and satisfyobligations. Our marketing activity has been intensified and management remains optimistic aboutour growth opportunity. However, due to the nature of our business, there is no assurance that wewill receive new orders during the quarters that we expect them and although management believes itcan obtain additional financing, there is no certainty that it can.
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**RISK FACTORS**     **An investment in our common stock is subject to a high degree of risk. The risks describedbelow should be carefully considered, as well as the other information contained in this annualreport and in the documents incorporated herein by reference. If any of the following risksactually occurs, our business, financial condition, results of operations and business prospectscould be materially and adversely affected. In such event, the trading price of our common stockwould likely decline.****Risks Related to Our Business****We have a limited operating history, which makes it difficult for investors to evaluate ourbusiness prospects.**     We have been engaged in selling high intensity illumination products only since March 2003. Weonly started selling night vision products in the third quarter of the fiscal year ended September30, 2007. As a result, we have a very limited operating history for investors to consider inevaluating an investment in our common stock.**Fluctuations in our quarterly and annual operating results make it difficult to assure futurepositive cash flows from operations.**     For the most recent fiscal year ended September 30, 2008, we posted a net loss of $1,391,000on revenue of $10,168,000, compared to a net loss of $4,034,000 on revenues of $4,984,000 for theyear ended September 30, 2007. For the year ended September 30, 2006, we had a net loss of$1,488,000 on revenues of $4,833,000. For the year ended September 30, 2005, we had a net loss of$5,310,000 on revenues of $4,434,000. For the year ended September 30, 2004, we recorded netincome of $1,476,000 on revenues of $11,927,000. Since our revenues are primarily dependent uponthe receipt of large orders from the military and other governmental organizations, which ordersare sporadic and unpredictable, our revenues fluctuate significantly from quarter to quarter andfrom year to year. No assurance can be given that we will generate sales at any specific levels orthat any additional sales that may be generated will result in the profitability or viability ofour Company.**The loss of contracts with U.S. government agencies would adversely affect our revenue.**     To date, substantially all of our sales have been derived from sales to military and securityorganizations, such as the U.S. military, and various other governmental law enforcement agencies.While we believe that we will continue to be successful in marketing our products to theseentities, there are certain considerations and limitations inherent in sales to governmental ormunicipal entities such as budgetary constraints, timing of procurement, political considerations,and listing requirements that are beyond our control and could affect our future sales. There is noassurance that we will be able to achieve our targeted sales objectives to these governmental andmunicipal entities or that we will continue to generate any material sales to these entities in thefuture.**Potential customers may prefer our competitors’ technology and products.**     The ultra-high intensity lighting industry, in which we operate, is characterized by matureproducts and established industry participants. We compete with other providers of specializedlights in the United States and abroad who have created or are developing technologies and productsthat are similar to the products we are selling to many of the same purchasers in our targetedmarkets. Although we believe that our competitors do not offer products as advanced as ours,competition from these companies is intense. Because we are currently a small company with alimited marketing budget, our ability to compete effectively will depend on the benefits of ourtechnology and on our patents. There is no assurance that potential customers will select ourtechnology over that of a competitor, or that a competitor will not market a competing technologywith operating characteristics similar to those owned by us.     Our products could be rendered obsolete or uneconomical by the introduction and marketacceptance of competing products, technological advances by current or potential competitors, orother approaches. If such a development were to occur, we might be required to reduce our prices inorder to remain competitive and these lower prices could affect our profitability. We compete onthe basis of a number of factors in areas in which we have limited experience, including marketingto the military and governmental agencies, and customer service and support. There is no assurancethat we will be able to compete successfully against current or future competitors.
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**Because we have a small and new marketing and sales team, we may be unable to compete successfullyagainst other companies that have a history and track record in the high-intensity lighting andnight vision marketplaces.**     We have a small and new marketing and sales team. We currently have eight persons engaged ona full-time basis in marketing and sales. Although our officers have experience in the operationsand management of various businesses and have experience in the high intensity lighting field, theyhave limited experience in the management of a company engaged in the high volume sale ofhigh-intensity lighting and night vision. In addition, while we have had success in marketing tocertain branches of the U.S. military and to certain other U.S.governmental agencies, we are newto marketing our products to a wider market. There can be no assurance that our current marketingand sales capabilities will enable us to compete successfully against competitors that have ahistory and track record in the high-intensity lighting and night vision marketplaces. If we do notmaintain an effective marketing and sales organization, our business will be adversely affected.**The loss of any of our key personnel could adversely affect our business.**     We depend on the efforts of our senior management, particularly Alan P. Magerman, our Chairmanof the Board, Charles W. Hunter, our Chief Executive Officer, andJeffrey P. Kennedy, our ChiefOperating Officer and President. The loss of the services of one or more of these individuals coulddelay or prevent us from achieving our objectives.**The interests of our current shareholders will be diluted if we seek additional equity financing inthe future, and any debt financing that we seek in the future will expose us to the risk of defaultand insolvency.**     We are dependent on our ability to obtain sales orders and/or additional equity or debtfinancing to continue to support planned operations and satisfy obligations. The Company’smarketing activity has been intensified and management remains optimistic about our growthopportunity. However, due to the nature of our business, there is no assurance that we will receivenew orders during the quarters that we expect them. Although management believes it can obtainadditional financing, there is no certainty that it can. Any equity financing may involve dilutionof the interests of our current shareholders, and any debt financing would subject us to the risksassociated with leverage, including the possible risk of default and insolvency**.****We are subject to government regulation which may require us to obtain additional licenses andcould limit our ability to sell our products outside the United States.**     The sale of certain of our products outside the United States is subject to compliance withthe United States Export Administration Regulations and potentially *International Traffic in ArmsRegulations*(*ITAR*). Compliance with government regulations may also subject us to additional feesand costs. The absence of comparable restrictions on competitors in other countries may adverselyaffect our competitive position. The need to obtain licenses could limit or impede our ability toship to certain foreign markets. Although we currently hold the requisite export licenses requiredunder current requirements, future laws and regulations cannot be anticipated that could impact ourability to generate revenues from the sale of our products outside the United States, which couldhave a material adverse effect on our business, financial condition and results of operations.**We may experience production delays if suppliers fail to deliver materials to us, which couldreduce our revenue.**     The manufacturing process for our products consists primarily of the assembly of purchasedcomponents. Although we can obtain materials and purchase components from different suppliers, werely on certain suppliers for our components. If a supplier should cease to deliver suchcomponents, this could result in added cost and manufacturing delays and have an adverse effect onour business.**Our operations involve evolving products and technological change, which could make our productsobsolete.**     Ultra-high intensity portable illumination products are continuously evolving and subject totechnological change. Our ability to maintain a competitive advantage and build our businessrequires us to consistently invest in research and development. Many of the companies thatcurrently compete in the portable illumination market, or that may in the future compete with us inour market, may have greater capital resources, research and development staffs, facilities andfield trial experience than we do. Our products could be rendered obsolete by the introduction andmarket acceptance of competing products, technological advances by current or potentialcompetitors, or other approaches.
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**We may not have adequate protection of our intellectual property, which could result in a reductionin our revenue if our competitors are able to use our intellectual property.**     We own the rights to eleven patents, including 4 design patents and five patent pendingapplications relating to the design and configuration of our xenon illumination technology anddigital lowlight viewing. There is no assurance, however, that our patents will provide competitiveadvantages for our products or that our patents will not be successfully challenged or circumventedby our competitors. No assurance can be given that our pending patent applications will ultimatelybe issued or provide patent protection for improvements to our base technology. While we believethat our patent rights are valid, we cannot be sure that our products or technologies do notinfringe on other patents or intellectual property or proprietary rights of third parties. In theevent that any relevant claims of third-party patents are upheld as valid and enforceable, we couldbe prevented from selling our products or could be required to obtain licenses from the owners ofsuch patents or to redesign our products to avoid infringement. In addition, many of the processesof our products that we deem significant are not protected by patents or pending patentapplications.     We regard portions of the designs and technologies incorporated into our products asproprietary, and we attempt to protect them with a combination of patent, trademark and tradesecret laws, employee and third-party nondisclosure agreements and similar means. Despite theseprecautions, it may be possible for unauthorized third parties to copy certain portions of ourproducts or to otherwise obtain and use to our detriment information that we regard as proprietary.There is no assurance that the agreements we have entered into with employees or third parties tomaintain the confidentiality of our confidential or proprietary information will effectivelyprevent disclosure of our confidential information or provide meaningful protection for ourproprietary information or that our confidential or proprietary information will not beindependently used by our competitors.**Because we currently only have a single line of products, any delay in our ability to market, sellor ship these existing products would adversely affect our revenue.**     To date, all of our revenues have been generated from the sales of our three NightHunterillumination system products (the NightHunter One, NightHunter II and NightHunter ext), relatedaccessories and SuperVision. In addition to the NightHunter models and SuperVision, we have startedmarketing the new NightHunter 3 and have done early stage marketing on tactical illumination. Theprofitability and viability of our Company is dependent upon our continued ability to sell,manufacture and ship our illumination products and SuperVision, and any delay or interruption inour ability to market, sell, or ship our NightHunter illumination systems or SuperVision andrelated accessories will have a material adverse affect on our business and financial condition.     Further, our future growth and profitability will depend on our ability to both successfullyexpand NightHunter, SuperVision and other products. While our goal is to develop and commercializea line of ultra-high intensity illumination systems, and digital low-light viewing devices, newproducts will require substantial expenditures of money for development and advertising. There isno guarantee that the market will accept these new products. If we are unable to develop andrelease other products, the future of our Company will depend on the commercial success of ourexisting NightHunter products and SuperVision.**Because we depend on a single manufacturer to make our NightHunter II and NightHunter 3 products,any failure by the manufacturer to honor its obligations to us will impair our ability to deliverour products to customers.**     In January 2003, we entered into a three-year manufacturing agreement with PerkinElmer, aglobal provider of products and services to, among others, the optoelectronics industries, for themanufacture of NightHunter II products. In the absence of termination notification by either party,the agreement will automatically renew for a twelve**-**month term. In 2008 we extended this agreementto include NightHunter 3.     Under this agreement, PerkinElmer is the sole and exclusive manufacturer of the NightHunter IIand NightHunter 3 products, and we are not permitted to engage any other manufacturer. In additionPerkinElmer is responsible for testing, packaging and maintaining product inventories. Accordingly,we are dependent upon PerkinElmer for the manufacture and delivery of our new NightHunter 3product. To date, as a small company with limited resources, our arrangement with PerkinElmer hasprovided us with the manufacturing, packaging and shipping expertise normally only available tolarger firms. However, should PerkinElmer for any reason in the future be unable or unwilling tofully live up to its obligations under our manufacturing agreement, we would lose the ability tomanufacture and deliver our principal product until PerkinElmer recommences manufacturing, or untilwe obtain an alternate manufacturer. While we believe that we could replace PerkinElmer in such anevent, any such event would adversely affect our operations and financial results during the periodin which we transitioned to another manufacturer.
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**Risks Related to Our Common Stock****You may be unable to sell your shares at an adequate price or at all**.     There is no assurance as to the depth or liquidity of any market for the common stock or theprices at which holders may be able to sell the shares. As a consequence, there may be periods ofseveral days or more when trading activity in our shares is minimal or non-existent, as compared toa seasoned issuer which has a large and steady volume of trading activity that will generallysupport continuous sales without an adverse effect on share price. Due to these conditions, thereis no assurance that shareholders will be able to sell their shares at or near ask prices or atall.**If securities or industry analysts do not publish research reports about our business or if theydowngrade our stock, the price of our common stock could decline.**     Small, relatively unknown companies can achieve visibility in the trading market throughresearch and reports that industry or securities analysts publish. The lack of published reports byindependent securities analysts could limit the interest in our common stock and negatively affectour stock price. We do not have any control over the research and reports these analysts publish orwhether they will be published at all. If any analyst who does cover us downgrades our stock, ourstock price would likely decline. If any analyst ceases coverage of our Company or fails toregularly publish reports on us, we could lose visibility in the financial markets, which in turncould cause our stock price to decline.**Anti-takeover provisions in our articles of incorporation could adversely affect the value of ourcommon stock.**     Our articles of incorporation contain certain provisions that could impede a non-negotiatedchange in control. In particular, without shareholder approval we can issue up to 5,000,000 sharesof preferred stock with rights and preferences determined by the board of directors. Theseprovisions could make a hostile takeover or other non-negotiated change in control difficult,through which takeover or change of control could be at a premium to the then-current stock price.**The future issuance of additional common and preferred stock could dilute existing shareholders.**     We are currently authorized to issue up to 50,000,000 shares of common stock. To the extentthat common shares are available for issuance, our board of directors has the ability, withoutseeking shareholder approval, to issue additional shares of common stock in the future for suchconsideration as the board of directors may consider sufficient. The issuance of additional commonstock in the future will reduce the proportionate ownership and voting power of the common stockheld by our existing shareholders.     We are also authorized to issue up to 5,000,000 shares of preferred stock, the rights andpreferences of which may be designated in series by the board of directors. Such designation of newseries of preferred stock may be made without shareholder approval and could create additionalsecurities which would have dividend and liquidation preferences over our common stock. Preferredshareholders could adversely affect the rights of holders of common stock by: — exercising voting, redemption and conversion rights to the detriment of the holders of common stock;  — receiving preferences over the holders of common stock or surplus funds in the event of our dissolution or liquidation;  — delaying, deferring or preventing a change in control of our company; and  — discouraging bids for our common stock.**We do not plan to pay any cash dividends on our common stock.**     We do not plan to pay any cash dividends on our common stock in the foreseeable future. Anydecision to pay dividends is within the discretion of the board of directors and will depend uponour profitability at the time, cash available and other factors. As a result, there is no assurancethat there will ever be any cash dividends or other distributions on our common stock.
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**The exercise of outstanding stock options and warrants would dilute the ownership interests of ourexisting shareholders.**     There are currently outstanding stock options and warrants entitling the holders to purchase4,956,000 shares of our common stock, including a number of options granted to directors, officers,employees and consultants that are subject to vesting conditions. These options and warrants haveexercise prices ranging from $0.875 per share to $8.00 per share. It is likely that many of theholders of these options and warrants will exercise and sell shares of our common stock when thestock price exceeds their exercise price. Substantial option and warrant exercises and subsequentstock sales by our option and warrantholders would significantly dilute the ownership interests ofour existing shareholders.**Future sales of common stock by our existing shareholders and option and warrantholders could causeour stock price to decline.**     The release into the public market of a large number of freely tradable shares and restrictedsecurities that are now eligible or subsequently become eligible for public resale under Rule 144could cause the market price of our common stock to decline. The perception among investors thatthese sales may occur could produce the same adverse effect on our market price.
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**ITEM 7. FINANCIAL STATEMENTS****INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE****XENONICS HOLDINGS, INC.**     Report of Independent Registered Public Accounting Firm  F-2      Consolidated Financial Statements:    Balance Sheet as of September 30, 2008  F-3 Statements of Operations for the years ended September 30, 2008 and 2007  F-4 Statements of Shareholders’ Equity for the years ended September 30, 2008 and 2007  F-5 Statements of Cash Flows for the years ended September 30, 2008 and 2007  F-6 Notes to Consolidated Financial Statements  F-7 
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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**Board of Directors and Shareholders