xchange_10q-093008.htm

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

	Page Number

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007	3
Consolidated Statements of Operations for the three months and the nine months ended September 30, 2008 and 2007 (unaudited)	4
Consolidated Statement of Stockholders’ Equity as of September 30, 2008 (unaudited)	5
Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited)	6 – 7
Notes to Consolidated Financial Statements (unaudited)	8 - 13
Item 2. Management's Discussion and Analysis or Plan of Operation	14 – 18
Item 4T. Controls and Procedures	19

PART II - OTHER INFORMATION
Item 1. Legal Proceedings	20
Item 1A. Risk Factors	20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3. Defaults Upon Senior Securities	20
Item 4. Submission of Matters to a Vote of Security Holders	20
Item 5. Other Information	20
Item 6. Exhibits	20
SIGNATURES	21

	September 30, 2008 (unaudited)		December 31, 2007

ASSETS

Current assets:
Cash	$	497,896	$	739,869
Accounts receivable, net of allowance for doubtful
accounts of $22,064 at September 30, 2008
and $35,663 at December 31, 2007		-		79,729
Prepaid expenses		15,301		1,339
Total current assets		513,197		820,937

Property and equipment, net		35,623		51,976
Deposits		47,000		40,770
Debt issuance costs, net		974,632		608,648
TOTAL ASSETS	$	1,570,452	$	1,522,331

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Note payable, net of discount of $22,546 at
September 30, 2008 and $243,039 at December 31, 2007	$	675,248	$	554,755
Accounts payable		62,733		461,660
Accrued expenses		58,411		38,413
Customer deposits		30,000		30,000
Total current liabilities		826,392		1,084,828

Long-term liabilities:
Convertible long-term notes payable, net of discount
of $3,406,776 at September 30, 2008 and
$2,133,620 at December 31, 2007.		681,010		87,980
TOTAL LIABILITIES		1,507,402		1,172,808

Commitments and contingencies		-		-


Stockholders' equity:
Preferred stock, par value $.001, 10,000,000 shares
authorized, none issued and outstanding at
September 30, 2008 and December 31, 2007		-			-
Common stock, par value $.001, 100,000,000 shares authorized,
49,091,640 issued and outstanding at September 30, 2008
and 31,589,501 issued and outstanding at December 31, 2007		49,092			31,590
Additional paid-in capital		17,849,486			15,748,998
Accumulated deficit		(17,835,528	)		(15,431,065	)
Total stockholders' equity		63,050			349,523
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,570,452		$	1,522,331

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007

Revenues	$	7,657		$	345,514		$	386,755		$	1,360,422

Expenses
Research & development		53,874			303,702			524,888			1,155,148
Sales & marketing		83,695			46,706			203,894			149,167
General & administrative		391,671			719,074			1,154,155			1,849,398
Total expenses		529,240			1,069,482			1,882,937			3,153,713

Operating loss		(521,583	)		(723,968	)		(1,496,182	)		(1,793,291	)

Other income (expense)
Interest expense		(352,069	)		(124,764	)		(912,547	)		(365,897	)
Interest income		2,447			247			4,265			4,022
Net loss	$	(871,205	)	$	(848,485	)	$	(2,404,464	)	$	(2,155,166	)

Loss per share, basic and diluted	$	(0.02	)	$	(0.03	)	$	(0.07	)	$	(0.07	)

Weighted average shares outstanding, basic and diluted		47,530,474			30,949,917			36,903,159			29,880,333

	Common Stock
	Shares		Par Value		Paid-in Capital			Accumulated Deficit			Totals
Balance at December 31, 2007		31,589,501	$	31,590	$	15,748,998		$	(15,431,065	)	$	349,523

Stock-based compensation		-		-		77,483			-			77,483

Net loss		-		-		-			(677,804	)		(677,804	)

Balance at March 31, 2008		31,589,501		31,590		15,826,481			(16,108,869	)		(250,798	)

Stock-based compensation		-		-		23,578			-			23,578

Allocation to note discount on prepayment		-		-		(16,978	)		-			(16,978	)

Net loss		-		-		-			(855,454	)		(855,454	)

Balance at June 30, 2008		31,589,501		31,590		15,833,081			(16,964,323	)		(1,099,652	)

Stock-based compensation		-		-		29,238			-			29,238

Shares issued for services		300,000		300		17,700			-			18,000

Allocation to note discount for prepayment		-		-		(37,291	)		-			(37,291	)

Debt discount on note payable		16,714,286		16,714		1,776,166			-			1,792,880

Shares and warrants issued for financing fees		487,853		488		230,592			-			231,080

Net loss		-		-		-			(871,205	)		(871,205	)

Balance at September 30, 2008		49,091,640	$	49,092	$	17,849,486		$	(17,835,528	)	$	63,050

	Nine months ended September 30,
	2008			2007

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(2,404,464	)	$	(2,155,166	)
Adjustments to reconcile net loss to net cash
used by operating activities:
Stock based compensation expense		130,299			307,935
Gain on early extinguishment of debt		(8,363	)		-
Depreciation		16,353			17,272
Stock issued for consulting services		18,000			-
Amortization of financing fees		123,897			-
Amortization of debt discount		694,311			296,662
Change in operating assets and liabilities:
Accounts receivable (net of allowance)		79,729			(7,061	)
Prepaid expenses		(13,962	)		59,661
Other current assets		(6,230	)		5,115
Accounts payable		(398,927	)		364,439
Accrued expenses		152,034			44,533
Deferred revenue		-			23,838
Customer deposits		-			30,000
Net cash used by operations		(1,617,323	)		(1,012,772	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets		-			(4,737	)
Net cash used in investing activities		-			(4,737	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issued		-			1,117,500
Payments on debt		(165,850	)		(120,000	)
Proceeds from notes payable, net of fees		1,541,200			368,000
Net cash provided by financing activities		1,375,350			1,365,500

Net increase (decrease) in cash		(241,973	)		347,991
Cash at beginning of period		739,869			1,955
Cash at end of period	$	497,896		$	349,946

	Nine months ended September 30,
	2008		2007

SUPPLEMENTAL INFORMATION

Interest paid	$	86,200	$	-
Taxes paid	$	-	$	-

Non-Cash Financing activities:
Accrued interest rolled into note principal	$	132,036	$	-
Debt discount relieved from prepayment of principal	$	45,906	$	-

Our Consolidated Balance Sheet as of September 30, 2008, the Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007, and the Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 have not been audited. These statements have been prepared on a basis that is consistent with the accounting principles applied in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007. In our opinion, these financial statements include all normal and recurring adjustments necessary for a fair presentation of X-Change Corporation (the “Company”) and Subsidiary. The results for the nine months are not necessarily indicative of the results expected for the year.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with the published rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for interim financial statements. The unaudited Consolidated Financial Statements and the notes thereto in this report should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007 (the “10-KSB”).

The X-Change Corporation was incorporated under the laws of the State of Delaware on February 5, 1969, and changed its domicile to the State of Nevada on October 4, 2000. We were originally organized to seek merger and/or acquisition candidates. In this respect, we have engaged in numerous transactions since our inception. For the periods reported on herein, AirGATE Technologies, Inc. (“AirGATE”) is the sole operating subsidiary of the Company.

Our business model is focused on furthering the opportunities of its wholly owned subsidiary AirGATE. AirGATE is developing end-to-end solutions in wireless technologies including radio frequency identification (“RFID”) for the business-to-business customer. We focus on products and services in vertical markets, especially the oil and gas industry. We intend to deliver wireless solutions in these markets built around a strategy focused on high-value, high-return, recurring revenue opportunities. We are working on a number of specialized technologies, but have not yet commercialized any of our technologies.

The accompanying financial statements have been prepared on the basis of accounting principles applicable to a going concern, which assume that the Company will continue in operation for at least one year and will be able to realize its assets and discharge its liabilities in the normal course of operations. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. While management believes that the actions already taken or planned will mitigate the adverse conditions and events which raise doubt about the validity of the going concern assumption used in preparing these financial statements, there can be no assurance that these actions will be successful. If the Company were unable to continue as a going concern, then substantial adjustments could be necessary to the reported carrying values of assets and the reported amounts of its liabilities.

Several conditions and events cast doubt about our ability to continue as a going concern. We have incurred substantial losses in the periods being reported. We require additional financing in order to fund our business activities on an ongoing basis. During 2007, the Company raised approximately $3 million in three separate transactions including a private placement and two financings structured as convertible debt. The Company closed an additional convertible debt financing of $1.8 million on July 10, 2008. This financing does not provide sufficient capital to alleviate concerns regarding our ability to continue as a going concern.

We do not have sufficient working capital to sustain our operations. We have been unable to generate sufficient revenues to sustain our operations. We will have to continue to obtain funds to meet our cash requirements through business alliances or financial transactions with third parties, the sale of securities or other financing arrangements, or we may be required to curtail our operations, seek a merger partner, or seek protection under federal bankruptcy laws. Any of the foregoing may be on terms that are unfavorable to us or disadvantageous to existing stockholders. In addition, no assurance may be given that we will be successful in raising additional funds or entering into business alliances.

The Company has incurred substantial costs in maintaining its status as a reporting public company including dealing with recent SEC reviews. The Company has also incurred substantial costs associated with raising capital for its continued operations. Management is continually reviewing these costs on an on-going basis.

We are considering alternatives with respect to our intellectual property in areas outside the oil and gas industry including our GenuDot system. In evaluating these technologies, we may consider readdressing the marketplace, joint ventures or outright sales of these technologies.

Our auditors have included an explanatory paragraph in their audit opinion with respect to our consolidated financial statements at December 31, 2007. The paragraph states that our recurring losses from operations and resulting continued dependence on access to external financing raise substantial doubt about our ability to continue as a going concern. Furthermore, the factors leading to and the existence of our going concern status may adversely affect our relationship with customers and suppliers and have an adverse effect on our ability to obtain financing.

In February, 2008, FASB issued a staff position, Effective Date of FASB Statement No. 157 (“FSP 157-2”) which defers the effective date of SFAS 157 to fiscal years beginning after December 15, 2008 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Examples of items within the scope of FSP 157-2 are non-financial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods), and long-lived assets such as property plant and equipment and intangible assets measured at fair value for an impairment assessment under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

The partial adoption of SFAS 157 on January 1, 2008 with respect to financial assets and financial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis did not have a material impact on the Company’s consolidated financial statements. The Company is in the process of analyzing the potential impact of SFAS 157 relating to our planned January 1, 2009 adoption of the remainder of the standard.

Basic loss per share is calculated by dividing the net loss by the weighted average common shares outstanding for the period. The effects of common stock equivalents are anti-dilutive and accordingly are excluded from the diluted loss per share computation. Therefore, diluted loss is equal to basic loss per share. If all potentially dilutive instruments (warrants, options and convertible notes) were converted to common shares, total outstanding shares are estimated to be approximately 151.3 million shares at September 30, 2008, subject to conversion terms on certain convertible notes. We currently do not have a sufficient number of authorized shares if all notes were converted and all options and warrants were exercised.

On October 31, 2008, we filed Schedule 14C, Information Statement Pursuant to Section 14(c) of the Securities Exchange Act 1934, with the Securities Exchange Commission in order to amend our Articles of Incorporation with the state of Nevada. The purpose of the Amendment is to increase our authorized Common Stock from 100,000,000 shares to 750,000,000 shares and our authorized Preferred Stock from 10,000,000 to 75,000,000 shares. The Amendment will become effective upon the effectiveness of our filing of a Certificate of Amendment to the Articles of Incorporation with the Secretary of State of the State of Nevada. The Board reserves the right to not make such filing if it deems it appropriate not to do so.

In June 2007, the Board of Directors approved and adopted the 2007 Stock Incentive Plan ("2007 Plan"). The 2007 Plan provides for the issuance of incentive stock options and non-statutory stock options to the Company’s employees, directors and consultants. Under the 2007 Plan, the Company may grant up to 6,000,000 shares of common stock to its employees or directors. The exercise price of each option may not be less than the market price of the Company’s stock on the date of grant and an option’s maximum term is ten years. The options generally vest over a four year service period. The Plan has not yet been submitted for a vote of stockholders.

				Weighted		Weighted
				Average		Average		Aggregate
	Number of			Exercise		Remaining		Intrinsic
	Options			Price		Term		Value

Options outstanding at January 1, 2008		4,475,000		$	0.21
Options granted		100,000			0.20
Options exercised		-
Options forfeited		(1,075,000	)		0.20
Options outstanding at September 30, 2008		3,500,000			0.21		9	$	-

Options exerciseable at September 30, 2008		1,750,000			0.20		9	$	-

Options available for grants as of September 30, 2008		2,500,000

	Options Outstanding			Options Exercisable
		Weighted Average	Weighted	Number	Weighted Average	Weighted
	Number	Remaining	Average	Of	Remaining	Average
Range of	of	Contract Term	Exercise	Options	Contract Term	Exercise
Exercise Price	Options	(in years)	Price	Exercisable	(in years)	Price

$0.20 - $0.22	3,500,000	9	$0.21	1,750,000	9	$0.20

The Company’s assumption of expected volatility is based on the historical volatility of the Company’s stock price subsequent to purchasing AirGATE Technologies, Inc. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life at the date of grant. The expected dividend yield is zero because the Company has not made any dividend payments in its history and does not plan to pay dividends in the foreseeable future.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

On December 4, 2007, the Company entered into a Securities Purchase Agreement (“SPA”) with Samson Investment Company (“Samson”), Ironman PI Fund (QP), LP (“Ironman”), and John Thomas Bridge & Opportunity Fund, LP (“Opportunity Fund”) (“SIJ Investors”). In addition to the SPA, with each of the SIJ Investors, the Company also entered into a Senior Secured Convertible Term Note—Tranche A (“Tranche A Notes”) and a Tranche A Warrant (“Tranche A Warrants”). The Company, the SIJ Investors and Tejas Securities Group, Inc. (“Tejas”) also executed a Registration Rights Agreement (“RRA”). Finally, the Company and the Investors executed a Security Agreement and a Guaranty Agreement. Pursuant to the SPA, the SIJ Investors agreed to provide us with a total of $3.6 million in two $1.8 million tranches, Tranche A and Tranche B. On December 4, 2007, Tranche A was closed.

On July 10, 2008, we closed on the Tranche B financing and received $1.8 million from the SIJ Investors. As a result of the Tranche A Financing and the Tranche B Financing, X-Change received a total of $3.6 million. As an inducement to the Investors, X-Change delivered to the Investors 16,714,286 shares ("Tranche B Shares") of its common stock (par value $0.001 per share "Common Stock"), split in proportion to their participation in the Tranche B Financing. X-Change, the Investors and Tejas also executed on July 10, 2008 an amendment ("RRA Amendment No. 1") to that certain Registration Rights Agreement that was entered into on December 4, 2007 by and among the same parties ("RRA").

The Tranche B Notes obligate the Company to repay to the SIJ Investors the aggregate principal amount of $1.8 million, together with interest at 8% per annum. Principal on these notes is due five years after issuance. Interest on the notes accrues and is payable quarterly, although the Company has the option to add accrued and unpaid interest to the outstanding principal amount of the notes. The Tranche B Notes are convertible at the option of the SIJ Investors at a conversion price of $0.07. An automatic conversion feature also exists at this same conversion price, and is applicable upon the Company’s achieving certain commercialization milestones. As additional consideration for the Tranche B Financing, X-Change issued the Investors Tranche B Warrants that are exercisable for five years into an aggregate of 25,714,286 shares of Common Stock at $0.17 per share.

The Company allocated the proceeds from the debentures between the warrants, stock and debt based on the estimated relative fair values. The value of the warrants was calculated at $1,377,852 using the Black Scholes valuation model and the following assumptions: discount rate of 3.1%, volatility of 162% and expected term of 5 years. The value of the stock was calculated based on the number of shares issued and the current market price at the date of the agreement. The Company also calculated a beneficial conversion feature totaling $767,869. The Company is amortizing the warrant value, stock value and the value attributable to the beneficial conversion feature over the term of the debentures, five years.

The Company incurred debt issuance costs in connection with the SIJ financing which were recorded at $489,880. The amounts recorded included cash paid for legal and placement fees totaling $258,800, stock issued for services valued at $34,150, and warrants issued for services in connection with the debt totaling $196,930. There were 2,970,000 warrants issued to Tejas and 434,000 warrants issued to Bergman to purchase shares of the Company’s common stock at an exercise price of $0.07. The value of the warrants was determined using the Black Sholes model with the following assumptions: discount rate of 3.1%, volatility of 162% and expected terms of 4 to 10 years.

All shares of the Company’s common stock issued or issuable to the SIJ investors, as well as shares issuable to Tejas upon exercise of their warrant rights, are subject to the RRA. Pursuant to the RRA, the Company agreed to register all such shares upon request of an SIJ Investor, provided that no demand may be made within 180 days of the date of the closing.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in our Annual Report on Form 10-KSB for the year ended December 31, 2007 (“Annual Report”), the financial statements and related notes in this quarterly report, the risk factors in our 2007 Annual Report and all of the other information contained elsewhere in this quarterly report. The terms “we”, “us”, “our”, “our Company” or “X-Change” refer to The X-Change Corporation and its subsidiary, unless the context suggests otherwise.

This quarterly report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, which can be identified by the use of forward-looking terminology such as, “may,” “expect,” “could,” “plan,” “seek,” “anticipate,” “estimate,” or “continue” or the negative thereof or other variations thereon or comparable terminology.

These forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those referred to in the forward-looking statements and are made pursuant to the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements are made based on management’s current expectations or beliefs as well as assumptions made by, and information currently available to, management.

A variety of factors could cause actual results to differ materially from those anticipated in the Company’s forward-looking statements, including the following factors: changes from anticipated levels of sales, access to capital, future national or regional economic and competitive conditions, changes in relationships with customers, difficulties in developing and marketing new products, marketing existing products, customer acceptance of existing and new products, validity of patents, technological change, dependence on key personnel, availability of key component parts, dependence on third party manufacturers, vendors, contractors, product liability, casualty to or other disruption of the production facilities, delays and disruptions in the shipment of the Company’s product, and the ability of the Company to meet its stated business goals. For a detailed discussion of these and other cautionary statements and factors that could cause actual results to differ from the Company’s forward-looking statements, please refer to the Company’s filings with the Securities and Exchange Commission, especially “Item 1. Description of Business” (including the “Risk Factors” section of Item 1) and “Item 6. Management’s Discussion and Analysis or Plan of Operation” of the Company’s 2007 Annual Report on Form 10-KSB.

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. The Company does not undertake any obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission.

An investment in our common stock is highly speculative, involves a high degree of risk, and should be made only by investors who can afford a complete loss. You should carefully consider the information in this report along with the risk factors disclosed in our Form 10-KSB for the year ended December 31, 2007, including our financial statements and the related notes, and our prior filings of Form 10-QSB before you decide to buy or continue to hold our common stock.

Several conditions and events cast doubt about our ability to continue as a going concern. We have incurred substantial losses in the periods being reported. We require additional financing in order to fund its business activities on an ongoing basis. During 2007, we raised approximately $3 million in three separate transactions including a private placement and two financings structured as convertible debt. We closed an additional convertible debt financing of $1.8 million on July 10, 2008. This financing does not provide sufficient capital to alleviate concerns regarding our ability to continue as a going concern.

The Company is considering alternatives with respect to its intellectual property in areas outside the oil and gas industry including its GenuDot system. In evaluating these technologies, the company may consider readdressing the marketplace, joint ventures or outright sales of these technologies.

Our business is focused on furthering the success of our wholly owned subsidiary AirGATE Technologies, Inc. AirGATE derives its revenue from the design, manufacturing and distribution of wireless and sophisticated technologies that include radio frequency identification (“RFID”) and down-hole solutions for the oil field services. We continue to develop products, services and solutions that optimize exploration and production performance for oil and gas companies. The strategy is to continue to focus on delivering new solutions directly to the oil and gas market for high-value, high-return, recurring revenue opportunities.

We generated revenues of $7,657 and $345,514 for the quarter ended September 30, 2008 and 2007, respectively. Revenues were $386,755 and $1,360,422 for the nine months ending September 30, 2008 and 2007, respectively. The decrease in revenues was primarily due to the completion of the down-hole tool project in early 2008. This project provided the bulk of the revenues of the Company in 2007 and was not extended or replaced upon completion.

Research and development cost decreased to $53,874 from $303,702 for the three months ended September 30, 2008 and 2007, respectively. Research and development expenses were $524,888 and $1,155,148 for the nine months ended September 30, 2008 and 2007, respectively. This reduction reflects the wind down of our efforts on the Hexion tool though additional efforts have been put into the development of SAW (surface acoustic wave) applications which are not yet producing revenue.

Sales and marketing expenses were $83,695 and $46,706 for the three months ended September 30, 2008 and 2007, respectively. These costs were $203,894 for the first nine months of 2008 and $149,167 for the same period of 2007. The increase was primarily a result of increased allocation of salaries due to focus of executive time. These costs have increased primarily due to our marketing efforts expended to penetrate into the oil and gas industry. We expect to continue to increase sales and marketing efforts in the future as our planned products get closer to commercialization.

General and administrative expenses decreased to $391,671 for the three months ended September 30, 2008 from $719,074 for the same period in 2007. These costs decreased to $1,154,155 in the first nine months of 2008 from $1,849,398 for the same comparable period of 2007. The decrease is primarily due to reduced salary costs as we have lowered Company head count.

Our interest expense increased to $352,069 for the three months ended September 30, 2008 from $124,764 for the same period in 2007. Interest expense was $912,547 for the nine month period ending September 30, 2008 versus $365,897 for the same period for 2007. Interest expense has increased substantially due to two financings completed in the second half of 2007 and an additional financing completed in the third quarter of 2008. The increase is primarily due to the amortization of convertible note discounts resulting from warrants issued with debt and beneficial conversion features.

Our operations generated losses in 2007 and continued to generate losses in the first nine months of 2008. Our net loss for the nine months ended September 30, 2008 was $2,404,464. For the nine months ended September 30, 2008, we recorded stock based compensation expense in the amount of $130,299, paid in kind accrued interest of $139,036, amortization of financing fees of $123,897 and amortization of debt discount in the amount of $694,311. Accounts payable decreased $398,927 for the nine months ended September 30, 2008 over the same period ended 2007.

Our working capital requirements depend on many factors including contract extensions and new contracts. However, our primary source of working capital at this time comes from securing investment financing. If losses continue as we expect, we will have to obtain additional funds to meet our ongoing business requirements. We had a working capital deficit on September 30, 2008 in the amount of $313,195.

On July 10, 2008, we closed on the Tranche B financing and received $1.8 million from the SIJ Investors. Between the Tranche A Financing and the Tranche B Financing, X-Change received a total of $3.6 million. As an inducement to the Investors, X-Change delivered to the Investors 16,714,286 shares ("Tranche B Shares") of its common stock (par value $0.001 per share "Common Stock"), split in proportion to their participation in the Tranche B Financing. X-Change, the Investors and Tejas also executed on July 10, 2008 an amendment ("RRA Amendment No. 1") to that certain Registration Rights Agreement that was entered into on December 4, 2007 by and among the same parties ("RRA").

In connection with our Form 10-KSB for the year ended December 31, 2007, our Independent Registered Public Accountants included a paragraph in their opinion that referred to doubts about our ability to continue as a going concern. Several conditions and events cast doubt concerning our ability to continue as a going concern. We are dependent upon the expected cash flow of ongoing development contracts, and require additional financing in order to fund our business activities on an ongoing basis. We have taken steps to provide additional financing to the Company and we are actively in discussions with a number of capital sources. While we believe that the actions already taken or planned may mitigate the adverse conditions and events which raise doubt about the validity of the going concern assumption used in preparing these financial statements, there can be no assurance that these actions will be successful or that we will have sufficient funds to continue its operations.

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, accumulated and communicated to the Company’s management, including its Chief Executive Officer ("CEO") and its Chief Financial Officer ("CFO"), as appropriate, to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, the Company's CEO and CFO carried out an evaluation of the effectiveness of the design and operation of the Company's system of disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act.

Based on this evaluation, our principal executive officer and our chief financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective and not adequately designed to ensure that the information required to be disclosed by us in the reports we submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms and that such information was accumulated and communicated to our chief executive officer and chief financial officer, in a manner that allowed for timely decisions regarding required disclosure.

Based on our evaluation, management has concluded that our internal control over financial reporting was not effective as of September 30, 2008. Management has determined that (i) we are unable to maintain the proper segregation of various accounting and finance duties because of our small size and limited resources, (ii) much of the financial closing process is done off-line on electronic spreadsheets that are maintained on individual computers and (iii) based on our staffing limitations, we rely on our Chief Financial Officer to provide a significant amount of our compensating controls.

The Company will continue to periodically assess the cost versus benefit of adding the resources that would improve segregation of duties and additional accounting resources necessary to assure adequate compliance. Currently, with the concurrence of the board of directors, the Company does not consider the benefits to outweigh the costs of adding additional staff in light of the limited number of transactions related to the Company’s operations.

In connection with the evaluation of the Company's internal controls during the Company's last fiscal quarter covered by this report required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, the Company's CEO and CFO has determined that there were no changes to the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially effect, the Company's internal controls over financial reporting.

	Nevada		90-0156146
	(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Large Accelerated Filer o	Accelerated Filer o

Non-accelerated filer o	Smaller reporting company x

	Nine months ended
	September 30, 2008
Weighted average assumptions used
Volatility		155.12%
Expected option term (years)	6 years
Risk-free interest rate		2.50%
Expected dividend yield		—

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Included in this filing
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Included in this filing
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Included in this filing
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Included in this filing

THE X-CHANGE CORPORATION (Registrant)

DATE: November 12, 2008	/s/ Kathleen Hanafan Kathleen Hanafan Chief Executive Officer


DATE: November 12, 2008	/s/ Wm Chris Mathers Wm Chris Mathers Chief Financial Officer

x	Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

	For the quarterly period ended September 30, 2008

o	Transition report under Section 13 or 15(d) of the Exchange Act

	Three months ended			Nine months ended
	September 30, 2008			September 30, 2008


Research and development	$	(5,437	)	$	(7,035	)
Sales and marketing		-			(5,469	)
General and administrative		34,675			128,733
	$	29,238		$	116,229