UNITED
STATES


SECURITIES
EXCHANGE COMMISSION


Washington,
D.C.20549





FORM
10-K





ANNUAL
REPORT PURSUANT TO


THE
SECURITIES EXCHANGE ACT OF 1934





For
the Fiscal Year Ended September 30, 2010





Commission File Number
000-29621





XSUNX,
INC.


(Exact
Name of Registrant as Specified in Its Charter)





Colorado
                  84-1384159(State
      of Incorporation)
                  (I.R.S.
      EmployerIdentification
      No.)





65 Enterprise, Aliso Viejo,
CA 92656


(Address
of Principal Executive Offices) (Zip Code)





(949)
330-8060


(Registrant’s
Telephone Number)





Securities
registered pursuant to Section 12(b) of the Act: Title of each class:None





Name of
Each Exchange on which Registered:N/A





Securities
registered pursuant to Section 12(g) of the Act:





Title of
each class:Common Stock, no par
value per share





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes     ̈   NO    x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes     ̈   NO    x





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months.  Yes     ̈    NO   ̈





Check if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of Registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
     ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.




(Check
      one): ̈ Large
      accelerated filer
               ̈ Accelerated
      filer
               ̈ Non-accelerated
      filer
              x Smaller
      reporting company





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.) (Check one): Yes     ̈   NO    x





As of
March 30, 2010, the aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant was approximately $25,945,872 million based
on the closing price as reported on the OTCBB.





As
of December 29, 2010, there were 211,067,886 shares of the registrant’s
company stock outstanding.





XSUNX,
INC.





TABLE
OF CONTENTS





PagePART
      IItem
      1.    Business
                    
                    3Item
      1A. Risk Factors
                    
                    6Item
      1B. Unresolved Staff Comments
                    
                    10Item
      2.    Properties
                    
                    10Item
      3.    Legal Proceedings
                    
                    10Item
      4.    Submission of Matters to a Vote of Security
      Holders
                    
                    10PART
      IIItem
      5. Market for Registrant’s Common Equity, Related Stockholder Matters and
      Issuer Purchases ofEquity Securities
                    
                    11Item
      6.    Selected Financial Data
                    
                    14Item
      7.    Management’s Discussion and Analysis or Plan of
      Operations
                    
                    14Item
      7A. Quantitative and Qualitative Disclosures About Market
    Risk
                    
                    16Item
      8.    Financial Statements and Supplementary
      Data
                    
                    17Item
      9.    Changes in and Disagreements on Accounting and
      Financial Disclosure
                    
                    17Item
      9A. Controls and Procedures
                    
                    17Item
      9B. Other Information
                    
                    18PART
      IIIItem
      10.  Directors, Executive Officers, and Corporate
      Governance
                    
                    20Item
      11.  Executive Compensation
                    
                    22Item
      12.  Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
                    
                    25Item
      13.  Certain Relationships and Related Transactions, and Director
      Independence
                    
                    26Item
      14.  Principal Accounting Fees and Services
                    
                    26PART
      IVItem
      15.  Exhibits, Financial Statement Schedules
                    
                    27Signatures
                    
                    28Financial
      Statements
                    
                    F-1


2


CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS





This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
and the Securities Act of 1933, as amended (the “Securities Act”)which are
subject to risks, uncertainties and assumptions that are difficult to predict.
All statements in this Annual Report on Form 10-K, other than statements of
historical fact, are forward-looking statements. These forward-looking
statements are made pursuant to safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The forward-looking statements include
statements, among other things, concerning our business strategy, including
anticipated trends and developments in and management plans for, our business
and the markets in which we operate; future financial results, operating
results, revenues, gross margin, operating expenses, products, projected costs
and capital expenditures; research and development programs; sales and marketing
initiatives; and competition. In some cases, you can identify these statements
by forward-looking words, such as “estimate”, “expect”, “anticipate”, “project”,
“plan”, “intend”, “believe”, “forecast”, “foresee”, “likely”, “may”, “should”,
“goal”, “target”, “might”, “will”, “could”, “predict” and “continue”, the
negative or plural of these words and other comparable terminology. The
forward-looking statements are only predictions based on our current
expectations and our projections about future events. All forward-looking
statements included in this Annual Report on Form 10-K are based upon
information available to us as of the filing date of this Annual Report on Form
10-K. You should not place undue reliance on these forward-looking statements.
We undertake no obligation to update any of these forward-looking statements for
any reason. These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance, or achievements to differ materially from those expressed
or implied by these statements. These factors include the matters discussed in
the section entitled “Item 1A: Risk Factors” and elsewhere in this Form 10-K.
You should carefully consider the risks and uncertainties described under this
section.





For
further information about these and other risks, uncertainties and factors,
please review the disclosure included in this report under Item 1A “Risk
Factors.”





PART
I





Item
1. Business.





In
this Report, we use the terms “Company,” “XsunX,” “we,” “us,” and “our,” unless
otherwise indicated, or the context otherwise requires, to refer to XsunX,
Inc.





Organization





XsunX,
Inc. (“XsunX,” the “Company” or the “issuer”) is a Colorado corporation formerly
known as Sun River Mining Inc. “Sun River”). The Company was originally
incorporated in Colorado on February 25, 1997. Effective September 24, 2003, the
Company completed a plan of reorganization and name change to XsunX,
Inc.





Business
Overview





XsunX,
Inc. is developing and has begun to market a hybrid manufacturing solution to
produce high performance Copper Indium Gallium (di) Selenide (CIGS) thin film
solar cells.  Our patent pending system and processing technology,
which we call CIGSolarTM, focuses on the mass production of individual thin-film
CIGS solar cells that match silicon solar cell dimensions and can be offered as
a non-toxic, high-efficiency and lowest-cost alternative to the use of silicon
solar cells. We intend to offer licenses for the use of the CIGSolarTM process
technology thereby generating revenue streams through licensing fees and
manufacturing royalties for the use of the technology.





Technology
Overview





Our
efforts have been focused on the development and customization of a series of
specialized processing tools that when combined provide a turn-key
high-throughput manufacturing system to produce CIGS solar
cells.





Core
attributes to our process method are the use of small area thermal
co-evaporation techniques coupled with state-of-the-art sputter deposition
technologies derived from the hard disc drive (HDD) industry to improve
manufacturing output, increase cell efficiency, production yields, and lower the
costs for the production of high efficiency CIGS cells.





There are
five (5) core process tools that when combined will initially produce 125mm
format (about 5” square) solar cells, scaling to 156mm formats (about 6”
square). We believe that it will be the ability of our system to minimize
processing defects while maintaining exceptional per hour production rates that
will provide superior commercial opportunities. CIGSolarTM cells will be
manufactured on stainless steel squares sized to match silicon solar cells
currently used in nearly 75% of all solar modules manufactured
today.





This
innovative approach bridges the gap between inexpensive thin-film and costly
high efficiency silicon wafer technologies to produce a new breed of solar cell
combining what we believe are the best attributes of each technology. The mass
production of individual, high performance CIGS solar cells – like solar
building blocks – we believe will allow solar power to finally compete
effectively against other sources of electrical energy.


3


CIGS Thin Film Solar
Devices





Copper
Indium Gallium (di) Selenide(CIGS) exceeds all other thin film solar cell
performance to date delivering nearly 20% conversions in laboratory
environments. It is this high efficiency low cost potential for CIGS, and its
wide array of uses and applications, that we believe provides the basis to drive
the cost of energy production for alternative sources to unprecedented new lows.
For this reason many major researchinstitutes and agencies worldwide view CIGS
as a significant solar technology and support continuous development and
research efforts related to CIGS thin films.





We
believe that through the successful combination of small area co-evaporation
processing techniques with the high rate sputter processing techniques developed
within the hard disc media industry, overall factory yields (total watts of
production per day) canbe increased thereby resulting in lower production costs
while still delivering the full energy and low cost potential that CIGS based
devices can offer.





CIGS
Experience





Our staff
experience includes nearly 16 years of thin film and CIGS experience in
successful technology development, equipment design, and production of several
million square feet CIGS products in a commercial production
setting.  Our Chief Technology Officer has worked side by side with
leading researchers at NREL and in fact shares an R&D 100 award with NREL
staff for efforts related to CIGS technology development.





Our
resident XsunX thin film CIGS technologists and manufacturing experts are
working jointly with a leading producer of manufacturing equipment utilized in
the hard disc market to create a unique process of coupling small area
deposition (approximately 5X5 inch squares), material control, and material
transport technologies from the disk drive industry for use in the production of
thin film CIGS solar cells. We are combining the expertise and years of
technological improvements derived from the sophisticated hard disc drive
manufacturing industry with XsunX staff experience in the CIGS thin film
industry.





Sales and
Marketing





We have
developed and have begun to implement a plan to offer CIGSolarTM technology to
existing manufacturers of solar products in the renewable energy industry.
Although XsunX focuses on the development of solar technology and products, we
are not a systems or a machine manufacturer.We have and intend to continue to
develop relationships with equipment manufacturers that can build systems to our
specifications thereby allowing us to offer turn-key manufacturing solutions to
enable our licensees to manufacturer CIGS cells quickly and
inexpensively.





We
anticipate that at the conclusion of the initial development of our CIGS
technology, that we will generate revenue from an array of services and license
fees from manufacturers that utilize our technologies. These revenue fees may
include inception license fees and royalty streams based upon the efficiencies
our unique CIGS technology, guidance for the conversion of new or existing
facilities, production line equipment and systems design and markups, training
and implementation, as well as R&D support, and product reliability
expertise.





Intellectual
Property





We plan
to market license opportunities for our technology and not directly manufacture
the solar technologies and related products that may employ the use of our thin
film technologies. This business model requires that we develop and maintain
intellectual property that includes both patented and proprietary technologies.
We have licensed certain patented and patent pending technologies, and we are
developing with the intent to file for patent protection certain other thin film
manufacturing technologies. The following is an outline of certain patents and
technologies we are developing, have acquired, or licensed:





The
Company is developing a hybrid manufacturing solution to produce high
performance Copper Indium Gallium (di) Selenide (CIGS) thin film solar
cells.  Our system and processing technology, which we call CIGSolarTM,
focuses on the mass production of individual thin-film CIGS solar cells that
match silicon solar cell dimensions and can be offered as a non-toxic,
high-efficiency and lowest-cost alternative to the use of silicon solar cells.
We have designed a proprietary system for a process known as co-evaporation used
in the manufacture of the solar absorbing material CIGS. Certain key features
related to this system we believe may qualify for patent protection. In November
2010 we filed provisional patent application with the United States Patent and
Trademark Office identifying five (5) claims. As we continue to refine our
designs and process technologies we may elect to file additional applications
and we may seek to enforce our claims through filing of utility
patents.





In
September 2003, the Company was assigned the rights to three patents as part of
an Asset Purchase Agreement with Xoptix Inc., a California corporation. The
patents acquired were No. 6,180,871 for Transparent Solar Cell and Method of
Fabrication (Device), granted on January 30, 2001; No. 6,320,117 for Transparent
Solar Cell and Method of Fabrication (Method of Fabrication), granted on
November 20, 2001; and No. 6,509,204 for Transparent Solar Cell and Method of
Fabrication (formed with a Schottky barrier diode and method of its
manufacture), granted on January 21, 2003.


4


As we
continue to develop these new technologies, we may actively seek patent
protection for certain aspects related to methods and apparatus we develop. We
can give no assurance that any such patent(s) will be granted for any process
and manufacturing technology that we may develop individually or in conjunction
with third parties.





We rely
on trademark and copyright law, trade secret protection and confidentiality or
license agreements with our employees, customers, partners and others to protect
our proprietary rights. We have not been subject to any intellectual property
claims.





Company
History





XsunX is
a Colorado corporation formerly known as Sun River Mining Inc. (“Sun River”).
The Company was originally incorporated in Colorado on February 25, 1997.
Effective September 24, 2003, the Company completed a Plan of Reorganization and
Asset Purchase Agreement (the “Plan”).





Pursuant
to the Plan, the Company acquired the following three patents from Xoptix, Inc.,
a California corporation for Seventy Million (70,000,000) shares of common stock
(post reverse split one for twenty): No. 6,180,871 for Transparent Solar Cell
and Method of Fabrication (Device), granted on January 30, 2001; No. 6,320,117
for Transparent Solar Cell and Method of Fabrication (Method of Fabrication),
granted on November 20, 2001; and No. 6,509,204 for Transparent Solar Cell and
Method of Fabrication (formed with a Schottky barrier diode and method of its
manufacture), granted on January 21, 2003.





Pursuant to the Plan, the
Company authorized the issuance of 110,530,000 (post reverse split) common
shares. Prior to the Plan, the Company had no tangible assets and insignificant
liabilities. Subsequent to the Plan, the Company completed its name change from
Sun River Mining, Inc. to XsunX, Inc. The transaction was completed on September
30, 2003.





Government
Contracts





There are
no government contracts as of the fiscal year ended September 30,
2010.





Competitive
Conditions





A number
of thin film solar cell technologies have and are being developed by other
companies. Such technologies include amorphous silicon, cadmium telluride,
copper-indium-gallium-selenide (CIGS), and copper indium selenide as well as
advanced concepts in thin film crystalline silicon, and the use of organic
materials. Given the benefit of time, investment, and advances in manufacturing
technologies any of these competing technologies may be offered in formats
delivering power similar or greater to technologies developed that may be
developed by us, and they may also achieve manufacturing costs per watt lower
than cost per watt to manufacture technologies developed by us.





In
accessing the principal competitive factors in the market for solar electric
power products, we use price per watt, stability and reliability, conversion
efficiency, diversity in use applications, and other performance metrics such as
scalability of manufacturing processes and the ability to adapt new technologies
into cell designs and the manufacturing process without antiquation of existing
infrastructure. If we do not compete successfully with respect to these or other
factors, it could materially and adversely affect our business, results of
operations, and financial condition.





A number
of large companies are actively engaged in the development, manufacturing and
marketing of solar electric power products. Several of the larger TFPV cell
suppliers are Q-Cells, Shell Solar, Sharp Corporation, BP Solar, Kyocera
Corporation, First Solar, and Energy Conversion Devices, which together supply
the significant portion of the current TFPV market. All of these companies have
greater resources to devote to research, development, manufacturing and
marketing than we do.





Other
competitive factors lie in the current use of other clean, renewable energy
technologies such as wind, ocean thermal, ocean tidal, and geo-thermal power
sources and conventional fossil fuel based technologies for the production of
electricity. We expect our primary competition will be within the solar cell
marketplace itself. Barriers to entering the solar cell manufacturing industry
include the technical know-how required to produce solar cells that maintain
acceptable efficiency rates, the design of efficient and scalable manufacturing
processes, and access to necessary manufacturing infrastructure.





Compliance
with Environmental Laws and Regulations





The
operations of the Company are subject to local, state and federal laws and
regulations governing environmental quality and pollution control. Compliance
with these regulations by the Company has required that we retain the use of
consulting firms to assist in the engineering and design of systems related to
equipment operations, management of industrial gas storage and delivery systems,
and occupancy fire and safety construction standards to deal with emergency
conditions. We do not anticipate that these costs will have a material effect on
the Company’s operations or competitive position, and the cost of such
compliance has not been material. The Company is unable to assess or predict at
this time what effect additional regulations or legislation could have on its
activities.





Employees
and Consultants





As of the
fiscal year ended September 30, 2010 we had 6 salaried employees. This
represents an increase of 1 employee over the same period ended 2009. The
Company also engages consultants to perform specific functions that otherwise
would require an employee. We have not experienced any work stoppages and we
consider relations with our employees to be good.


5


Available
Information





Our
website address is www.xsunx.com. We make available on our website access to our
Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to these reports that we have filed with the U.S.
Securities and Exchange Commission (“SEC”). The information found on our website
is not part of this or any other report we file with, or furnish to, the
SEC.





Item
1A. Risk Factors





An
investment in our common stock involves a high degree of risk. You should
carefully consider the following risk factors, as well as the other information
in this Annual Report on Form 10-K, in evaluating XsunX and our business. If any
of the following risks occur, our business, financial condition and results of
operations could be materially and adversely affected. Accordingly, the trading
price of our common stock could decline and you may lose all or part of your
investment in our common stock. The risks and uncertainties described below are
not the only ones we face. Additional risks that we currently do not know about
or that we currently believe to be immaterial may also impair our business
operations.





We
Have Not Generated Any Significant Revenues and Our Financial Statements Raise
Substantial Doubt About Our Ability to Continue As A Going Concern.





We are a
development stage company and, to date, have not generated any significant
revenues.  The accompanying consolidated financial statements have
been prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate our continuation as a going concern.
Net loss for the years ended September 30, 2010 and 2009 was $2,210,603and
$10,634,133, respectively. Net cash used for operations was $(1,347,395) and
$(2,862,327) for the years ended September 30, 2010 and 2009,
respectively. At September 30, 2010, we had a working capital deficit of $220,
978. From inception through September 30, 2010, we had an accumulated deficit of
$33,919,805.





The items
discussed above raise substantial doubt about our ability to continue as a going
concern. We cannot assure you that we can achieve or sustain profitability in
the future. Our operations are subject to the risks and competition inherent in
the establishment of a business enterprise. There can be no assurance that
future operations will be profitable. Revenues and profits, if any, will depend
upon various factors, including whether our product development can be
completed, whether our products will achieve market acceptance and whether we
obtain additional financing. We may not achieve our business objectives and the
failure to achieve such goals would have a materially adverse impact on
us.





We
expect that we will need to obtain additional financing to continue to operate
our business, including capital expenditures to complete the development of
marketable thin film manufacturing technologies, and financing may be
unavailable or available only on disadvantageous terms which could cause the
Company to curtail its business operations and delay the execution of its
business plan.





We have
in the past experienced substantial losses and negative cash flow from
operations and have required financing, including equity and debt financing, in
order to pursue the commercialization of products based on our technologies. We
expect that we will continue to need significant financing to operate our
business. Although the Company entered into a financing arrangement with Lincoln
Park Capital Fund, LLC pursuant to which the Company has the right over a
25-month period to receive $50,000 every two business days under such financing
arrangement unless our stock price equals or exceeds $0.20, in which case we can
sell greater amounts to Lincoln Park as the price of our common stock increases,
Lincoln Park shall not have the right or the obligation to purchase any shares
of our common stock on any business day that the market price of our common
stock is less than $0.08. Furthermore, there can be no assurance that additional
financing will be available or that the terms of such additional financing, if
available, will be acceptable to us. If additional financing is not available or
not available on terms acceptable to us, our ability to fund our operations,
complete the development of marketable technologies, develop a sales network,
maintain our research and development efforts or otherwise respond to
competitive pressures may be significantly impaired. We could also be forced to
curtail our business operations, reduce our investments, decrease or eliminate
capital expenditures and delay the execution of our business plan, including,
without limitation, all aspects of our operations, which would have a material
adverse effect on our business.





We
may be required to raise additional financing by issuing new securities with
terms or rights superior to those of our shares of common stock, which could
adversely affect the market price of our shares of common stock and our
business.





We will
require additional financing to fund future operations, including expansion in
current and new markets, development and acquisition, capital costs and the
costs of any necessary implementation of technological innovations or
alternative technologies. We may not be able to obtain financing on favorable
terms, if at all. If we raise additional funds by issuing equity securities, the
percentage ownership of our current stockholders will be reduced, and the
holders of the new equity securities may have rights superior to those of the
holders of shares of common stock, which could adversely affect the market price
and the voting power of shares of our common stock. If we raise additional funds
by issuing debt securities, the holders of these debt securities would similarly
have some rights senior to those of the holders of shares of common stock, and
the terms of these debt securities could impose restrictions on operations and
create a significant interest expense for us which could have a materially
adverse effect on our business.


6


If
future products based on technologies we are developing cannot be developed for
manufacture and sold commercially or our products become obsolete or
noncompetitive, we may be unable to recover our investments or achieve
profitability which will have a materially adverse effect on our
business.





There can
be no assurance that such research and development efforts will be successful or
that we will be able to develop commercial applications for our products and
technologies. Further, the areas in which we are developing technologies and
products are characterized by rapid and significant technological change. Rapid
technological development may result in our products becoming obsolete or
noncompetitive. If future products based on our technologies cannot be developed
for manufacture and sold commercially or our products become obsolete or
noncompetitive, we may be unable to recover our investments or achieve
profitability. In addition, the commercialization schedule may be delayed if we
experience delays in meeting development goals, if products based on our
technologies exhibit technical defects, or if we are unable to meet cost or
performance goals. In this event, potential purchasers of products based on our
technologies may choose alternative technologies and any delays could allow
potential competitors to gain market advantages.





There
is no assurance that the market will accept our products once development has
been completed which could have an adverse effect on our business.





There can
be no assurance that products based on our technologies will be perceived as
being superior to existing products or new products being developed by competing
companies or that such products will otherwise be accepted by consumers. The
market prices for products based on our technologies may exceed the prices of
competitive products based on existing technologies or new products based on
technologies currently under development by competitors. There can be no
assurance that the prices of products based on our technologies will be
perceived by consumers as cost-effective or that the prices of such products
will be competitive with existing products or with other new products or
technologies. If consumers do not accept products based on our technologies, we
may be unable to recover our investments or achieve profitability.





Other companies,
many of which have greater resources than we have, may develop competing
products or technologies which cause products based on our technologies to
become noncompetitive which could have an adverse effect on our
business.





We will
be competing with firms, both domestic and foreign, that perform research and
development, as well as firms that manufacture and sell solar products. In
addition, we expect additional potential competitors to enter the markets for
solar products in the future. Some of these current and potential competitors
are among the largest industrial companies in the world with longer operating
histories, greater name recognition, access to larger customer bases,
well-established business organizations and product lines and significantly
greater resources and research and development staff and facilities. There can
be no assurance that one or more such companies will not succeed in developing
technologies or products that will become available for commercial sale prior to
our products, that will have performance superior to products based on our
technologies or that would otherwise render our products noncompetitive. If we
fail to compete successfully, our business would suffer and we may lose or be
unable to gain market share.





The
loss of strategic relationships used in the development of our thin film
manufacturing technologies and products could impede our ability to complete the
development of our products and have a material adverse effect on our
business.





We have
established a plan of operations under which a portion of our operations rely on
strategic relationships with third parties, to provide systems design, assembly
and support. A loss of any of our third party relationships for any reason could
cause us to experience difficulties in implementing our business strategy. There
can be no assurance that we could establish other relationships of adequate
expertise in a timely manner or at all.





We
may suffer the loss of key personnel or may be unable to attract and retain
qualified personnel to maintain and expand our business which could have a
material adverse effect on our business.





Our
success is highly dependent on the continued services of a limited number of
skilled managers, scientists and technicians. The loss of any of these
individuals could have a material adverse effect on us. In addition, our success
will depend upon, among other factors, the recruitment and retention of
additional highly skilled and experienced management and technical personnel.
There can be no assurance that we will be able to retain existing employees or
to attract and retain additional personnel on acceptable terms given the
competition for such personnel in industrial, academic and nonprofit research
sectors.





We
may not be successful in protecting our intellectual property and proprietary
rights and may be required to expend significant amounts of money and time in
attempting to protect these rights. If we are unable to protect our intellectual
property and proprietary rights, our competitive position in the market could
suffer.





Our
intellectual property consists of patents, trade secrets, and trade dress. Our
success depends in part on our ability to obtain patents and maintain adequate
protection of our other intellectual property for our technologies and products
in the U.S. and in other countries. The laws of some foreign countries do not
protect proprietary rights to the same extent as do the laws of the U.S., and
many companies have encountered significant problems in protecting their
proprietary rights in these foreign countries. These problems may be caused by,
among other factors, a lack of rules and methods for defending intellectual
property rights.





Our
future commercial success requires us not to infringe on patents and proprietary
rights of third parties, or breach any licenses or other agreements that we have
entered into with respect to our technologies, products and businesses. The
enforceability of patent positions cannot be predicted with certainty. We intend
to apply for patents covering both our technologies and our products, if any, as
we deem appropriate. Patents, if issued, may be challenged, invalidated or
circumvented. There can be no assurance that no other relevant patents have been
issued that could block our ability to obtain patents or to operate as we would
like. Others may develop similar technologies or may duplicate technologies
developed by us.


7


We are
not currently a party to any litigation with respect to any of our patent
positions or trade secrets. However, if we become involved in litigation or
interference proceedings declared by the United States Patent and Trademark
Office, or other intellectual property proceedings outside of the U.S., we might
have to spend significant amounts of money to defend our intellectual property
rights. If any of our competitors file patent applications or obtain patents
that claim inventions or other rights also claimed by us, we may have to
participate in interference proceedings declared by the relevant patent
regulatory agency to determine priority of invention and our right to a patent
of these inventions in the U.S. Even if the outcome is favorable, such
proceedings might result in substantial costs to us, including, significant
legal fees and other expenses, diversion of management time and disruption of
our business. Even if successful on priority grounds, an interference proceeding
may result in loss of claims based on patentability grounds raised in the
interference proceeding. Uncertainties resulting from initiation and
continuation of any patent or related litigation also might harm our ability to
continue our research or to bring products to market.





An
adverse ruling arising out of any intellectual property dispute, including an
adverse decision as to the priority of our inventions would undercut or
invalidate our intellectual property position. An adverse ruling also could
subject us to significant liability for damages, prevent us from using certain
processes or products, or require us to enter into royalty or licensing
agreements with third parties. Furthermore, necessary licenses may not be
available to us on satisfactory terms, or at all.





Confidentiality
agreements with employees and others may not adequately prevent disclosure of
trade secrets and other proprietary information.





To
protect our proprietary technologies and processes, we rely on trade secret
protection as well as on formal legal devices such as patents. Although we have
taken security measures to protect our trade secrets and other proprietary
information, these measures may not provide adequate protection for such
information. Our policy is to execute confidentiality and proprietary
information agreements with each of our employees and consultants upon the
commencement of an employment or consulting arrangement with us. These
agreements generally require that all confidential information developed by the
individual or made known to the individual by us during the course of the
individual’s relationship with us be kept confidential and not be disclosed to
third parties. These agreements also generally provide that technology conceived
by the individual in the course of rendering services to us shall be our
exclusive property. Even though these agreements are in place there can be no
assurances that that trade secrets and proprietary information will not be
disclosed, that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to our trade
secrets, or that we can fully protect our trade secrets and proprietary
information. Violations by others of our confidentiality agreements and the loss
of employees who have specialized knowledge and expertise could harm our
competitive position and cause our sales and operating results to decline as a
result of increased competition. Costly and time-consuming litigation might be
necessary to enforce and determine the scope of our proprietary rights, and
failure to obtain or maintain trade secret protection might adversely affect our
ability to continue our research or bring products to market.





Downturns
in general economic conditions could adversely affect our
profitability.





Downturns
in general economic conditions can cause fluctuations in demand for our
products, product prices, volumes and margins. Future economic conditions may
not be favorable to our industry. A decline in the demand for our products or a
shift to lower-margin products due to deteriorating economic conditions could
adversely affect sales of our intended products and our profitability and could
also result in impairments of certain of our assets.





Standards
for compliance with section 404 of The Sarbanes-Oxley Act Of 2002 are uncertain,
and if we fail to comply in a timely manner, our business could be harmed and
our stock price could decline.





This
annual report does not include an attestation report of the company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to rules of the Securities and Exchange
Commission that permit the Company to provide only management's report in this
annual report. The standards that must be met for management to assess the
internal control over financial reporting as effective are new and complex, and
require significant documentation, testing and possible remediation to meet the
detailed standards and will impose significant additional expenses on us. We may
encounter problems or delays in completing activities necessary to make an
assessment of our internal control over financial reporting. If we cannot assess
our internal control over financial reporting as effective, investor confidence
and share value may be negatively impacted.





Our
common stock is considered a “Penny Stock” and as a result, related
broker-dealer requirements affect its trading and liquidity.





Our
common stock is considered to be a “penny stock” since it meets one or more of
the definitions in Rules 15g-2 through 15g-6 promulgated under
Section 15(g) of the Exchange Act. These include but are not limited to the
following: (i) the common stock trades at a price less than $5.00 per
share; (ii) the common stock is not traded on a “recognized” national
exchange; (iii) the common stock is not quoted on the NASDAQ Stock Market,
or (iv) the common stock is issued by a company with average revenues of
less than $6.0 million for the past three (3) years. The principal result
or effect of being designated a “penny stock” is that securities broker-dealers
cannot recommend our Common Stock to investors, thus hampering its
liquidity.





Section 15(g)
and Rule 15g-2 require broker-dealers dealing in penny stocks to provide
potential investors with documentation disclosing the risks of penny stocks and
to obtain a manually signed and dated written receipt of the documents before
effecting any transaction in a penny stock for the investor’s account. Potential
investors in our Common Stock are urged to obtain and read such disclosure
carefully before purchasing any of our shares.


8


Moreover,
Rule 15g-9 requires broker-dealers in penny stocks to approve the account
of any investor for transactions in such stocks before selling any penny stock
to that investor. This procedure requires the broker-dealer to (i) obtain
from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable for
the investor and that the investor has sufficient knowledge and experience as to
be reasonably capable of evaluating the risks of penny stock transactions;
(iii) provide the investor with a written statement setting forth the basis
on which the broker-dealer made the determination in (ii) above; and
(iv) receive a signed and dated copy of such statement from the investor,
confirming that it accurately reflects the investor’s financial situation,
investment experience and investment objectives.





The
trading market in our common stock is limited and may cause volatility in the
market price.





Our
common stock is currently traded on a limited basis on the OTCBB. The OTCBB is
an inter-dealer, over-the-counter market that provides significantly less
liquidity than the NASDAQ Stock Market and the other national markets. Quotes
for stocks included on the OTCBB are not listed in the financial sections of
newspapers as are those for the NASDAQ Stock Market. Therefore, prices for
securities traded solely on the OTCBB may be difficult to obtain.





The
quotation of our common stock on the OTCBB does not assure that a meaningful,
consistent and liquid trading market currently exists, and in recent years such
market has experienced extreme price and volume fluctuations that have
particularly affected the market prices of many smaller companies like us. Thus,
the market price for our common stock is subject to volatility and holders of
common stock may be unable to resell their shares at or near their original
purchase price or at any price. In the absence of an active trading
market:




·
            investors
      may have difficulty buying and selling or obtaining market
      quotations;




·
            market
      visibility for our common stock may be limited;
  and




·
            a
      lack of visibility for our common stock may have a depressive effect on
      the market for our common stock.





Due to
the low price of the securities, many brokerage firms may not be willing to
effect transactions in the securities. Even if a purchaser finds a broker
willing to effect a transaction in these securities, the combination of
brokerage commissions, state transfer taxes, if any, and any other selling costs
may exceed the selling price. Further, many lending institutions will not permit
the use of such securities as collateral for any loans.  Such
restrictions could have a materially adverse effect on our
business.





We
may have difficulty raising necessary capital to fund operations as a result of
market price volatility for our shares of common stock.





The
market price of our common stock is likely to be highly volatile and could
fluctuate widely in price in response to various factors, many of which are
beyond our control, including:





•
            technological
      innovations or new products and services by us or our
      competitors;





•
            additions
      or departures of key personnel;





•
            sales
      of our common stock;





•
            our
      ability to integrate operations, technology, products and
      services;





•
            our
      ability to execute our business
plan;





•
            operating
      results below expectations;





•
            loss
      of any strategic relationship;





•
            industry
      developments;





•
            economic
      and other external factors; and





•
            period-to-period
      fluctuations in our financial
results.





Because
we have a limited operating history with limited revenues to date, you may
consider any one of these factors to be material. Our stock price may fluctuate
widely as a result of any of the above listed factors.  In recent
years, the securities markets in the United States have experienced a high level
of price and volume volatility, and the market price of securities of many
companies have experienced wide fluctuations that have not necessarily been
related to the operations, performances, underlying asset values or prospects of
such companies. For these reasons, our shares of common stock can also be
expected to be subject to volatility resulting from purely market forces over
which we will have no control. If our business development plans are successful,
we may require additional financing to continue to develop and exploit existing
and new technologies and to expand into new markets. The exploitation of our
technologies may, therefore, be dependent upon our ability to obtain financing
through debt and equity or other means.


9


Item
1B. Unresolved Staff Comments





As of the
date of this Annual Report on Form 10-K, there are no unresolved staff comments
regarding our previously filed periodic or current reports under the Securities
Exchange Act of 1934, as amended.





Item
2. Properties





California
Corporate Office Lease





The
Company leases facilities in Aliso Viejo, CA. At the lease rate of approximately
$1,000 per month. The Company extended its lease for 12 months in May 2010 and
plans to continue to lease these facilities for the foreseeable
future.





Colorado
Facilities Lease





Our lease
for facilities in Golden, Colorado at the lease rate of $1,790 per month plus
$945 in triple net for a total of $2,735 per month expired May 30,
2010.  We vacated the premises on May 25, 2010. A security deposit in
the amount of $2,615 was returned to the Company. The Company consolidated
operations in its Aliso Viejo facilities.





The
Company owns no real property.





Item
3. Legal Proceedings





In the
ordinary conduct of our business, we may become involved in various lawsuits and
legal proceedings, which arise in the ordinary course of business. However,
litigation is subject to inherent uncertainties, and an adverse result in these
or other matters may arise from time to time that may harm our business. We are
currently not aware of any such legal proceedings or claims that we believe will
have, individually or in the aggregate, a material adverse effect on our
business, financial condition or operating results except as set forth
below.





On
September 21, 2010 we received notice of a claim filed by Billco Manufacturing
Inc. in the State of California, Orange County Superior Court, requesting that
the court award $340,567.50 for an open book account balance purportedly owed to
the manufacturer by XsunX. The vendor allegations stem from a demand for payment
made in the amount of $340,567.50 for the order of certain equipment by XsunX in
2008. XsunX refused to pay this amount as we had cancelled the order placed with
the vendor, the vendor was in possession of its own un-used standard systems
that it could market to other buyers in the course of its normal business, and
that XsunX’s prior payment in the amount of $130,987.50 to the vendor
represented, in the judgment of management, a fair and final re-stocking fee. We
dispute any additional amounts claimed by the vendor and have retained counsel
to defend this matter.





In
February 2010, we elected to negotiate a settlement related to a dispute over
certain equipment with Airgas Corp.agreeing to pay $114,641 in 12 equal monthly
payments of $9,553 commencing March 1, 2010. As of September 30, 2010 the
Company has made payments totaling $66,874 leaving a principal balance in the
amount of $47,767 as of the fiscal year ended September 30, 2010. No default
currently exists under this agreement.





Item
4. (Removed and Reserved)


10


PART
II





Item
5. Market for Registrant’s Common Equity and Related Stockholder Matters and
Issuer Purchases of Equity Securities





Price
Range of Common Stock





The
Company’s common stock trades on the OTC Bulletin Board under the symbol
“XSNX”.  The range of high, low and close quotations for the Company’s
common stock by fiscal quarter within the last two fiscal years, as reported by
the OTC Bulletin Board, was as follows:





YearEndedSeptember30,2010
                
                High
                
                
                Low
                
                
                CloseFirst
      Quarter ended December 31, 2009
                
                
                0.26
                
                
                
                0.13
                
                
                
                0.16Second
      Quarter ended March 31, 2010
                
                
                0.21
                
                
                
                0.11
                
                
                
                0.13Third
      Quarter ended June 30, 2010
                
                
                0.15
                
                
                
                0.10
                
                
                
                0.11Fourth
      Quarter ended September 30, 2010
                
                
                0.12
                
                
                
                0.07
                
                
                
                0.10Year
      Ended September 30, 2009First
      Quarter ended December 31, 2008
                
                
                0.30
                
                
                
                0.18
                
                
                
                0.19Second
      Quarter ended March 31, 2009
                
                
                0.20
                
                
                
                0.09
                
                
                
                0.16Third
      Quarter ended June 30, 2009
                
                
                0.17
                
                
                
                0.11
                
                
                
                0.13Fourth
      Quarter ended September 30, 2009
                
                
                0.22
                
                
                
                0.10
                
                
                
                0.15





The
market price for our common stock, like that of other technology companies, is
highly volatile and is subject to fluctuations in response to variations in our
operating results, announcements related to technological innovation or business
development, or other events and factors. Our stock price may also be affected
by broader market trends unrelated to our performance.





The above
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission and may not necessarily represent actual transactions.





Number
of Holders





As of
September 30, 2010, there were approximately 280 record holders of the Company’s
common stock, not counting shares held in “street name” in brokerage accounts
which is unknown. As of September 30, 2010, there were approximately 209,055,337
shares of common stock outstanding on record with the Company’s stock transfer
agent, Mountain Share Transfer. On September 30, 2010 the last reported sales
price of our common stock on the OTCBB was approximately $0.10per
share.





Transfer
Agent





Our
transfer agent is Mountain Share Transfer, Inc. located at 1625 Abilene Drive,
Broomfield, CO  80020





Dividends





The
Company has not declared or paid any cash dividends on its common stock and does
not anticipate paying dividends for the foreseeable future.





Stock
Option Plan





On
January 5, 2007, the Board of Directors of XsunX resolved to establish the
Company’s 2007 Stock Option Plan to enable the Company to obtain and retain the
services of the types of employees, consultants and directors who could
contribute to the Company’s long range success and to provide incentives which
are linked directly to increases in share value which will inure to the benefit
of all stockholders of the Company. Options granted under the Plan may be either
Incentive Options or Nonqualified Options and shall be administered by the
Company's Board of Directors ("Board").  Each Option shall be
exercisable to the nearest whole share, in installments or otherwise, as the
respective Option agreements may provide. Notwithstanding any other provision of
the Plan or of any Option agreement, each Option shall expire on the date
specified in the Option agreement. A total of 20,000,000 shares of common stock
are authorized under the plan.





Stock
Compensation, Issuance of Stock Purchase Options





During
the fiscal year ended September 30, 2010 no options or warrants were
granted.





Table
of Equity Compensation





The
following table sets forth summary information, as of September 30, 2010,
concerning securities authorized for issuance under all equity compensation
plans and agreements for the fiscal years ended September 30, 2010, and 2009 is
as follows:


11


During
the period ended September 30, 2010 and 2009, the Company granted 0 and
5,350,000 stock options, respectively. The stock options are exercisable for a
period of five years from the date of grant at an exercise price between $0.16
and $0.36 per share and expire at various times through April 2014.





9/30/2010
                
                9/30/2009Risk
      free interest rate
                
                1.67%
      to 2.77%
                
                1.67%
      to 2.77%Stock
      volatility factor
                
                90.56%
      to 104.73%
                
                90.56%
      to 104.73%Weighted
      average expected option life
                
                5
      years
                
                5
      yearsExpected
      dividend yield
                
                None
                
                None





A summary
of the Company’s stock option activity and related information
follows:





9/30/2010
                  
                  
                  9/30/2009Weighted
                  
                  
                  
                  
                  
                  WeightedNumber
                  
                  
                  average
                  
                  
                  Number
                  
                  
                  averageof
                  
                  
                  exercise
                  
                  
                  of
                  
                  
                  exerciseOptions
                  
                  
                  price
                  
                  
                  Options
                  
                  
                  priceOutstanding,
      beginning of year
                  
                  
                  10,180,000
                  
                  
                  $
                  0.27
                  
                  
                  
                  5,750,000
                  
                  
                  $
                  0.39Granted
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  5,350,000
                  
                  
                  $
                  0.17Exercised
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  -Expired
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  (920,000
                  )
                  
                  $
                  0.41Outstanding,
      end of year
                  
                  
                  10,180,000
                  
                  
                  $
                  0.27
                  
                  
                  
                  10,180,000
                  
                  
                  $
                  0.27Exercisable
      at the end of year
                  
                  
                  6,858,328
                  
                  
                  $
                  0.29
                  
                  
                  
                  4,927,500
                  
                  
                  $
                  0.33Weighted
      average fair value of options granted during the year
                  
                  
                  
                  
                  
                  $
                  -
                  
                  
                  
                  
                  
                  
                  $
                  0.11





The
weighted average remaining contractual life of options outstanding issued under
the plan as of September 30, 2010 was as follows:





WeightedAverageStock
                            
                            
                            Stock
                            
                            
                            RemainingExercisable
                            
                            
                            Options
                            
                            
                            Options
                            
                            
                            ContractualPrices
                            
                            
                            Outstanding
                            
                            
                            Exercisable
                            
                            
                            Life (years)$
                            0.46
                            
                            
                            
                            1,150,000
                            
                            
                            
                            950,000
                            
                            
                            1.32
      years$
                            0.53
                            
                            
                            
                            100,000
                            
                            
                            
                            100,000
                            
                            
                            1.40
      years$
                            0.45
                            
                            
                            
                            100,000
                            
                            
                            
                            100,000
                            
                            
                            1.56
      years$
                            0.41
                            
                            
                            
                            100,000
                            
                            
                            
                            100,000
                            
                            
                            1.91
      years$
                            0.36
                            
                            
                            
                            2,500,000
                            
                            
                            
                            1,500,000
                            
                            
                            2.07
      years$
                            0.36
                            
                            
                            
                            500,000
                            
                            
                            
                            500,000
                            
                            
                            2.12
      years$
                            0.36
                            
                            
                            
                            500,000
                            
                            
                            
                            500,000
                            
                            
                            2.16
      years$
                            0.36
                            
                            
                            
                            115,000
                            
                            
                            
                            95,833
                            
                            
                            3.03
      years$
                            0.16
                            
                            
                            
                            5,115,000
                            
                            
                            
                            3,012,495
                            
                            
                            3.50
      years10,180,000
                            
                            
                            
                            6,858,328





Stock-based
compensation expense recognized during the period is based on the value of the
portion of stock-based payment awards that is ultimately expected to vest.
Stock-based compensation expense recognized in the financial statements of
operations during the year ended September 30, 2010, included compensation
expense for the stock-based payment awards granted prior to, but not yet vested,
as of September 30, 2010 based on the grant date fair value estimated, and
compensation expense for the stock-based payment awards granted subsequent to
September 30, 2010, based on the grant date fair value estimated. We account for
forfeitures as they occur. The stock-based compensation expense recognized in
the statement of operations during the years ended September 30, 2010 and 2009
was $273,133 and $534,518, respectively.





Warrants





During
the fiscal year ended September 30, 2010, the Company issued no warrants. At
September 30, 2010, the Company had a total of 4,195,332 warrants to purchase
shares of common stock, 4,047,332 of which were exercisable at September 30,
2010.


12


A summary
of the Company’s warrants activity and related information follows:




9/30/2010
                  
                  
                  9/30/2009Weighted
                  
                  
                  
                  
                  
                  WeightedNumber
                  
                  
                  average
                  
                  
                  Number
                  
                  
                  averageof
                  
                  
                  exercise
                  
                  
                  of
                  
                  
                  exerciseOptions
                  
                  
                  price
                  
                  
                  Options
                  
                  
                  priceOutstanding,
      beginning of year
                  
                  
                  4,195,332
                  
                  
                  $
                  0.61
                  
                  
                  
                  4,195,332
                  
                  
                  $
                  0.61Granted
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  -Exercised
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  -Expired
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  -Outstanding,
      end of year
                  
                  
                  4,195,332
                  
                  
                  $
                  0.61
                  
                  
                  
                  4,195,332
                  
                  
                  $
                  0.61Exercisable
      at the end of year
                  
                  
                  4,047,332
                  
                  
                  $
                  0.64
                  
                  
                  
                  4,047,332
                  
                  
                  $
                  0.62Weighted
      average fair value of warrants granted during the year
                  
                  
                  
                  
                  
                  $
                  -
                  
                  
                  
                  
                  
                  
                  $
                  -




At
September 30, 2010, the weighted average remaining contractual life of warrants
outstanding:




WeightedAverageRemainingExercisable
                          
                          
                          Warrants
                          
                          
                          Warrants
                          
                          
                          ContractualPrices
                          
                          
                          Outstanding
                          
                          
                          Exercisable
                          
                          
                          Life (years)$
                          1.69
                          
                          
                          
                          112,000
                          
                          
                          
                          112,000
                          
                          
                          0.51
      years$
                          0.51
                          
                          
                          
                          500,000
                          
                          
                          
                          352,000
                          
                          
                          0.80
      years$
                          0.20
                          
                          
                          
                          250,000
                          
                          
                          
                          250,000
                          
                          
                          1.25
      years$
                          0.50
                          
                          
                          
                          1,666,666
                          
                          
                          
                          1,666,666
                          
                          
                          2.09
      years$
                          0.75
                          
                          
                          
                          1,666,666
                          
                          
                          
                          1,666,666
                          
                          
                          2.09
      years4,195,332
                          
                          
                          
                          4,047,332





Recent
Sales of Securities (Registered and Unregistered)





The
authorized Common stock of the Company was established at 500,000,000
shares with no par value.The Company is also authorized to issue 50,000,000
shares of preferred stock with a par value of $0.01 per share.  The
rights, preferences and privileges of the holders of the preferred stock will be
determined by the Board of Directors prior to issuance of such shares. The
following represents a detailed analysis of the fiscal year ended September 30,
2010 Common stock transactions.





On
October 16, 2009, the Company accepted an offer for the sale of 2,556,818 shares
of its restricted common stock in a private placement for cash proceeds of
$225,000. The shares were issued in a transaction exempt from registration
pursuant to Section 4(2) of the Securities Act.





On
December 31, 2009 the Company accepted an offer for the sale of 1,000,000 shares
of its restricted common stock in a private placement for cash proceeds of
$88,000. The shares were issued in a transaction exempt from registration
pursuant to Section 4(2) of the Securities Act.





On March
17, 2010 the Company accepted an offer for the sale of 2,000,000 shares of its
restricted common stock in a private placement for cash proceeds of $150,000.
The shares were issued in a transaction exempt from registration pursuant to
Section 4(2) of the Securities Act.





Lincoln
Park Capital Fund, LLC Transaction





On March
30, 2010, XsunX signed a $5 million stock purchase agreement with Lincoln Park
Capital Fund, LLC (“LPC”), an Illinois limited liability
company.  Upon signing the agreement, XsunX received $500,000 from LPC
as an initial purchase under the $5 million dollar commitment in exchange for
5,000,000 shares of our common stock.  We also entered into a
registration rights agreement with LPC whereby we agreed to file a registration
statement related to the transaction with the U.S. Securities & Exchange
Commission (“SEC”) covering the shares that have been issued or may be issued to
LPC under the purchase agreement.  On April 30, 2010, XsunX, Inc.
filed a Form S-1 with the Securities and Exchange Commission seeking to register
27,500,000 shares related to our financing agreements with LPC. The registration
was declared effective by the Securities and Exchange Commission on June 30,
2010.Subject to the effective registration statement related to the transaction,
we have the right over a 25-month period to sell our shares of common stock to
LPC in amounts up to $500,000 per sale, depending on certain conditions as set
forth in the purchase agreement, up to the aggregate commitment of $5
million.


13


There are
no upper limits to the price LPC may pay to purchase our common stock, and the
purchase price of the shares related to the $4.5 million of future funding will
be based on the prevailing market prices of the Company’s shares at the time of
sales without any fixed discount. The Company will control the timing and amount
of any sales of shares to LPC.  LPC shall not have the right or the
obligation to purchase any shares of our common stock on any business day that
the price of our common stock is below $0.08.





In
consideration for entering into the $5 million agreement which provides for an
additional $4.5 million of future funding, we issued to LPC 1,250,000 shares of
our common stock as a financing inception commitment and shall issue an
equivalent amount of shares pro rata as LPC purchases the additional $4.5
million. The common stock purchase agreement may be terminated by us at any time
at our discretion without any cost to us.  Except for a limitation on
variable priced financings, there are no negative covenants, restrictions on
future funding’s, penalties or liquidated damages in the
agreement.  The proceeds received by the Company under the common
stock purchase agreement are expected to be used in the development of thin film
manufacturing equipment and technologies, general and administrative costs, and
general working capital.





Pursuant
to the stock purchase agreement with LPC and the S-1 Registration Statement
declared effective by the SEC on June 30, 2010, the Company has sold to Lincoln
Park Capital Fund, LLC through September 30, 2010, approximately 5,556,808
shares for a total investment of $549,999.98 including the initial $500,000 and
5,000,000 shares.  These shares were sold at various pricing between
$0.08 and $0.10 per share.  Subsequent to September 30, 2010, we have
sold an additional 1,963,940 shares for $175,000.10 for a total of 7,520,748
shares issued and $725,000.08 cash received.  These shares were sold
at various pricing between $0.08 and $0.09 per share.  Including
1,250,000 shares provided to LPC as financing inception commitment shares, and
an additional 62,497 commitment shares issued pro rata as LPC has purchased
additional shares this leaves 18,666,755 registered shares available for future
sales pursuant to the effective S-1 Registration Statement.





Issuance
of Shares for Services





For the
fiscal period ended September 30, 2010, the Company issued a total of 193,213
shares of its restricted common stock in connection with service agreements to
provide various marketing, and consulting services to the Company as
follows:





On
November 16, 2009 the Company issued 53,789 shares of its common restricted
stock for services related to marketing and public relations valued at $10,000
dollars. The shares were issued in a transaction exempt from registration
pursuant to Section 4(2) of the Securities Act.





In March
2010, the Company issued 139,424 shares of its restricted common stock in
connection with a service agreement that had provided marketing and financing
service to the Company.  Subject to the service agreement the shares
were valued at $22,500. Such shares were issued in a transaction exempt from
registration pursuant to Section 4(2) of the Securities Act.





Use
of Proceeds from the Sale of Securities





The
proceeds from the above sales of securities were and are being used primarily to
fund efforts by the Company to develop marketable technologies for the
manufacture of thin film solar technologies, and in the day-to-day operations of
the Company and to pay the accrued liabilities associated with these
operations.





Item
6. Selected Financial Data





N/A





Item
7. Management’s Discussion and Analysis or Plan of Operations





Cautionary
and Forward-Looking Statements





The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes included elsewhere in this Annual Report on
Form 10-K. In addition to historical consolidated financial information, the
following discussion and analysis contains forward-looking statements that
involve risks, uncertainties and assumptions as described under the “Cautionary
Note Regarding Forward-Looking Statements” that appears earlier in this Annual
Report on Form 10-K. Our actual results could differ materially from those
anticipated by these forward-looking statements as a result of many factors,
including those discussed under “Item 1A: Risk Factors” and elsewhere in this
Annual Report on Form 10-K.





The
Company undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
Readers should carefully review the factors described in other documents the
Company files from time to time with the Securities and Exchange Commission,
including the Quarterly Reports on Form 10-Q and Annual Report on Form 10-K
filed and any Current Reports on Form 8-K filed by the Company.


14


Business
Overview





XsunX,
Inc. is developing and has begun to market a hybrid manufacturing solution to
produce high performance Copper Indium Gallium (di) Selenide (CIGS) thin film
solar cells.  Our patent pending system and processing technology,
which we call CIGSolarTM, focuses on the mass production of individual thin-film
CIGS solar cells that match silicon solar cell dimensions and can be offered as
a non-toxic, high-efficiency and lowest-cost alternative to the use of silicon
solar cells. We intend to offer licenses for the use of the CIGSolarTM process
technology thereby generating revenue streams through licensing fees and
manufacturing royalties for the use of the technology.





Our
efforts have been focused on the development and customization of a series of
specialized processing tools that when combined provide a turn-key
high-throughput manufacturing system to produce CIGS solar
cells.





Core
attributes to our process method are the use of small area thermal
co-evaporation techniques coupled with state-of-the-art sputter deposition
technologies derived from the hard disc drive (HDD) industry to improve
manufacturing output, increase cell efficiency, production yields, and lower the
costs for the production of high efficiency CIGS cells.





There are
five (5) core process tools that when combined will initially produce 125mm
format (about 5” square) solar cells, scaling to 156mm formats (about 6”
square). We believe that it will be the ability of our system to minimize
processing defects while maintaining exceptional per hour production rates that
will provide superior commercial opportunities. CIGSolarTM cells will be
manufactured on stainless steel squares sized to match silicon solar cells
currently used in nearly 75% of all solar modules manufactured
today.





This
innovative approach bridges the gap between inexpensive thin-film and costly
high efficiency silicon wafer technologies to produce a new breed of solar cell
combining what we believe are the best attributes of each technology. The mass
production of individual, high performance CIGS solar cells – like solar
building blocks – we believe will allow solar power to finally compete
effectively against other sources of electrical energy.





Plan
of Operations





For the
fiscal year ending September 30, 2011, the Company has developed a plan of
operations focused on the continued development and marketing of the
aforementionedthin film solar manufacturing technology that we believe provides
an opportunity for XsunX to establish a competitive advantage within the solar
industry.





Our Plan
of Operations, based upon the aforementioned activities, commits $1.67million
for general, administrative, research and development activities, and $2.62
million working capitalunder a phase two plan to establish a limited
scale  production system for use in marketing and sales efforts
through the use of the system to demonstrate technologies, continued process
development and improvement under our technology license model, and for support
purposes of the systems placed in the field as we work to commercialize our
proposed new CIGS manufacturing technology.





The
Company may change any or all of the budget categories in the execution of its
business attempts. None of the items is to be considered fixed or
unchangeable.





Management
believes the summary data and audit presented herein is a fair presentation of
the Company’s results of operations for the periods presented. Due to the
Company’s change in primary business focus and new business opportunities these
historical results may not necessarily be indicative of results to be expected
for any future period. As such, future results of the Company may differ
significantly from previous periods.





Results
of Operations for the Fiscal Year Ended September 30, 2010 Compared to Fiscal
Year Ended September 30, 2009.




Revenue and Cost of
Sales:




The Company generated no revenues in
the fiscal years ended September 30, 2010, and 2009. There were no associated
costs of goods sold in any of the fiscal periods represented above. The Company
to date has had minimal revenue and cost of sales, and is still in the
development stage.




Selling,
General and Administrative Expenses:




Selling,
General and Administrative (SG&A) expenses decreased by ($2,021,756) during
the fiscal year ended September 30, 2010 to $1,470,731 as compared to $3,492,487
for the fiscal year ended September 30, 2009. The decreases in SG&A expenses
were related primarily to closing the Company’s Oregon and Colorado facilities,
and a general reduction to salaries and operating expenses under the Company’s
re-focused plan of operations.We anticipate that expenditures associated with
the development and sales of our thin-film solar manufacturing technologies will
increase SG&A expenditures in the future. However, we plan to offer our
technology as a licensable process to existing solar product manufacturers which
we anticipate will mitigate future expenditures that would normally be
associated with our need to establish direct large scale manufacturing
capabilities and the associated facility infrastructure.


15


Research
and Development:




Our
current research and development plans include the use of third party equipment
vendors whose equipment we plan to use as part of our integrated CIGSolarTM
manufacturing system. These vendors assist with access to equipment and
technologies that we are working to customize for use in our manufacturing
processes. This approach to research and development has allowed expenses to
decrease by $65,885 during the fiscal year ended September 30, 2010 to $292,999
as compared to $358,884 for the fiscal year ended September 30, 2009. We
anticipate that future R&D expense will increase as we establish each of the
various system capabilities within our own facilities for use in continued
process improvement, marketing efforts, and systems support.




Net
Loss:




For the
fiscal year ended September 30, 2010, our net loss was ($2,210,603) as compared
to a net loss of ($10,634,133) for the fiscal year ended September 30,
2009.   This decrease in Net Loss of $(8,423,530) compared to the
fiscal year ended September 30, 2009 was primarily due to a decrease in the
impairment of assets expense compared to the prior fiscal years impairment and
write down of assets, which resulted in an expense of $6,943,990. Also, the
decrease in net loss was due to the Company’s overall decrease in operating
expenses. The Company anticipates the trend of losses to continue in future
quarters until the Company can recognize sales of significance of which there is
no assurance.




Liquidity
and Capital Resources




We had a
workingcapital deficit at September 30, 2010 of $(220,978), as compared to a
working capital of $517,387 as of September 30, 2009. The decrease in working
capital was the result of a decrease in prepaid expenses, and an increase in
accounts payable. There were no revenue producing activities for the fiscal year
ended September 30, 2010.




Cash flow
used by operating activities was $(1,347,395) for the fiscal year ended
September 30, 2010, as compared to cash flow used by operating activities of
($2,862,327) for the fiscal year ended September 30, 2009. The decrease in cash
flow used of $(1,514,932) by operating activities was primarily due to a
decrease in operating net loss and prepaid expenses.




Cash flow
provided by investing activities was $14,100 for the fiscal year ended September
30, 2010, as compared to cash flow used in investing activities of $(16,174)
during the fiscal year ended September 30, 2009. The net increase in investing
activities was primarily due to proceeds received of $244,100 from the sale of
assets, and the purchase of equipment in the amount of $(230,000), compared to
purchasing fixed assets of $(16,174) in the prior fiscal year.




Cash flow
provided by financing activities was $1,003,000 for the fiscal year ended
September 30, 2010, as compared to cash provided by financing activities of
$1,020,000 during the fiscal year ended September 30, 2009. The decrease in cash
flow provided by financing activities was the result of a reduction to cash
provided through equity financing.




The
Company is currently engaged in efforts to develop a cross-industry thin film
solar manufacturing concept that we believe provides an opportunity for XsunX to
establish a competitive advantage within the solar industry. However the cash
flow requirements associated with the completion of these development efforts,
and the transition to revenue recognition will exceed cash generated from
operations in the current and future periods. We will need toseek to obtain
additional financing from equity and/or debt placements. We have been able to
raise capital in a series of equity and debt offerings in the past. While there
can be no assurances that we will be able to obtain such additional financing,
on terms acceptable to us and at the times required, or at all, we believe that
sufficient capital can be raised in the foreseeable future as
necessary.




Off-Balance
Sheet Arrangements





We do not
have any relationships with unconsolidated entities or financial partnerships
such as entities often referred to as structured finance or special purpose
entities that would have been established for the purpose of facilitating
off-balance-sheet arrangements or for other contractually narrow or limited
purposes. As such, we are not exposed to any financing, liquidity, market or
credit risk that could arise if we had engaged in such
relationships.





Item
7A. Quantitative and Qualitative Disclosures About Market Risk





Our
products will be quoted for sale and licensure in United States dollars and as
our business development efforts progress we anticipate the sale and/or
licensure of our products to foreign entities. To the extent that we may be
exposed to foreign currency risks related to the rise and/or fall of foreign
currencies against the U.S. dollar we will report in United States
dollars.


16


Item
8. Financial Statements and Supplementary Data





All
financial information required by this Item is attached hereto at the end of
this report beginning on page F-1 and is hereby incorporated by
reference.





Item
9. Changes in and Disagreements on Accounting and Financial
Disclosure





Effective
as of July 17, 2009, the board of directors of the Company approved the
engagement of HJ Associates& Consultants, LLP (“HJ”) as its principal
independent registered public accounting firm to audit the Company’s financial
statements. During the Company’s two (2) most recent fiscal years, as well as
the subsequent interim period through the Effective Date, there were no
disagreements between the Company and HJ on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures,
which disagreements if not resolved to their satisfaction would have caused them
to make reference to the subject matter of the disagreement in connection with
HJ’s report. During the Company’s most recent two (2) fiscal years, as well as
the subsequent interim period through the Effective Date, HJ did not advise the
Company of any of the matters identified in Item 304(a)(v)(A) - (D) of
Regulation S-K.





Item
9A. Controls and Procedures





Disclosure
Controls and Procedures





Our Chief
Executive Officer and Chief Operating Officer, have evaluated the effectiveness
of our disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period
covered by this report. The evaluation included certain control areas in which
we have made, and are continuing to make, changes to improve and enhance
controls. A material weakness is a condition in which the design or operation of
one or more of the internal control components does not reduce to a relatively
low level the risk that misstatements caused by error or fraud in amounts that
would be material in relation to the financial statements being audited may
occur and not be detected within a timely period by employees in the normal
course of performing their assigned functions. Based on such evaluation, our
Chief Executive Officer and Chief Operating Officer have concluded that, as of
the end of such period, our disclosure controls and procedures were effective,
and we have discovered no material weakness.





Internal
Control over Financial Reporting





Management
is responsible for establishing and maintaining adequate internal control
structure and procedures over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f)) under the Exchange Act. The SEC rule making
for the Sarbanes-Oxley Act of 2002 Section 404 requires that a company's
internal controls over financial reporting be based upon a recognized internal
control framework. Our management conducted an assessment of the effectiveness
of our internal control over financial reporting as of September 30, 2010 based
on the framework set forth in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) that has been modified to more appropriately reflect the current
limited operational scope of the Company as a Development Stage company. The
Company used the COSO guide - The Internal Control over Financial Reporting -
Guidance for Smaller Public Companies to implement the Company’s internal
control framework. Additionally, the limited scope of operations of the Company
means that traditional separation of duties controls are not used by the Company
as a result of the limited staffing within the Company. The Company relies on
alternative procedures to overcome this non-material control
weakness.





During
the Company's fiscal year ended September 30, 2010, management continued
revising the Company's internal and controls procedure document basing this
revision upon additional guidance for implementing the model framework created
by COSO as is appropriate to our operations and operations of smaller public
entities. This framework is entitled Internal Control-Integrated Framework. The
COSO Framework, which is the common shortened title, was published in 1992 and
has been updated, and we believe will satisfy the SEC requirements of Section
404 of the Sarbanes-Oxley Act of 2002. As the Company expands operations,
additional staff will be added to implement separation of duties controls as
well.





Based on
that evaluation, our Chief Executive Officer and our Chief Operating Officer
concluded that our internal control over financial reporting as of September 30,
2010 was effective.    Internal control over financial
reporting cannot provide absolute assurance of achieving financial reporting
objectives because of its inherent limitations. Internal control over financial
reporting is a process that involves human diligence and compliance and is
subject to lapses in judgment and breakdowns resulting from human failures.
Because of such limitations, there is a risk that material misstatements may not
be prevented or detected on a timely basis by internal control over financial
reporting. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.





Changes
in Internal Control over Financial Reporting





Except as
noted above, there have not been any changes in our internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during our fourth fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.


17


Auditors
Report on Internal Control over Financial Reporting





This
annual report does not include an attestation report of the company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management's report
in this annual report.





Item
9B. Other Information





Pursuant
to an S-1 Registration Statement declared effective by the SEC on June 30, 2010,
the Company sold to Lincoln Park Capital Group, LLC (LPC) from October 1, 2010
through the date of this report, a total of approximately 1,963,940 shares for a
total investment of $175,000.10. These shares were sold at various pricing
between $0.08 and $0.09 per share.  An additional 48,609of the
remaining pool of 1,250,000 commitment shares were issued on a pro rata basis to
LPC as LPC has purchased additional shares pursuant to the effective S-1
Registration Statement.





Issuance
of Stock Purchase Options





On
October 18, 2010, the Board of Directors authorized the issuance of stock option
agreements to the named employees listed below as follows:


Name
                              
                              Date of Grant
                              
                              Amount
                              
                              
                              Exercise Price
                              
                              
                              Term
                              
                              ConsiderationJoseph
      Grimes
                              
                              October
      18, 2010
                              
                              
                              1,000,000
                              
                              
                              $
                              0.10
                              
                              
                              5
      yr.
                              
                              Future
      key deliverables within the scope of the employees
    influenceRobert
      G. Wendt
                              
                              October
      18, 2010
                              
                              
                              10,000,000
                              
                              
                              $
                              0.10
                              
                              
                              5
      yr.
                              
                              Future
      key deliverables within the scope of the employees
    influence





The
vesting schedule for Mr. Grimes is as follows:





The
option shall become exercisable in the following amounts upon the delivery
and/or achievement by the optionee(s) of the following performance
milestones:





(a)
            The
      Option shall become exercisable in the amount of 1,000,000 shares upon
      Optionee’s management of the assembly and operation of initial baseline
      CIGSolar process equipment contemplated under the Company’s CIGS solar
      cell equipment and technology plan, and the subsequent production of 1,000
      full size solar cells (dimension of 125 or 156 mm square) that achieve a
      minimum of >10% conversion efficiency over a five (5) day operating
      period in which the system operates at the designed through-put speed
      range delivering a cell yield of >80%. Cells measured at AM1.5 using a
      light source and tester calibrated to NIST
  standards.





(b)
            In
      the event of a sale or merger of all or substantially all of the Company’s
      assets to an acquiring party following which the Company would not be a
      surviving operating entity, the Company will provide Optionee a fifteen
      (15) day prior notice of such proposed event providing for immediate
      vesting of all remaining unvested Options under this
      Agreement.





The
vesting schedule for Mr. Wendt is as follows:





The
option shall becomeexercisable in the following amounts upon the delivery and/or
achievement by the optionee(s) of the following performance
milestones:





(a)
            The
      Option shall become exercisable in the amount of 1,000,000 shares upon the
      award to the Company of a least one patent issued by the United States
      Patent and Trademark Office protecting a key element to the Company’s
      CIGSolar manufacturing approach in which Optionee had an instrumental
      involvement in either the design, development, prosecution, or inception
      of the intellectual property.





(b)
            The
      Option shall become exercisable in the amount of 4,000,000 shares upon
      Optionee’s assembly and/or management of the assembly and operation of
      initial baseline CIGSolar process equipment contemplated under the
      Company’s CIGS solar cell equipment and technology plan, and the
      subsequent production of 1,000 full size solar cells (dimension of 125 or
      156 mm square) that achieve a minimum of >10% conversion efficiency
      over a five (5) day operating period in which the system operates at the
      designed through-put speed range delivering a cell yield of >80%. Cells
      measured at AM1.5 using a light source and tester calibrated to NIST
      standards.


18


(c)
            The
      Option shall become exercisable in the amount of 5,000,000 shares upon
      Optionee’s assembly and/or management of the assembly and operation of
      commercial CIGSolar production equipment prepared for use by the Company,
      or for delivery to a third party by the Company for use in a commercial
      setting, and the subsequent production of 2,000 full size solar cells
      (dimension of 125 or 156 mm square) that achieve a minimum of > 12%
      conversion efficiency while operating over a five (5) day operating period
      in which the system operates at the designed through-put speed range
      delivering a cell yield of >85%. Cells measured at AM1.5 using a light
      source and tester calibrated to NIST
standards.





(d)
            Achievement
      of each milestone to be reviewed and determined by the Company’s Board of
      Directors prior to the Company acknowledgment of any vesting rights by
      Optionee. Determination by the Board of Directors will be provided within
      ten (10) business days from notice to the Company by Optionee of milestone
      achievement. Notice by Optionee shall contain all relevant information
      necessary for the Board of Directors to review and make a
      determination.





Additionally,
on October 18, 2010, the Board of Directors authorized amendments to prior
option grants issued to the named employee listed below as follows:





Grant
                      Number
                    
                    Optionee
                      Name
                    
                    Amended Terms07-016
                    
                    Robert
      Wendt
                    
                    Section
      3(i) (b) Exercise of Option was amended as follows; This Option shall
      become exercisable in the amount of 100,000 shares upon production by
      Optionee of a >10% NREL CIGS device produced on glass
      substrate.  Device measured at AM1.5 using a light source and
      tester calibrated to NIST standards07-023
                    
                    Robert
      Wendt
                    
                    Section
      3(i) (a,b,c) Vesting Schedule was amended as follows;(a)          This
      Option shall become exercisable in the amount of 250,000 shares upon
      production by Optionee of a >10% NREL CIGS device produced on stainless
      steel substrate.  Device measured at AM1.5 using a light source
      and tester calibrated to NIST standards.”“(b)        This
      Option shall become exercisable in the amount of 250,000 shares upon
      production by Optionee of one >10% full size 125 mm pseudo square cell
      on stainless steel (SS).  Device measured at AM1.5 using a light
      source and tester calibrated to NIST standards.”“(c)         Intentionally
      Omitted”34-2009
                    
                    Robert
      Wendt
                    
                    Section
      3(i) (a) Exercise of Option was amended as follows; All remaining unvested
      Options under this Agreement shall vest and become exercisable upon
      production by Optionee, and third party validation, of functioning>10%
      full size 125 mm pseudo square cells on stainless steel (SS) – minimum 20
      cells.  Cells measured at AM1.5 using a light source and tester
      calibrated to NIST
standards.”


19


PART
III





Item
10. Directors, Executive Officers, and Corporate Governance





The
following table lists the executive offices and directors of the Company during
the fiscal year ended September 30, 2010:




Name
              
              Age
              
              Position Held
              
              TenureTom
      Djokovich
              
              53
              
              CEO,
      Director, Secretary, and acting Principal Accounting
    Officer
              
              CEO
      and Director since October 2003, Secretary and PAO since September
      2009Joseph
      Grimes
              
              53
              
              President,
      COO, Director
              
              President
      since March 2009, COO since April 2006, and as a director Since August
      2008Robert
      Wendt
              
              48
              
              CTO
              
              Since
      March 2009Thomas
      Anderson
              
              45
              
              Director
              
              Since
      August 2001Oz
      Fundingsland
              
              67
              
              Director
              
              Since
      November 2007Michael
      Russak
              
              63
              
              Director
              
              Since
      November 2007





The above
listed directors will serve until the next annual meeting of the stockholders or
until their death, resignation, retirement, removal, or disqualification, and
until their successors have been duly elected and qualified. Vacancies in the
existing Board of Directors are filled by majority vote of the remaining
Directors. There are no agreements or understandings for any officer or director
to resign at the request of another person and no officer or director is acting
on behalf of or will act at the direction of any other person. There is no
family relationship between any of our directors.





The
directors of the Company will devote such time to the Company’s affairs on an
“as needed” basis, but typically less than 20 hours per month. As a result, the
actual amount of time which they will devote to the Company’s affairs is unknown
and is likely to vary substantially from month to month.





Biographical
Information





Mr.
Tom Djokovich, age 53, Chief Executive Officer and a Director as of October
2003,acting Principal Accounting Officer as of September 2009;





Mr.
Djokovich was the founder and served from 1995 to 2002 as the Chief Executive
Officer of Accesspoint Corporation, a vertically integrated provider of
electronic transaction processing and e-business solutions for merchants. Under
Mr. Djokovich’s guidance, Accesspoint became a member of the Visa/MasterCard
association, the national check processing association NACHA, and developed one
of the payment industry’s most diverse set of network based transaction
processing, business management and CRM systems for both Internet and
conventional points of sale. Prior to Accesspoint, Mr. Djokovich founded TMD
Construction and Development in 1979. TMD provided management for
multimillion-dollar projects incorporating at times hundreds of employees,
subcontractors and international material acquisitions for commercial,
industrial and custom residential construction services as a licensed building
and development firm in California. In 1995 Mr. Djokovich developed an early
Internet based business-to-business ordering system for the construction
industry.





Mr.
Joseph Grimes, age 53, Chief Operating Officer as of April 2006, a Director as
of August 2008, and President as of March 2009;





Mr.
Grimes brings to XsunX more than eight years direct experience in thin-film
technology and manufacturing. He was most recently Vice President, Defense
Solutions, for Envisage Technology Company, where he directed and managed the
defense group business development process, acquisition strategies and vision
for next generation applications from October 2005 to March 2006. Previously he
was Co-Founder, President and CEO of ISERA Group, where he established the
company infrastructure and guided five development teams, finally selling the
company to Envisage from 1993 to 2005. His direct experience in thin-film
technology came with Applied Magnetics Corporation from 1985 to 1993 as manager
for thin-film prototype assembly. Mr. Grimes holds a Bachelor’s degree in
business economics and environmental studies, and a Master’s in computer
modeling and operation research applications, both from the University of
California at Santa Barbara.





Mr.
Robert Wendt, age 48, Chief Technology Officer as of March 2009;


Mr. Wendt
holds a B.S. and M.S. in Metallurgical Engineering and Material Science from the
Colorado School of Mines. His responsibility encompasses technical specification
of the facilities, equipment, and manufacturing processes for XsunX. Prior to
joining XsunX in 2007, Mr. Wendt served at various times as Vice President of
Sales, Product Development, and Engineering at Global Solar Energy from May 1996
to 2005. At Global Solar, Mr. Wendt has led and directed several areas including
copper indium gallium di-selenide (CIGS) technology development, equipment
design and integration, facilities design and construction, engineering,
production, and operations


20


Prior to
Global Solar, Mr. Wendt was at ITN with responsibility for the development of
thin-film deposition technologies, thin-film PV, and development of charge
controller/battery systems for portable solar cell powered systems. Prior to
joining ITN, Mr. Wendt spent eight years with Lockheed Marietta Astronautics,
Denver Division. While in this position, Mr. Wendt was program manager/principal
investigator on over 20 material-based programs. During 1994/1995, Mr. Wendt was
the technical lead for thin-film PV research at the Denver
Division.





Independent
Directors





Mr.
Thomas Anderson, age 45, became a director of the Company in August
2001;





Mr.Anderson
presently works as the Director of Southwest Business Operations forAmerican
Capital Energy, a commercial and utility scale solar integrator. Hehas been with
American Capital Energy since October, 2008.  He recently served as
Managing Directorof the Environmental Science and Engineering Directorate of
Qinetiq NorthAmerica in Los Alamos, New Mexico. He was with Qinetiq North
America, formerlyApogen Technologies, from January, 2005, through September,
2008. Mr. Andersonworked for 19 years in the environmental consulting field,
providing consultingservices in the areas of environmental compliance,
characterization andremediation services to Department of Energy, Department of
Defense, andindustrial clients. He formerly worked as a Senior Environmental
Scientist atConcurrent Technologies Corp. from November 2000 to December 2004.
He earnedhis B.S. in Geology from DenisonUniversity and his M.S. in
EnvironmentalScience and Engineering from Colorado School of Mines.





Mr.
Oz Fundingsland as Director, age 67, became a director of the Company in
November 2007;





On
November 12, 2007, the Company announced the appointment of Mr. Oz Fundingsland
as Director, effective November 12, 2007. Mr. Fundingsland brings over forty
years of sales, marketing, executive business management, finance, and corporate
governance experience to XsunX. His professional and business experience
principally originated with his tenure, commencing in 1964, at Applied Magnetics
Corp., a disk drive and data storage company. Prior to his retirement from
Applied Magnetics in 1994, Mr. Fundingsland served as an Executive Officer and
Vice President of Sales and Marketing for 11 years directing sales growth from
$50 million to over $550 million. Commencing in 1993 through 2003 Mr.
Fundingsland served as a member of the board of directors for the International
Disk Drive Equipment Manufacturers Association “IDEMA” where he retired
emeritus, and continues to serve as an advisor to the board. For the last 13
years, Mr. Fundingsland has provided consulting services assisting with sales,
marketing, and management to a host of companies within the disk drive, optical,
software, and LED industries.





Dr.
Michael A. Russak as Director, age 63, became a director of the Company in
November 2007;





On
November 28, 2007, the Company announced the appointment of Dr. Michael A.
Russak as a Director, effective November 26, 2007. Dr. Russak is also a member
of the Company’s Scientific Advisory Board. Dr. Michael A. Russak currently
holds the position of Executive Vice President of Business Development with
Intevac, Inc. in Santa Clara, CA.  He has been working as a consultant
in the hard disk drive and photovoltaic industries since Jan 2007. He is also
currently the Executive Director of IDEMA-U.S. (the hard disk drive industry
trade association) and a member of the Board of Directors and Scientific
Advisory Board of XsunX, Inc. From 2001 to 2006 he was President and Chief
Technical Officer of Komag, Inc., a manufacturer of hard magnetic recording
disks for hard disk drive applications. From 1993 to 2001 he was Chief Technical
Officer of HMT Technology, Inc. also a manufacturer of magnetic recording disks.
From 1985 to 1993 he was a research staff member and program manager in the
Research Division of the IBM Corporation. Dr. Russak has over thirty five years
of industrial experience progressing from a research scientist to senior
executive officer of two public companies. He has expertise in thin film
materials and devices for magnetic recording, photovoltaic, solar thermal
applications, semiconductor devices as well as glass, glass-ceramic and ceramic
materials. He also has over twelve years’ experience at the executive management
level of public companies with significant off shore development and
manufacturing functions. He received his B.S. in Ceramic Engineering in 1968 and
Ph.D. in Materials Science in 1971, both from RutgersUniversity in New
Brunswick, NJ. During his career, he has been a contributing scientist and
program manager at the Grumman Aerospace Corporation, a Research Staff Member
and technical manager in the areas of thin film materials and processes at the
Research Division of the IBM Corporation at the T.J. Watson Research
Laboratories. In 1993, he joined HMT Technology, a manufacturer of thin film
disks for magnetic storage, as Vice President of Research and Development. His
responsibilities included new product design and introduction. Dr. Russak became
Chief Technical Officer of HMT and held that position until 2000 when HMT merged
with Komag Inc. Dr. Russak was appointed President and Chief Technical Officer
of the combined company. He continued to set technical, operational and business
direction for Komag until his retirement at the end of 2006. He has published
over 90 technical papers, and holds 23 U.S. patents.





Involvement
in Certain Legal Proceedings





None of
the members of the Board of Directors or other executives has been involved in
any bankruptcy proceedings, criminal proceedings, any proceeding involving any
possibility of enjoining or suspending members of our Board of Directors or
other executives from engaging in any business, securities or banking
activities, and have not been found to have violated, nor been accused of having
violated, any federal or state securities or commodities laws.


21


Board
Committees; Audit Committee





As of
September 30, 2010, the Company’s board was comprised of five directors, three
of which are considered independent directors and the Company did not have an
audit committee. Further, none of the members of the board of directors is
qualified as a financial expert. We are a development stage company with limited
resources and we are actively seeking a qualified financial expert for addition
to the board. The board of directors will appoint committees as necessary,
including an audit committee as resources permit.  In the meantime,
the Board serves as the Company’s audit committee utilizing business judgment
rules and good faith efforts.





Section
16(A) Beneficial Ownership Reporting Compliance





Section
16(a) of the Exchange Act requires the Company’s officers and directors, and
certain persons who own more than 10% of a registered class of the Company’s
equity securities (collectively, “Reporting Persons”), to file reports of
ownership and changes in ownership (“Section 16 Reports”) with the SEC.
Reporting Persons are required by the SEC to furnish the Company with copies of
all Section 16 Reports they file.  Based on its review of the copies
of such forms received by it, or written representations from certain reporting
persons, the Company believes that, during the fiscal year ended September 30,
2010, all filing requirements applicable to its officers, directors, and greater
than ten-percent beneficial owners were complied with the exception
that one report, covering an aggregate of onetransaction was not
timely filed by the chief executive officer with the SEC via Form 4 or
via year-end report on Form 5.





Code
of Ethics





The
Company’s board of directors adopted a Code of Ethics policy on January 7,
2008.





Item
11. Executive Compensation





Overview





We are a
development stage Company and we rely on our board of directors to evaluate
compensation and incentive offerings made by the Company as it applies to our
executive officers, and efforts to attract and maintain qualified staff. To
date, our compensation policy has been conducted on a case by case basis with
input from our chief executive officer, and focused on the following three
primary areas; (a) salary compensatory with peer group companies and peer
position, (b) cash bonuses tied to sales and revenue attainment, and (c) long
term equity compensation tied to strategic objectives of establishing marketable
solar technologies.





In this
Compensation Discussion and Analysis, the individuals in the Summary
Compensation Table set forth below are referred to as the “named executive
officers”. Generally, the types of compensation and benefits provided to the
named executive officers may be similar to what we intend to provide to future
executive officers.





Executive
Compensation





The
following table sets forth information with respect to compensation earned by
our chief executive officer, our former chief financial officer, our chief
operating officer, and our chief technical officer (collectively, our “named
executive officers”) for the fiscal years ended September 30, 2010, and 2009
respectively.





Summary
Compensation Table





Name and Principal Position
                                                                          
                                                                          Year
                                                                          
                                                                          Salary
                                                                            ($)
                                                                          
                                                                          
                                                                          Bonus
                                                                            ($)
                                                                          
                                                                          
                                                                          Stock
                                                                            Awards
                                                                            ($)
                                                                          
                                                                          
                                                                          Option
                                                                            Awards
                                                                            ($)
                                                                          
                                                                          
                                                                          All Other
                                                                            Compensation
                                                                            ($)
                                                                          
                                                                          
                                                                          Total
                                                                            ($)2010
                                                                          
                                                                          
                                                                          165,000
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          4,800
                                                                          
                                                                          
                                                                          
                                                                          169,800Tom Djokovich,
      CEO(1)
                                                                          
                                                                          2009
                                                                          
                                                                          
                                                                          189,327
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          4,800
                                                                          
                                                                          
                                                                          
                                                                          194,1272010
                                                                          
                                                                          
                                                                          157,500
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          4,800
                                                                          
                                                                          
                                                                          
                                                                          162,300Joe Grimes,
      COO(2)
                                                                          
                                                                          2009
                                                                          
                                                                          
                                                                          181,730
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          107,750
                                                                          
                                                                          
                                                                          
                                                                          4,800
                                                                          
                                                                          
                                                                          
                                                                          294,2802010
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          0Jeff Huitt,
      CFO(3)
                                                                          
                                                                          2009
                                                                          
                                                                          
                                                                          155,000
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          39,000
                                                                          
                                                                          
                                                                          
                                                                          4,800
                                                                          
                                                                          
                                                                          
                                                                          198,8002010
                                                                          
                                                                          
                                                                          160,384
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          4,800
                                                                          
                                                                          
                                                                          
                                                                          165,184Robert Wendt,
      CTO(4)
                                                                          
                                                                          2009
                                                                          
                                                                          
                                                                          173,146
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          107,750
                                                                          
                                                                          
                                                                          
                                                                          3,600
                                                                          
                                                                          
                                                                          
                                                                          284,496


22


(1)
            In
      March 2009 Mr. Djokovich and the Company agreed to the reduction of annual
      salary from $220,000to $165,000 as part of cost cutting measures approved
      by the Board of Directors in association with the Company’s efforts to
      modify its plan of operations. In addition to Mr. Djokovich’s base
      compensation the Company also provides Mr. Djokovich with a $400 monthly
      health insurance allowance.





(2)
            In
      March 2009 Mr. Grimes and the Company agreed to the reduction of annual
      salary from $210,000 to $157,500 as part of cost cutting measures approved
      by the Board of Directors in association with the Company’s efforts to
      modify its plan of operations.In addition to Mr. Grimes base compensation
      the Company also provides Mr. Grimes with a $400 monthly health insurance
      allowance.





(3)
            Effective
      September 9, 2009 Jeff Huitt and the Company agreed to the termination of
      his services.





(4)
            In
      March 2009 Mr. Wendt and the Company agreed to the reduction of annual
      salary from $200,000 to $150,000 as part of cost cutting measures approved
      by the Board of Directors in association with the Company’s efforts to
      modify its plan of operations. In January 2010 Mr. Wendt and the Company
      agreed to increase the annual salary to $165,000. In addition to Mr.
      Wendt’s base compensation the Company also agreed to provide Mr. Wendt
      with a $400 monthly health insurance
allowance.





No other
compensation not described above was paid or distributed during the listed
fiscal years to the executive officers of the Company.





Grants
of Plan-Based Awards Table





The
following table sets forth summary information regarding all grants of
plan-based awards made to our named executive officers during the two years
ended September 30, 2010, and 2009 respectively.




Name
                            
                            Grant
                              Date
                            
                            All Other
                              Option
                              Awards:
                              Number of
                              Securities
                              Underlying
                              Options
                              (#)
                            
                            
                            Exercise or
                              Base Price
                              of Option
                              Awards
                              ($/Sh)
                            
                            
                            Grant Date
                              Fair Value of
                              Stock and
                              Option Awards
                              ($)Tom
      Djokovich, CEO
                            
                            2010
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            02009
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0Jeff
      Huitt, CFO(1)
                            
                            2010
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            02009
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0Joe
      Grimes, COO
                            
                            2010
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            02009
                            
                            
                            2,500,000
                            
                            
                            
                            0.16
                            
                            
                            
                            68,750Robert
      Wendt, CTO
                            
                            2010
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            02009
                            
                            
                            2,500,000
                            
                            
                            
                            0.16
                            
                            
                            
                            68,750





(1)
            Effective
      September 9, 2009 Mr. Jeff Huitt and the Company agreed to the termination
      of his services.


23


Outstanding
Equity Awards at Fiscal Year End Table





The
following table sets forth the outstanding equity awards with respect our named
executive officers for the fiscal year ended September 30, 2010





OPTION AWARDS
                      
                      
                      STOCK AWARDSEquity
                      
                      
                      EquityEquity
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      Incentive Plan
                      
                      
                      Incentive PlanIncentive Plan
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      Awards:
                      
                      
                      Awards:Number of
                      
                      
                      Awards:
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      Market
                      
                      
                      Number of
                      
                      
                      Market orNumber of
                      
                      
                      Securities
                      
                      
                      Number of
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      Number of
                      
                      
                      Value of
                      
                      
                      Unearned
                      
                      
                      Payout Value ofSecurities
                      
                      
                      Underlying
                      
                      
                      Securities
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      Shares or
                      
                      
                      Shares or
                      
                      
                      Shares, Units
                      
                      
                      UnearnedUnderlying
                      
                      
                      Unexercised
                      
                      
                      Underlying
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      Units of
                      
                      
                      Units of
                      
                      
                      or Other
                      
                      
                      Shares, Units orUnexercised
                      
                      
                      Unearned
                      
                      
                      Unexercisable
                      
                      
                      Option
                      
                      
                      Option
                      
                      
                      Stock That
                      
                      
                      Stock that
                      
                      
                      Rights That
                      
                      
                      Other RightsOptions (#)
                      
                      
                      Options (#)
                      
                      
                      Unearned
                      
                      
                      Exercise
                      
                      
                      Expiration
                      
                      
                      Have Not
                      
                      
                      Have Not
                      
                      
                      Have Not
                      
                      
                      That HaveName
                      
                      Exercisable
                      
                      
                      Unexercisable
                      
                      
                      Options (#)
                      
                      
                      Price ($)
                      
                      
                      Date
                      
                      
                      Vested (#)
                      
                      
                      Vested ($)
                      
                      
                      Vested (#)
                      
                      
                      Not Vested (#)Tom
      Djokovich, CEO
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Jeff
      Huitt, CFO(1)
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Joe
      Grimes, COO
                      
                      
                      1,249,998
                      
                      
                      
                      1,250,002
                      
                      
                      
                      0
                      
                      
                      $
                      0.16
                      
                      
                      
                      4/1/2014
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —0
                      
                      
                      
                      500,000
                      
                      
                      
                      0
                      
                      
                      $
                      0.36
                      
                      
                      
                      10/23/2012
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —400,000
                      
                      
                      
                      100,000
                      
                      
                      
                      0
                      
                      
                      $
                      0.46
                      
                      
                      
                      1/26/2012
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —500,000
                      
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      $
                      0.51
                      
                      
                      
                      7/20/2011
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —112,000
                      
                      
                      
                      0
                      
                      
                      
                      0
                      
                      
                      $
                      1.69
                      
                      
                      
                      4/5/2011
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Robert
      Wendt
                      
                      
                      1,249,998
                      
                      
                      
                      1,250,002
                      
                      
                      
                      0
                      
                      
                      $
                      0.11
                      
                      
                      
                      4/1/2014
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —0
                      
                      
                      
                      500,000
                      
                      
                      
                      0
                      
                      
                      $
                      0.36
                      
                      
                      
                      10/23/2012
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -400,000
                      
                      
                      
                      100,000
                      
                      
                      
                      0
                      
                      
                      $
                      0.46
                      
                      
                      
                      1/26/2012
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -





(1)
            Effective
      September 9, 2009 Mr. Jeff Huitt and the Company agreed to the termination
      of his services.





Option
Exercises





None





Pension
Benefits





None





Nonqualified
Defined Contribution and Other Nonqualified Deferred Compensation
Plans





None





Employment
Agreements and Arrangements





Tom
M. Djokovich





Mr.
Djokovich serves as our chief executive officer, acting principal accounting
officer, and a director. We do not have an employment agreement with Mr.
Djokovich. He currently works at the discretion of the board of directors as he
has since October 2003. His annual base salary compensation for the 2010 period
was $165,000, and he was provided a $400 per month allowance for use in the
payment of medical benefits. His total compensation is based solely on the
annual base cash salary and we do not have any equity based, cash bonus, or
special compensation agreements or understanding in place with Mr.
Djokovich.





Joseph
Grimes


On
November 6, 2007, we entered into an amended and restated employment agreement
with Mr. Joseph Grimes, our chief operating officer. Under the terms of his
employment agreement, Mr. Wendt was initially entitled to a minimum annual
base salary of $200,000 which was adjusted downward to $157,500 in March 2009 as
part of cost cutting measures approved by Mr. Grimes and the Board of Directors
in association with the Company’s efforts to modify its plan of operations.In
conjunction with agreeing to the reduction in base salary the Company provided
Mr. Grimes with a stock option grant to purchase 2,500,000 shares of our
common stock, exercisable at $0.16 cents per share. Mr. Grimes is eligible to
receive additional compensation in the form of a cash payment bonus upon certain
remaining business development attainment goals as follows; a $5,000 cash
payment bonus upon the successful implementation of a pilot production line. Mr.
Grimes is also eligible for cash payment bonus subject to attainment by the
Company of certain minimum revenues in the course of a calendar year as follows;
a $5,000 cash payment bonus upon the attainment by the Company of $5,000,000 in
revenue, a $10,000 cash payment bonus upon the attainment by the Company of
$10,000,000 in revenue, a $15,000 cash payment bonus upon the attainment by the
Company of $15,000,000 in revenue. We also provide Mr. Grimes a $400 monthly
allowance for use in payment for health benefits with the balance of such
benefits paid by Mr. Grimes. Under the employment agreement Mr. Grimes is
also subject to confidentiality and non-solicitation provisions which provide
that Mr. Grimes will not divulge information or solicit employees for
24 months after termination of his employment.





Robert
Wendt


On
January 1, 2009, we entered into an employment agreement with Mr. Robert Wendt,
our chief technical officer. Under the terms of his employment agreement,
Mr. Wendt was initially entitled to a minimum annual base salary of
$200,000 which was adjusted which was adjusted downward to $157,500 in March
2009 as part of cost cutting measures approved by Mr. Wendt and the Board of
Directors in association with the Company’s efforts to modify its plan of
operations. In conjunction with agreeing to the reduction in base salary the
Company provided Mr. Wendt with a stock option grant to purchase
2,500,000 shares of our common stock, exercisable at $0.16 cents per share.
In January 2010 Mr. Wendt and the Company agreed to increase the annual salary
to $165,000. We also provide Mr. Wendt a $400 monthly allowance for use in
payment for health benefits with the balance of such benefits paid by Mr. Wendt.
Under the employment agreement Mr. Wendt is also subject to confidentiality
and non-solicitation provisions which provide that Mr. Wendt will not
divulge information or solicit employees for 24 months after termination of
his employment.


24


Potential
Payments Upon Termination or Change-In-Control





Terms of
an amended and restated employment agreement dated November 6, 2007, with
Mr. Grimes, our chief operating officer, provide that in the event that
Mr. Grimes employment is terminated by us without good cause, Mr. Grimes
may receive a severance payment in the amount equal to 6 months of his
annual base salary then paid to Mr. Grimes, all payable within 30 days of such
termination. Potential cost to the Company could total at minimum $100,000 for
the termination of Mr. Grimes subject to the termination without good cause by
the Company.





Terms of
a two year Key Employee Retention Agreement dated September 1, 2009, with Mr.
Robert Wendt, our chief technical officer, provide that in the event that Mr.
Wendt’s employment is terminated by the Company without good cause, Mr. Wendt
may receive twelve months salary at the then salary rate at time of termination,
twelve months Company paid costs for actual costs incurred by Mr. Wendt for
medical benefits related to COBRA coverage, and a relocation payment up to
$2,500. Potential cost to the Company could total at minimum $167,500 for the
termination of Mr. Wendt subject to the termination without good cause by the
Company.





Long
Term Incentive Plans — Awards in Last Fiscal Year





Therewere
no incentive awards provided to named officers of the Company in 2010 fiscal
year.





Director
Compensation





In the
fiscal year ended September 30, 2010, Directors received no additional cash or
non-cash compensation for their service to the Company as
directors.  All Directors were reimbursed for any expenses actually
incurred in connection with attending meetings of the Board of
Directors.





SUMMARY
COMPENSATION TABLE OF DIRECTORS





Name
                  
                  Fees
                    Earnedor
                    Paidin
                    Cash
                    ($)
                  
                  
                  Stock
                    Awards
                    ($)
                  
                  
                  Option
                    Awards
                    ($)
                  
                  
                  All
                    Other
                    Compensation
                    ($)
                  
                  
                  Total
                    ($)Tom
      Djokovich
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  0Joseph
      Grimes
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  0Thomas
      Anderson
                  
                  $
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  $
                  0Oz
      Fundingsland
                  
                  $
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  $
                  0Dr.
      Michael Russak
                  
                  $
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  $
                  0





Compensation
Committee Interlocks and Insider Participation





For the
fiscal year ended September 30, 2010 adjustments or additions to new or existing
employment agreements were reviewed and deliberated by the five members of the
Company’s Board of Directors.





Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters





The
following table sets forth, as of December 29, 2010, the number of shares of
common stock owned of record and beneficially by executive officers, directors
and persons who hold 5.0% or more of the outstanding common stock of the
Company. Also included are the shares held by all executive officers and
directors as a group. Unless otherwise indicated, the address of each beneficial
owner listed below is c/o XsunX, Inc., 65 Enterprise, Aliso Viejo,
California92656.





Shareholders/BeneficialOwners
                      
                      Numberof
                        Shares
                      
                      
                      Ownership
                        Percentage(1)Tom
      Djokovich(2)
                        President
      & Director
                      
                      
                      15,793,000
                      
                      
                      7.5
                      %Thomas
      Anderson
                        Director
                      
                      
                      1,500,000
                      
                      
                      <
      1
                      %Oz
      Fundingsland
                        Director
                      
                      
                      500,000
                      
                      
                      <
      1
                      %Mike
      Russak
                        Director
                      
                      
                      600,000
                      
                      
                      <
      1
                      %Joseph
      Grimes(3)
                        Chief
      Operating Officer
                      
                      
                      2,465,331
                      
                      
                      1
                      %Robert
      Wendt(4)
                        Chief
      Technical Officer
                      
                      
                      1,833,331
                      
                      
                      <
      1
                      %





All
directors and executive officers as a group of (6 persons) account for ownership
of 22,696,662 shares representing 10.75% of the issued and outstanding common
stock. Each principal shareholder has sole investment power and sole voting
power over the shares.


25


(1)
            Applicable
      percentage ownership is based on 211,067,886 shares of common stock issued
      and outstanding as of December 29, 2010. Beneficial ownership is
      determined in accordance with the rules of the Securities and Exchange
      Commission and generally includes voting or investment power with respect
      to securities. Shares of common stock that are currently exercisable or
      exercisable within 60 days of December 29, 2010 are deemed to be
      beneficially owned by the person holding such securities for the purpose
      of computing the percentage of ownership of such person, but are not
      treated as outstanding for the purpose of computing the percentage
      ownership of any other person.





(2)
            Includes
      14,868,000 shares owned by the Djokovich Limited Partnership. Mr.
      Djokovich shares voting and dispositive power with respect to these shares
      with Mrs. Djokovich.





(3)
            Includes
      208,333 warrants/options that may vest and be exercised within 60
      days of the date of December
29, 2010.





(4)
            Includes
      223,333 warrants/options that may vest and be exercised within 60 days of
      the date of December 29, 2010.





Item
13. Certain Relationships and Related Transactions, and Director
Independence





No
officer, director, or related person of the Company has or proposes to have any
direct or indirect material interest in any asset proposed to be acquired by the
Company through securities holdings, contracts, options or otherwise or any
transaction in which the amount involved exceeds the lesser of $120,000 or one
percent of the Company's total assets at year end.





The
Company has adopted a policy under which any consulting or finder’s fee that may
be paid to a third party for consulting services to assist management in
evaluating a prospective business opportunity can be paid in stock, stock
purchase options or in cash. Any such issuance of stock or stock purchase
options would be made on an ad hoc basis. Accordingly, the Company is unable to
predict whether or in what amount such a stock issuance might be
made.





The
following directors are independent:  Thomas Anderson, Oz Fundingsland
and.Dr.Michael Russak.





The
following directors are not independent:  Tom Djokovich and Joseph
Grimes.





Item
14. Principal Accounting Fees and Services





Audit
Fees 2010





For
the fiscal year ended September 30, 2010 HJ Associates &
Consultants, LLP had incurred $51,000 for the following professional
services: review of the interim financial statements included in quarterly
reports on Form 10-Q for the periods ended December 30, 2009, March 31, 2010,
June 30, 2010 and for audit fees related to the Company’s annual report on Form
10-K. No other fees were billed by HJ Associates & Consultants, LLP in
the fiscal year ended September 30, 2010.





Audit
Fees 2009





For the
fiscal year ended September 30, 2009 HJ Associates & Consultants, LLP had
incurred $64,000 for the following professional services: review of the interim
financial statements included in quarterly reports on Form 10-Q for the periods
ended June 30, 2009, and for audit fees related to the Company’s annual report
on Form 10-K. No other fees were billed by HJ Associates & Consultants, LLP
in the fiscal year ended September 30, 2009.





During
the fiscal year ended September 30, 2009 Stark Winter Schenkein & Co., LLP
(“ SWSC ”), the Company’s prior auditors,  had billed the Company
$23,050 for the following professional services: $23,050 for review of the
interim financial statements included in quarterly reports on Form 10-Q for the
periods ended December 31, 2008 and March 31, 2009. They were not paid any fees
relating to the 2009 audit based on their dismissal as auditor.


26


PART
IV





Item
15. Exhibits, Financial Statement Schedules





Exhibits:





Exhibit
              
              Description3.1
              
              Articles of
      Incorporation(1)3.2
              
              Bylaws(2)10.1
              
              XsunX Plan of Reorganization and
      Asset Purchase Agreement, dated September 23,
    2003.(3)10.2
              
              XsunX 2007 Stock Option Plan,
      dated January 5, 2007.(4)10.3
              
              Form of Stock Sale agreement used
      in connection with the sale of equity to accredited investors totaling
      5,556,818 shares of common stock(8)10.4
              
              Common Stock Purchase Agreement
      dated as of March 30, 2010, by and between the Company and Lincoln Park
      Capital Fund, LLC. (5)10.5
              
              Registration Rights Agreement
      dated as of March 30, 2010, by and between the Company and Lincoln Park
      Capital Fund, LLC. (5)10.6
              
              Form S-1 and S-1/A related to the
      filing of a registration statement by the Company(6)(7)10.7
              
              Form
      of Stock Option Agreement used in connection with the issuance of Options
      to Joseph Grimes, October 2010(8)10.8
              
              Form of Stock Option Agreement
      used in connection with the issuance of options to Robert Wendt, October
      2010(8)16.1
              
              Auditor
      Letter(8)31.1
              
              Sarbanes-Oxley
      Certification(8)31.2
              
              Sarbanes-Oxley
      Certification(8)32.1
              
              Sarbanes-Oxley
      Certification(8)32.2
              
              Sarbanes-Oxley
      Certification(8)





(1)
            Incorporated
      by reference to Registration Statement Form 10SB12G #000-29621dated
      February 18, 2000 and by reference to exhibits included with the Company’s
      prior Report on Form 8-K/A filed with the Securities and Exchange
      Commission dated October 29, 2003.


(2)
            Incorporated
      by reference to Registration Statement Form 10SB12G #000-29621 filed with
      the Securities and Exchange Commission dated February 18,
      2000.


(3)
            Incorporated
      by reference to exhibits included with the Company’s prior Report on Form
      8-K/A filed with the Securities and Exchange Commission dated October 29,
      2003.


(4)
            Incorporated
      by reference to exhibits included with the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission dated January
      5, 2007.


(5)
            Incorporated
      by reference to exhibits included with the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission dated April 1,
      2010.


(6)
            Incorporated
      by reference to exhibits included with the Company’s prior Report on Form
      S-1 filed with the Securities and Exchange Commission dated April 30,
      2010.


(7)
            Incorporated
      by reference to exhibits included with the Company’s prior Report on Form
      S-1/A filed with the Securities and Exchange Commission dated June 25,
      2010.


(8)
            Provided
      herewith


27


SIGNATURES





Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.




Date: December 29,
      2010
            XSUNX,
      INC.By:
            /s/
      Tom DjokovichName:
            Tom
      DjokovichTitle:
            CEO
      and Principal Accounting Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.




/s/ Tom
      Djokovich
            
            December
      29, 2010Tom
      Djokovich,  Chief Executive Officer,
              Principal
      Executive Officer,  Principal
              Financial
      and Accounting Officer, and Director/s/
      Joseph Grimes
            
            December
      29, 2010Joseph
      Grimes, President, Chief Operating Officer and Director/s/
      Thomas Anderson
            
            December
      29, 2010Thomas
      Anderson, Director/s/
      Oz Fundingsland
            
            December
      29, 2010Oz
      Fundingsland, Director/s/
      Michael Russak
            
            December
      29, 2010Michael
      Russak, Director


28





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and Shareholders
 XsunX,
Inc. (A Development Stage Company)
 Alisa
Viejo, California
 
 We have
audited the accompanying balance sheets of XsunX, Inc. (a development stage
company) as of September 30, 2010 and 2009, and the related statements of
operations, stockholders' equity, and cash flows for the years then ended and
for the period from February 25, 1997 (inception) to September 30,
2010.  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on
these financial statements based on our audit.  The financial
statements for the period from February 25, 1997 (inception) to September 30,
2008 were audited by other auditors and our opinion, insofar as it relates to
cumulative amounts included for such prior periods, is based solely on the
reports of such other auditors.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of XsunX, Inc. as of September 30,
2010 and 2009, and the results of its operations and its cash flows for the
years then ended and for the period from February 25, 1997 (inception) to
September 30, 2010, in conformity with U.S. generally accepted accounting
principles.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note 1 to the
financial statements, the Company does not generate significant revenue and has
negative cash flows from operations which raise substantial doubt about its
ability to continue as a going concern.  Management’s plans in regard
to these matters are also described in Note 1.  The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
 
 
 
 HJ
Associates & Consultants, LLP
 Salt Lake
City, Utah
 December
29, 2010










XSUNX,
INC.


(A
Development Stage Company)


Balance
Sheets





September30,2010
                            
                            
                            September30,2009ASSETSCURRENT
      ASSETSCash
      & cash equivalents
                            
                            $
                            200,422
                            
                            
                            $
                            530,717Asset
      held for sale
                            
                            
                            -
                            
                            
                            
                            300,000Other
      receivable
                            
                            
                            2,500
                            
                            
                            
                            -Prepaid
      expenses
                            
                            
                            14,061
                            
                            
                            
                            118,332Total
      Current Assets
                            
                            
                            216,983
                            
                            
                            
                            949,049PROPERTY
      & EQUIPMENTOffice
      & miscellaneous equipment
                            
                            
                            28,942
                            
                            
                            
                            51,708Machinery
      & equipment
                            
                            
                            354,541
                            
                            
                            
                            450,386Leasehold
      improvements
                            
                            
                            -
                            
                            
                            
                            89,825383,483
                            
                            
                            
                            591,919Less
      accumulated depreciation
                            
                            
                            (307,995
                            )
                            
                            
                            (378,353
                            )Net
      Property & Equipment
                            
                            
                            75,488
                            
                            
                            
                            213,566OTHER
      ASSETSManufacturing
      equipment in progress
                            
                            
                            230,000
                            
                            
                            
                            207,219Security
      deposit
                            
                            
                            3,200
                            
                            
                            
                            5,815Total
      Other Assets
                            
                            
                            233,200
                            
                            
                            
                            213,034TOTAL
      ASSETS
                            
                            $
                            525,671
                            
                            
                            $
                            1,375,649LIABILITIES
      AND SHAREHOLDERS' EQUITY/(DEFICIT)CURRENT
      LIABILITIESAccounts
      payable
                            
                            $
                            418,288
                            
                            
                            $
                            389,293Accrued
      expenses
                            
                            
                            8,945
                            
                            
                            
                            24,451Credit
      card payable
                            
                            
                            10,728
                            
                            
                            
                            17,918Note
      payable, vendor
                            
                            
                            456,921
                            
                            
                            
                            -Accrued
      interest on note payable
                            
                            
                            49,949
                            
                            
                            
                            -Total
      Current Liabilities
                            
                            
                            944,831
                            
                            
                            
                            431,662LONG
      TERM LIABILITIESAccrued
      interest on note payable
                            
                            
                            -
                            
                            
                            
                            4,256Note
      payable, vendor
                            
                            
                            -
                            
                            
                            
                            456,921Total
      Long Term Liabilities
                            
                            
                            -
                            
                            
                            
                            461,177TOTAL
      LIABILITIES
                            
                            
                            944,831
                            
                            
                            
                            892,839SHAREHOLDERS'
      EQUITY/(DEFICIT)Preferred
      stock, $0.01 par value;50,000,000
      authorized preferred shares
                            
                            
                            -
                            
                            
                            
                            -Common
      stock, no par value;500,000,000
      authorized common shares209,055,337
      and 196,484,610 shares issued and outstanding,
respectively
                            
                            
                            24,813,369
                            
                            
                            
                            23,767,869Paid
      in capital, common stock warrants
                            
                            
                            3,449,063
                            
                            
                            
                            3,175,930Additional
      paid in capital
                            
                            
                            5,238,213
                            
                            
                            
                            5,248,213Deficit
      accumulated during the development stage
                            
                            
                            (33,919,805
                            )
                            
                            
                            (31,709,202
                            )TOTAL
      SHAREHOLDERS' EQUITY/(DEFICIT)
                            
                            
                            (419,160
                            )
                            
                            
                            482,810TOTAL
      LIABILITIES AND SHAREHOLDERS'  EQUITY/(DEFICIT)
                            
                            $
                            525,671
                            
                            
                            $
                            1,375,649





The
Accompanying Notes are an Integral Part of These Financial
Statements


F-1




XSUNX,
INC.


(A
Development Stage Company)


Statements
of Operations




From InceptionFebruary 25, 1997Years Ended
                    
                    
                    toSeptember 30, 2010
                    
                    
                    September 30, 2009
                    
                    
                    September 30, 2010REVENUE
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    14,880OPERATING
      EXPENSESSelling,
      general and administrative
                    
                    
                    1,470,731
                    
                    
                    
                    3,492,487
                    
                    
                    
                    16,930,341Research
      and development expense
                    
                    
                    292,999
                    
                    
                    
                    358,884
                    
                    
                    
                    2,881,462Depreciation
      and amortization expense
                    
                    
                    86,948
                    
                    
                    
                    127,293
                    
                    
                    
                    649,354TOTAL
      OPERATING EXPENSES
                    
                    
                    1,850,678
                    
                    
                    
                    3,978,664
                    
                    
                    
                    20,461,157LOSS
      FROM OPERATIONS BEFORE OTHER INCOME/(EXPENSE)
                    
                    
                    (1,850,678
                    )
                    
                    
                    (3,978,664
                    )
                    
                    
                    (20,446,277
                    )OTHER
      INCOME/(EXPENSES)Interest
      income
                    
                    
                    44
                    
                    
                    
                    5,443
                    
                    
                    
                    445,537Gain/(Loss)
      on sale of asset
                    
                    
                    (577
                    )
                    
                    
                    -
                    
                    
                    
                    (577
                    )Impairment
      of assets
                    
                    
                    (253,671
                    )
                    
                    
                    (5,826,990
                    )
                    
                    
                    (7,285,120
                    )Write
      down of inventory asset
                    
                    
                    (60,000
                    )
                    
                    
                    (1,117,000
                    )
                    
                    
                    (1,177,000
                    )Legal
      Settlement
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,100,000Loan
      Fees
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (7,001,990
                    )Forgiveness
      of debt
                    
                    
                    -
                    
                    
                    
                    287,381
                    
                    
                    
                    592,154Other,
      non-operating
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (5,215
                    )Interest
      expense
                    
                    
                    (45,721
                    )
                    
                    
                    (4,303
                    )
                    
                    
                    (141,317
                    )TOTAL
      OTHER INCOME/(EXPENSES)
                    
                    
                    (359,925
                    )
                    
                    
                    (6,655,469
                    )
                    
                    
                    (13,473,528
                    )NET
      LOSS
                    
                    $
                    (2,210,603
                    )
                    
                    $
                    (10,634,133
                    )
                    
                    
                    (33,919,805
                    )BASIC
      AND DILUTED LOSS PER SHARE
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.06
                    )WEIGHTED-AVERAGE
      COMMON SHARES OUTSTANDING BASIC AND DILUTED
                    
                    
                    204,441,056
                    
                    
                    
                    189,455,449





The
Accompanying Notes are an Integral Part of These Financial
Statements


F-2




XSUNX,
INC.


(A
Development Stage Company)


Statements
of Stockholders' Equity


From
Inception February 25, 1997 to September 30, 2010





DeficitAccumulatedAdditional
                    
                    
                    Stock Options/
                    
                    
                    Treasury
                    
                    
                    during thePreferred Stock
                    
                    
                    Common
      Stock
                    
                    
                    Paid-in
                    
                    
                    Warrants
                    
                    
                    Stock
                    
                    
                    DevelopmentShares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Paid-in-Capital
                    
                    
                    Shares
                    
                    
                    Stage
                    
                    
                    TotalBalance
      at February 25, 1997
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Issuance
      of stock for cash
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    15,880
                    
                    
                    
                    217,700
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    217,700Issuance
      of stock to Founders
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    14,110
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Issuance
      of stock for consolidation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    445,000
                    
                    
                    
                    312,106
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    312,106Net
      Loss for the year ended September 30, 1997
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (193,973
                    )
                    
                    
                    (193,973
                    )Balance
      at September 30, 1997
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    474,990
                    
                    
                    
                    529,806
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (193,973
                    )
                    
                    
                    335,833Issuance
      of stock for services
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,500
                    
                    
                    
                    30,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    30,000Issuance
      of stock for cash
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    50,200
                    
                    
                    
                    204,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    204,000Consolidation
      stock cancelled
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (60,000
                    )
                    
                    
                    (50,000
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (50,000
                    )Net
      Loss for the year ended September 30, 1998
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (799,451
                    )
                    
                    
                    (799,451
                    )Balance
      at September 30, 1998
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    466,690
                    
                    
                    
                    713,806
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (993,424
                    )
                    
                    
                    (279,618
                    )Issuance
      of stock for cash
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    151,458
                    
                    
                    
                    717,113
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    717,113Issuance
      of stock for services
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    135,000
                    
                    
                    
                    463,500
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    463,500Net
      Loss for the year ended September 30, 1999
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,482,017
                    )
                    
                    
                    (1,482,017
                    )Balance
      at September 30, 1999
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    753,148
                    
                    
                    
                    1,894,419
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2,475,441
                    )
                    
                    
                    (581,022
                    )Issuance
      of stock for cash
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    15,000
                    
                    
                    
                    27,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    27,000Net
      Loss for the year ended September 30, 2000
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (118,369
                    )
                    
                    
                    (118,369
                    )Balance
      at September 30, 2000
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    768,148
                    
                    
                    
                    1,921,419
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2,593,810
                    )
                    
                    
                    (672,391
                    )Extinguishment
      of debt
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    337,887
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    337,887Net
      Loss for the year ended September 30, 2001
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (32,402
                    )
                    
                    
                    (32,402
                    )Balance
      at September 30, 2001
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    768,148
                    
                    
                    
                    2,259,306
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2,626,212
                    )
                    
                    
                    (366,906
                    )Net
      Loss for the year ended September 30, 2002
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (47,297
                    )
                    
                    
                    (47,297
                    )Balance
      at September 30, 2002
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    768,148
                    
                    
                    
                    2,259,306
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2,673,509
                    )
                    
                    
                    (414,203
                    )Issuance
      of stock for assets
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    70,000,000
                    
                    
                    
                    3
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3Issuance
      of stock for cash
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    9,000,000
                    
                    
                    
                    225,450
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    225,450Issuance
      of stock for debt
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    115,000
                    
                    
                    
                    121,828
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    121,828Issuance
      of stock for expenses
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    115,000
                    
                    
                    
                    89,939
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    89,939Issuance
      of stock for services
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    31,300,000
                    
                    
                    
                    125,200
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    125,200Net
      Loss for the year ended September 30, 2003
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (145,868
                    )
                    
                    
                    (145,868
                    )Balance
      at September 30, 2003
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    111,298,148
                    
                    
                    
                    2,821,726
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2,819,377
                    )
                    
                    
                    2,349Issuance
      of stock for cash
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,737,954
                    
                    
                    
                    282,670
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    282,670Warrant
      expense
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    825,000
                    
                    
                    
                    -
                    
                    
                    
                    375,000
                    
                    
                    
                    1,200,000Net
      Loss for the year ended September 30, 2004
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,509,068
                    )
                    
                    
                    (1,509,068
                    )Balance
      at September 30, 2004
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    114,036,102
                    
                    
                    
                    3,104,396
                    
                    
                    
                    -
                    
                    
                    
                    825,000
                    
                    
                    
                    -
                    
                    
                    
                    (3,953,445
                    )
                    
                    
                    (24,049
                    )Issuance
      of stock for cash
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    6,747,037
                    
                    
                    
                    531,395
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    531,395Issuance
      of stock for services
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,093,500
                    
                    
                    
                    360,945
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    360,945Warrant
      expense
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    180,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    180,000Beneficial
      conversion
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    400,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    400,000Shares
      held as collateral for debentures
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    26,798,418
                    
                    
                    
                    -
                    
                    
                    
                    -Net
      Loss for the year ended September 30, 2005
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,980,838
                    )
                    
                    
                    (1,980,838
                    )Balance
      at September 30, 2005
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    123,876,639
                    
                    
                    
                    3,996,736
                    
                    
                    
                    400,000
                    
                    
                    
                    1,005,000
                    
                    
                    
                    26,798,418
                    
                    
                    
                    (5,934,283
                    )
                    
                    
                    (532,547
                    )Issuance
      of stock for services
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    72,366
                    
                    
                    
                    31,500
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    31,500Warrant
      expense
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    996,250
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    996,250Beneficial
      conversion
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,685,573
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,685,573Debenture
      conversion
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    21,657,895
                    
                    
                    
                    5,850,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,850,000Issuance
      of stock for interest expense
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    712,956
                    
                    
                    
                    241,383
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    241,383Issuance
      of stock for warrant conversion
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    10,850,000
                    
                    
                    
                    3,171,250
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,171,250Net
      Loss for the year ended September 30, 2006
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (9,112,988
                    )
                    
                    
                    (9,112,988
                    )Balance
      at September 30, 2006 (restated)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    157,169,856
                    
                    
                    
                    13,290,869
                    
                    
                    
                    6,085,573
                    
                    
                    
                    2,001,250
                    
                    
                    
                    26,798,418
                    
                    
                    
                    (15,047,271
                    )
                    
                    
                    6,330,421Cancellation
      of stock for serivces returned
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (150,000
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Release
      of security collateral
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (26,798,418
                    )
                    
                    
                    -
                    
                    
                    
                    -Issuance
      of stock for warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    900,000
                    
                    
                    
                    135,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    135,000Stock
      option and warrant expense
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    772,315
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    772,315Net
      Loss for the year ended September 30, 2007
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,968,846
                    )
                    
                    
                    (1,968,846
                    )Balance
      at September 30, 2007 (restated)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    157,919,856
                    
                    
                    
                    13,425,869
                    
                    
                    
                    6,085,573
                    
                    
                    
                    2,773,565
                    
                    
                    
                    -
                    
                    
                    
                    (17,016,117
                    )
                    
                    
                    5,268,890Fusion
      Equity common stock purchase
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    15,347,581
                    
                    
                    
                    5,200,000
                    
                    
                    
                    (55,300
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,144,700Commiment
      fees
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,500,000
                    
                    
                    
                    1,190,000
                    
                    
                    
                    (1,190,000
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Cumorah
      common stock purchase
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    8,650,000
                    
                    
                    
                    2,500,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,500,000Wharton
      settlement
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    875,000
                    
                    
                    
                    297,500
                    
                    
                    
                    (397,500
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (100,000
                    )MVS
      warrant cancellation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    805,440
                    
                    
                    
                    (805,440
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Stock
      options and warrant expense
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    673,287
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    673,287Net
      Loss for the year ended September 30, 2008
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (4,058,952
                    )
                    
                    
                    (4,058,952
                    )Balance
      at September 30, 2008
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    186,292,437
                    
                    
                    
                    22,613,369
                    
                    
                    
                    5,248,213
                    
                    
                    
                    2,641,412
                    
                    
                    
                    -
                    
                    
                    
                    (21,075,069
                    )
                    
                    
                    9,427,925




The
Accompanying Notes are an Integral Part of These Financial
Statements


F-3


XSUNX,
INC.


(A
Development Stage Company)


Statements
of Stockholders' Equity


From
Inception February 25, 1997 to September 30, 2010




DeficitAccumulatedAdditional
                                                                                                        
                                                                                                        
                                                                                                        Stock Options/
                                                                                                        
                                                                                                        
                                                                                                        Treasury
                                                                                                        
                                                                                                        
                                                                                                        during thePreferred Stock
                                                                                                        
                                                                                                        
                                                                                                        Common Stock
                                                                                                        
                                                                                                        
                                                                                                        Paid-in
                                                                                                        
                                                                                                        
                                                                                                        Warrants
                                                                                                        
                                                                                                        
                                                                                                        Stock
                                                                                                        
                                                                                                        
                                                                                                        DevelopmentShares
                                                                                                        
                                                                                                        
                                                                                                        Amount
                                                                                                        
                                                                                                        
                                                                                                        Shares
                                                                                                        
                                                                                                        
                                                                                                        Amount
                                                                                                        
                                                                                                        
                                                                                                        Capital
                                                                                                        
                                                                                                        
                                                                                                        Paid-in-Capital
                                                                                                        
                                                                                                        
                                                                                                        Shares
                                                                                                        
                                                                                                        
                                                                                                        Stage
                                                                                                        
                                                                                                        
                                                                                                        TotalIssuance
      of common shares in October 2008 for cash (2,000,000 common shares
      issued at $0.20 per share )
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        2,000,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        400,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        400,000Issuance
      of common shares in November 2008 for cash (1,000,000 common shares
      issued at $0.20 per share )
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        1,000,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        200,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        200,000Issuance
      of common shares in November 2008 for services (50,000 common shares
      issued at a fair value of $0.22 per share )
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        50,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        11,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        11,000Issuance
      of common shares in August 2009 for cash (1,129,483 common shares
      issued at $0.062 per share )
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        1,129,483
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        70,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        70,000Issuance
      of common shares in August 2009 for services (900,000 common shares
      issued at a fair value of $0.12 per share )
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        900,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        108,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        108,000Issuance
      of common shares in August 2009 for services (76,976 common shares
      issued at a fair value of $0.1364 per share )
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        76,976
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        10,500
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        10,500Issuance
      of common shares in September 2009 for services (35,714 common shares
      issued at a fair value of  $0.14 per share )
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        35,714
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        5,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        5,000Issuance
      of common shares in September 2009 for cash (5,000,000 common shares
      issued at $0.07 per share )
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        5,000,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        350,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        350,000Stock
      compensation expense
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        534,518
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        534,518Net
      Loss for the year ended September 30, 2009
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        (10,634,133
                                                                                                        )
                                                                                                        
                                                                                                        
                                                                                                        (10,634,133
                                                                                                        )Balance
      at September 30, 2009
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        196,484,610
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        23,767,869
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        5,248,213
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        3,175,930
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        (31,709,202
                                                                                                        )
                                                                                                        
                                                                                                        
                                                                                                        482,810Issuance
      of common shares in October 2009 for cash (2,556,818 common shares issued
      at $0.088 per share )
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        2,556,818
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        225,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        225,000Issuance
      of common shares in November 2009 for services (53,789 common shares
      issued at a fair value of $0.1859 per share)
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        53,789
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        10,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        10,000Issuance
      of common shares in December 2009 for subscription receivable (1,000,000
      common shares issued at $0.088 per share)
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        1,000,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        88,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        88,000Issuance
      of common shares in March 2010 for cash (2,000,000 common shares issued at
      $0.075 per share )
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        2,000,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        150,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        150,000Issuance
      of common shares in March 2010 for services (139,424 common shares issued
      at $0.16137 per share )
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        139,424
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        22,500
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        22,500Issuance
      of common shares in March 2010 for cash (6,250,000 common shares issued at
      $0.10 per share )
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        6,250,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        500,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        500,000Issuance
      of common shares in September 2010 for cash (279,661 common shares issued
      at $0.09167 per share )
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        279,661
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        25,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        25,000Issuance
      of common shares in September 2010 for cash (291,035 common shares issued
      at $0.088 per share )
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        291,035
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        25,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        25,000Stock
      compensation expense
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        273,133
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        273,133Stock
      issuance costs
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        (10,000
                                                                                                        )
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        (10,000
                                                                                                        )Net
      Loss for the year ended September 30, 2010
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        (2,210,603
                                                                                                        )
                                                                                                        
                                                                                                        
                                                                                                        (2,210,603
                                                                                                        )Balance
      at Septemer 30, 2010
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        209,055,337
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        24,813,369
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        5,238,213
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        3,449,063
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        (33,919,805
                                                                                                        )
                                                                                                        
                                                                                                        $
                                                                                                        (419,160
                                                                                                        )




The
Accompanying Notes are an Integral Part of These Financial
Statements


F-4


XSUNX,
INC.


(A
Development Stage Company)


Statements
of Cash Flows





From InceptionFebruary 25,1997Years Ended
                    
                    
                    toSeptember 30, 2010
                    
                    
                    September 30, 2009
                    
                    
                    September 30, 2010CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                    
                    $
                    (2,210,603
                    )
                    
                    $
                    (10,634,133
                    )
                    
                    $
                    (33,919,805
                    )Adjustment
      to reconcile net loss to net cash used in operating
    activitiesDepreciation
      & amortization
                    
                    
                    86,948
                    
                    
                    
                    127,293
                    
                    
                    
                    649,354Common
      stock issued for services and interest
                    
                    
                    32,500
                    
                    
                    
                    134,500
                    
                    
                    
                    1,996,634Stock
      option and warrant expense
                    
                    
                    273,133
                    
                    
                    
                    534,518
                    
                    
                    
                    3,723,253Beneficial
      conversion and commitment fees
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,685,573Asset
      impairment
                    
                    
                    253,671
                    
                    
                    
                    5,826,990
                    
                    
                    
                    7,285,120Write
      down of inventory asset
                    
                    
                    60,000
                    
                    
                    
                    1,117,000
                    
                    
                    
                    1,177,000Gain
      on settlement of debt
                    
                    
                    -
                    
                    
                    
                    (287,381
                    )
                    
                    
                    (287,381
                    )Settlement
      of lease
                    
                    
                    -
                    
                    
                    
                    59,784
                    
                    
                    
                    59,784Loss
      on sale of asset
                    
                    
                    577
                    
                    
                    
                    -
                    
                    
                    
                    577Change
      in Assets and Liabilites(Increase)
      Decrease in:Prepaid
      expenses
                    
                    
                    104,271
                    
                    
                    
                    (106,346
                    )
                    
                    
                    (14,061
                    )Inventory
      asset
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,417,000
                    )Other
      Receivable
                    
                    
                    (2,500
                    )
                    
                    
                    -
                    
                    
                    
                    (2,500
                    )Other
      assets
                    
                    
                    2,615
                    
                    
                    
                    -
                    
                    
                    
                    (3,200
                    )Increase
      (Decrease) in:Accounts
      payable
                    
                    
                    28,995
                    
                    
                    
                    345,211
                    
                    
                    
                    2,451,017Accrued
      expenses
                    
                    
                    22,998
                    
                    
                    
                    20,237
                    
                    
                    
                    69,623(1,347,395
                    )
                    
                    
                    (2,862,327
                    )
                    
                    
                    (12,546,012
                    )NET
      CASH USED IN OPERATING ACTIVITIESCASH
      FLOWS USED IN INVESTING ACTIVITIES:
                    
                    
                    
                    
                    
                    
                    -Purchase
      of manufacturing equipment and facilities in process
                    
                    
                    (230,000
                    )
                    
                    
                    -
                    
                    
                    
                    (6,054,629
                    )Payments
      on note receivable
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,500,000
                    )Proceeds
      from the sale of assets
                    
                    
                    244,100
                    
                    
                    
                    
                    
                    
                    
                    244,100Receipts
      on note receivable
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    1,500,000Purchase
      of marketable prototype
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    (1,780,396
                    )Purchase
      of fixed assets
                    
                    
                    -
                    
                    
                    
                    (16,174
                    )
                    
                    
                    (591,919
                    )NET
      CASH USED IN INVESTING ACTIVITIES
                    
                    
                    14,100
                    
                    
                    
                    (16,174
                    )
                    
                    
                    (8,182,844
                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from warrant conversion
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,306,250Proceeds
      from debentures
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,850,000Proceeds
      for issuance of common stock, net
                    
                    
                    1,003,000
                    
                    
                    
                    1,020,000
                    
                    
                    
                    11,773,028-NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                    
                    
                    1,003,000
                    
                    
                    
                    1,020,000
                    
                    
                    
                    20,929,278NET
      INCREASE (DECREASE) IN CASH
                    
                    
                    (330,295
                    )
                    
                    
                    (1,858,501
                    )
                    
                    
                    200,422CASH
      & CASH EQUIVALENTS, BEGINNING OF YEAR
                    
                    
                    530,717
                    
                    
                    
                    2,389,218
                    
                    
                    
                    -CASH
      & CASH EQUIVALENTS, END OF YEAR
                    
                    $
                    200,422
                    
                    
                    $
                    530,717
                    
                    
                    $
                    200,422SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONInterest
      paid
                    
                    $
                    28
                    
                    
                    $
                    46
                    
                    
                    $
                    119,691Taxes
      paid
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -





The
Accompanying Notes are an Integral Part of These Financial
Statements


F-5





XSUNX,
INC.


(A
Development Stage Company)


Notes
to Financial Statements


September
30, 2010 and 2009





1.
            ORGANIZATION
      AND LINE OF BUSINESS





Organization


XsunX,
Inc. (“XsunX,” the “Company” or the “issuer”) is a Colorado corporation formerly
known as Sun River Mining Inc. “Sun River”). The Company was originally
incorporated in Colorado on February 25, 1997. Effective September 24, 2003, the
Company completed a Plan of Reorganization and Asset Purchase Agreement (the
“Plan”).





Line of
Business


XsunX,
Inc. is developing and has begun marketing a hybrid manufacturing solution to
produce high performance Copper Indium Gallium (di) Selenide (CIGS) thin film
solar cells.  Our patent pending system and processing technology,
which we call CIGSolarTM, focuses on the mass production of individual thin-film
CIGS solar cells that match silicon solar cell dimensions and can be offered as
a non-toxic, high-efficiency and lowest-cost alternative to the use of silicon
solar cells. We intend to offer licenses for the use of the CIGSolar process
technology thereby generating revenue streams through licensing fees and
manufacturing royalties for the use of the technology.





Going
Concern


The
accompanying financial statements have been prepared on a going concern basis of
accounting, which contemplates continuity of operations, realization of assets
and liabilities and commitments in the normal course of business.  The
accompanying financial statements do not reflect any adjustments that might
result if the Company is unable to continue as a going concern.  The
Company does not generate significant revenue, and has negative cash flows from
operations, which raise substantial doubt about the Company’s ability to
continue as a going concern.  The ability of the Company to continue
as a going concern and appropriateness of using the going concern basis is
dependent upon, among other things, additional cash infusion.  The
Company has obtained funds from its shareholders since its inception through the
year ended September 30, 2010. Management believes the existing shareholders and
the prospective new investors will provide the additional cash needed to meet
the Company’s obligations as they become due, and will allow the development of
its core of business.





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





This
summary of significant accounting policies of XsunX, Inc. is presented to assist
in understanding the Company’s financial statements. The financial statements
and notes are representations of the Company’s management, which is responsible
for their integrity and objectivity. These accounting policies conform to
accounting principles generally accepted in the United States of America and
have been consistently applied in the preparation of the financial
statements.





Development Stage Activities
and Operations


The
Company has been in its initial stages of formation and for the year ended
September 30, 2010, had no revenues. A development stage activity as one in
which all efforts are devoted substantially to establishing a new business and
even if planned principal operations have commenced, revenues are
insignificant.





Use of
Estimates


The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the accompanying financial
statements.  Significant estimates made in preparing these financial
statements include the estimate of useful lives of property and equipment, the
deferred tax valuation allowance, and the fair value of stock options. Actual
results could differ from those estimates.





Cash and Cash
Equivalents


For
purposes of the statements of cash flows, cash and cash equivalents include cash
in banks and money markets with an original maturity of three months or
less.





Fair Value of Financial
Instruments


The
Company’s financial instruments, including cash and cash equivalents, accounts
payable and accrued liabilities are carried at cost, which approximates their
fair value, due to the relatively short maturity of these instruments. As of
September30, 2010, and 2009, the Company’s notes payable have stated borrowing
rates that are consistent with those currently available to the Company and,
accordingly, the Company believes the carrying value of these debt instruments
approximates their fair value.


F-6




XSUNX,
INC.


(A
Development Stage Company)


Notes
to Financial Statements


September
30, 2010 and 2009





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





Property and
Equipment


Property
and equipment are stated at cost, and are depreciated using straight line over
its estimated useful lives:





Leasehold
      improvements
                  Length
      of the leaseComputer
      software and equipment
                  3
      YearsFurniture
      & fixtures
                  5
      YearsMachinery
      & equipment
                  5
      Years




The
Company capitalizes property and equipment over $500. Property and equipment
under $500 are expensed in the year purchased.





Loss per Share
Calculations


Loss per
Share is the calculation of basic earnings per share and diluted earnings per
share. Basic earnings per share are computed by dividing income available to
common shareholders by the weighted-average number of common shares available.
Diluted earnings per share is computed similar to basic earnings per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive. The Company’s
diluted loss per share is the same as the basic loss per share for the years
ended September 30, 2010 and 2009 as the inclusion of any potential shares would
have had an anti-dilutive effect due to the Company generating a
loss.





Revenue
Recognition


The
Company recognizes revenue when services are performed, and at the time of
shipment of products, provided that evidence of an arrangement exists, title and
risk of loss have passed to the customer, fees are fixed or determinable, and
collection of the related receivable is reasonably assured.  To date
the Company has had minimal revenue and is still in the development
stage.





Advertising


Advertising
costs are expensed as incurred. Total advertising costs were $8,515, and 11,340
for the years ended September 30, 2010, and 2009, respectively.





Research and
Development


Research
and development costs are expensed as incurred. Total research and development
costs were $292,999 and $358,884 for the years ended September 30, 2010, and
2009, respectively.





Stock-Based
Compensation


Share-based
Payment applies to transactions in which an entity exchanges its equity
instruments for goods or services and also applies to liabilities an entity may
incur for goods or services that are to follow a fair value of those equity
instruments. We are required to follow a fair value approach using an
option-pricing model, such as the Black Scholes option valuation model, at the
date of a stock option grant. The deferred compensation calculated under the
fair value method would then be amortized over the respective vesting period of
the stock option. This has not had a material impact on our results of
operations.




Income
Taxes


Deferred
income taxes are provided using the liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carry-forwards and deferred tax liabilities are recognized for taxable
temporary differences.  Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax
bases.  Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized.  Deferred tax
assets and liabilities are adjusted for the effects of the changes in tax laws
and rates of the date of enactment.





When tax
returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained.  The benefit of a tax
position is recognized in the financial statements in the period during which,
based on all available evidence, management believes it is more likely than not
that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any.  Tax positions taken are
not offset or aggregated with other positions.  Tax positions that
meet the more-likely-than-not recognition threshold are measured as thelargest
amount of tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority.  The portion of the
benefits associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and penalties that
would be payable to the taxing authorities upon
examination.


F-7





XSUNX,
INC.


(A
Development Stage Company)


Notes
to Financial Statements


September
30, 2010 and 2009





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)




Recent Accounting
Pronouncements


Management
reviewed accounting pronouncements issued during the three months ended
September 30, 2010, and no pronouncements were adopted during the
period.





Reclassification


Certain
expenses for the year ended September 30, 2009 were reclassified to conform to
the expenses for the year ended September 30, 2010.





3.
            CAPITAL
      STOCK





At
September 30, 2009, the Company’s authorized stock consisted of 500,000,000
shares of common stock, with no par value.  The Company is also
authorized to issue 50,000,000 shares of preferred stock with a par value of
$0.01 per share.  The rights, preferences and privileges of the
holders of the preferred stock will be determined by the Board of Directors
prior to issuance of such shares. During the year ended September 30, 2010, the
Company issued 2,556,818 shares of common stock at a price of $0.088 per share
for cash of $225,000; issued 193,213 shares of common stock at fair values
between $0.16137 and $0.1859 per share for services;  issued 1,000,000
shares of common stock at a price of $0.088;issued 2,000,000 shares of common
stock at a price of $0.08 per share for cash of $150,000; Also, through an
equity offering the Company received $550,000 in cash, and issued 6,820,696
shares of common stock, which included 1,263,888 commitment shares. The shares
were issued at prices between $0.088 and $0.10 per share. During the year ended
September 30, 2009, the Company issued 3,000,000 shares of common stock issued
through a private placement at a price of $0.20 per share for cash of $600,000;
5,000,000 shares of common stock issued at a price of $0.07 per share for cash
of $350,000; 1,129,483 shares of common stock issued at a price of $0.062 per
share for cash of $70,000; 1,062,690 shares of common stock issued at prices
between $0.12 and $0.22 per share for services.





4.
            STOCK
      OPTIONS AND WARRANTS





The
Company adopted a Stock Option Plan for the purposes of granting stock options
to its employees and others providing services to the Company, which reserves
and sets aside for the granting of Options for Twenty Million (20,000,000)
shares of Common Stock.  Options granted under the Plan may be either
Incentive Options or Nonqualified Options and shall be administered by the
Company's Board of Directors ("Board").  Each Option shall be
exercisable to the nearest whole share, in installments or otherwise, as the
respective Option agreements may provide. Notwithstanding any other provision of
the Plan or of any Option agreement, each Option shall expire on the date
specified in the Option agreement. During the period ended September 30, 2010
and 2009, the Company granted 0 and 5,350,000 stock options. The stock options
are exercisable for a period of five years from the date of grant at an exercise
price between $0.16 and $0.36 per share and expire at various times through
April 2014.




9/30/2010
                                    
                                    9/30/2009Risk
      free interest rate
                                    1.67%
      to 2.77%
                                    
                                    1.67%
      to 2.77%Stock
      volatility factor
                                    90.56% to 104.73%
                                    
                                    90.56% to 104.73%Weighted
      average expected option life
                                    5
      years
                                    
                                    5
      yearsExpected
      dividend yield
                                    None
                                    
                                    None




F-8





XSUNX,
INC.


(A
Development Stage Company)


Notes
to Financial Statements


September
30, 2010 and 2009





4.       
     STOCK OPTIONS AND WARRANTS
(continued)




A summary
of the Company’s stock option activity and related information
follows:




9/30/2010
                  
                  
                  9/30/2009Weighted
                  
                  
                  
                  
                  
                  WeightedNumber
                  
                  
                  average
                  
                  
                  Number
                  
                  
                  averageof
                  
                  
                  exercise
                  
                  
                  of
                  
                  
                  exerciseOptions
                  
                  
                  price
                  
                  
                  Options
                  
                  
                  priceOutstanding,
      beginning of year
                  
                  
                  10,180,000
                  
                  
                  $
                  0.27
                  
                  
                  
                  5,750,000
                  
                  
                  $
                  0.39Granted
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  5,350,000
                  
                  
                  $
                  0.17Exercised
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  -Expired
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  (920,000
                  )
                  
                  $
                  0.41Outstanding,
      end of year
                  
                  
                  10,180,000
                  
                  
                  $
                  0.27
                  
                  
                  
                  10,180,000
                  
                  
                  $
                  0.27Exercisable
      at the end of year
                  
                  
                  6,858,328
                  
                  
                  $
                  0.29
                  
                  
                  
                  4,927,500
                  
                  
                  $
                  0.33Weighted
      average fair value of options granted during the year
                  
                  
                  
                  
                  
                  $
                  -
                  
                  
                  
                  
                  
                  
                  $
                  0.11




The
weighted average remaining contractual life of options outstanding issued under
the plan as of September 30, 2010 was as follows:





WeightedAverageStock
                          
                          
                          Stock
                          
                          RemainingExercisable
                          
                          Options
                          
                          
                          Options
                          
                          ContractualPrices
                          
                          Outstanding
                          
                          
                          Exercisable
                          
                          Life (years)$
                          0.46
                          
                          
                          1,150,000
                          
                          
                          
                          950,000
                          
                          1.32
      years$
                          0.53
                          
                          
                          100,000
                          
                          
                          
                          100,000
                          
                          1.40
      years$
                          0.45
                          
                          
                          100,000
                          
                          
                          
                          100,000
                          
                          1.56
      years$
                          0.41
                          
                          
                          100,000
                          
                          
                          
                          100,000
                          
                          1.91
      years$
                          0.36
                          
                          
                          2,500,000
                          
                          
                          
                          1,500,000
                          
                          2.07
      years$
                          0.36
                          
                          
                          500,000
                          
                          
                          
                          500,000
                          
                          2.12
      years$
                          0.36
                          
                          
                          500,000
                          
                          
                          
                          500,000
                          
                          2.16
      years$
                          0.36
                          
                          
                          115,000
                          
                          
                          
                          95,833
                          
                          3.03
      years$
                          0.16
                          
                          
                          5,115,000
                          
                          
                          
                          3,012,495
                          
                          3.50
      years10,180,000
                          
                          
                          
                          6,858,328





Stock-based
compensation expense recognized during the period is based on the value of the
portion of stock-based payment awards that is ultimately expected to vest.
Stock-based compensation expense recognized in the financial statements of
operations during the year ended September 30, 2010, included compensation
expense for the stock-based payment awards granted prior to, but not yet vested,
as of September 30, 2010 based on the grant date fair value estimated, and
compensation expense for the stock-based payment awards granted subsequent to
September 30, 2010, based on the grant date fair value estimated. We account for
forfeitures as they occur. The stock-based compensation expense recognized in
the statement of operations during the years ended September 30, 2010 and 2009
was $273,133 and $534,518, respectively.


F-9





XSUNX,
INC.


(A
Development Stage Company)


Notes
to Financial Statements


September
30, 2010 and 2009





4.
              STOCKOPTIONS
      AND WARRANTS
(Continued)





Warrants




A summary
of the Company’s warrants activity and related information follows:




9/30/2010
                  
                  
                  9/30/2009Weighted
                  
                  
                  
                  
                  
                  WeightedNumber
                  
                  
                  average
                  
                  
                  Number
                  
                  
                  averageof
                  
                  
                  exercise
                  
                  
                  of
                  
                  
                  exerciseOptions
                  
                  
                  price
                  
                  
                  Options
                  
                  
                  priceOutstanding,
      beginning of year
                  
                  
                  4,195,332
                  
                  
                  $
                  0.61
                  
                  
                  
                  4,195,332
                  
                  
                  $
                  0.61Granted
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  -Exercised
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  -Expired
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  -Outstanding,
      end of year
                  
                  
                  4,195,332
                  
                  
                  $
                  0.61
                  
                  
                  
                  4,195,332
                  
                  
                  $
                  0.61Exercisable
      at the end of year
                  
                  
                  4,047,332
                  
                  
                  $
                  0.64
                  
                  
                  
                  4,047,332
                  
                  
                  $
                  0.62Weighted
      average fair value of warrants granted during the
year
                  
                  
                  
                  
                  
                  $
                  -
                  
                  
                  
                  
                  
                  
                  $
                  -





At
September 30, 2010, the weighted average remaining contractual life of warrants
outstanding:




WeightedAverageRemainingExercisable
                        
                        Warrants
                        
                        
                        Warrants
                        
                        ContractualPrices
                        
                        Outstanding
                        
                        
                        Exercisable
                        
                        Life (years)$
                        1.69
                        
                        
                        112,000
                        
                        
                        
                        112,000
                        
                        0.51
      years$
                        0.51
                        
                        
                        500,000
                        
                        
                        
                        352,000
                        
                        0.80
      years$
                        0.20
                        
                        
                        250,000
                        
                        
                        
                        250,000
                        
                        1.25
      years$
                        0.50
                        
                        
                        1,666,666
                        
                        
                        
                        1,666,666
                        
                        2.09
      years$
                        0.75
                        
                        
                        1,666,666
                        
                        
                        
                        1,666,666
                        
                        2.09
      years4,195,332
                        
                        
                        
                        4,047,332




5.
            INCOME
      TAXES




The
Company files income tax returns in the U.S. Federal jurisdiction, and the state
of California. With few exceptions, the Company is no longer subject to U.S.
federal, state and local, or non-U.S. income tax examinations by tax authorities
for years before 2007.





At
September 30, 2010 and 2009, there were no tax positions for which the ultimate
deductibility is highly certain, but for which there is uncertainty about the
timing of such deductibility.  Because of the impact of deferred tax
accounting, other than interest and penalties, the disallowance of the shorter
deductibility period would not affect the annual effective tax rate but would
accelerate the payment of cash to the taxing authority to an earlier
period.





The
Company's policy is to recognize interest accrued related to unrecognized tax
benefits in interest expense and penalties in operating expenses. During the
period ended September 30, 2010, the Company did not recognize interest and
penalties.





6.
            DEFERRED
      TAX BENEFIT





At
September 30, 2010, the Company had net operating loss carry-forwards of
approximately $18,174,700 that may be offset against future taxable income from
the year 2010 through 2030. No tax benefit has been reported in the September
30, 2010 financial statements since the potential tax benefit is offset by a
valuation allowance of the same amount.




The
income tax provision differs from the amount of income tax determined by
applying the U.S. federal and state income tax rate of 40% to pretax income from
continuing operations for the years ended September 30, 2010 and 2009 due to the
following:


F-10


XSUNX,
INC.


(A
Development Stage Company)


Notes
to Financial Statements


September
30, 2010 and 2009





6.
            DEFERRED
      TAX BENEFIT (continued)





9/30/2010
                      
                      
                      9/30/2009Book
      Income
                      
                      $
                      (884,241
                      )
                      
                      $
                      (4,253,653
                      )State
      Income Taxes
                      
                      
                      -
                      
                      
                      
                      -Nondeductible
      Stock Compensation
                      
                      
                      109,253
                      
                      
                      
                      213,807Asset
      Impairment
                      
                      
                      125,468Other
                      
                      
                      682
                      
                      
                      
                      1,784Depreciation
                      
                      
                      24,225
                      
                      
                      
                      9,345Loss
      on disposal of assets
                      
                      
                      13,931
                      
                      
                      
                      -NOL
      Carryover
                      
                      
                      -
                      
                      
                      
                      -Valuation
      Allowance
                      
                      
                      610,682
                      
                      
                      
                      4,028,717Income
      Tax Expense
                      
                      $
                      -
                      
                      
                      $
                      -





Deferred
taxes are provided on a liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating loss and tax
credit carry-forwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.





Net
deferred tax assets consist of the following components as of September 30, 2010
and 2009:





9/30/2010
                    
                    
                    9/30/2009Deferred
      Tax Assets:NOL
      Carryforward
                    
                    $
                    7,269,868
                    
                    
                    $
                    6,659,187Depreciation
                    
                    
                    -
                    
                    
                    
                    38,990Contribution
      Carryforward
                    
                    
                    40
                    
                    
                    
                    40Section
      179 Expense Carry-forward
                    
                    
                    90,686
                    
                    
                    
                    90,686Deferred
      Tax Liabilities:
                    
                    
                    -
                    
                    
                    
                    -Depreciation
                    
                    
                    (10,058
                    )
                    
                    
                    -Valuation
      Allowance
                    
                    
                    (7,350,536
                    )
                    
                    
                    (6,788,903
                    )Net
      Deferred Tax Asset
                    
                    $
                    -
                    
                    
                    $
                    -




7.
            SALE
      AND DISPOSITION OF ASSETS




On April
21, 2010 the Company received payment in the amount of $240,000 for an offer it
accepted on April 16, 2010 for the sale of an asset held for sale, plus certain
associated attendant assets. The assets consisted of certain vacuum deposition
equipment held for sale and used support systems no longer required under the
Company’s current business plan. During
the year ended September 30, 2010, the Company recognized an impairment loss of
$253,671 on assets disposed of due to the Company’s change in operations and
business development plans, which required closing the Oregon and Colorado
facilities. The assets impaired could no longer be used by the Company, and the
fair value of the assets were determined by their cost basis less any
accumulated depreciation.





8.
            PROMISSORY
      NOTE





During
the year ended September 30, 2009, the Company converted accounts payable to a
promissory note in the amount of $456,921. The note accrues interest at 10% per
annum. The note, including all principal and interest are due September 1, 2011.
The interest expense for the years ended September 30, 2010 and 2009 was $45,721
and $4,303.





10.
            COMMITMENTS
      AND CONTINGENCES





Settlement of Vendor
Dispute


In
February 2010, we elected to negotiate a settlement related to a dispute over a
re-stocking fee on certain equipment with Airgas Corp., agreeing to pay $114,641
in 12 equal monthly payments of $9,553 commencing March 1, 2010. As of September
30, 2010 the Company has made payments totaling $66,874 leaving a principal
balance in the amount of $47,767 as of the period ended September 30, 2010. No
default currently exists under this agreement.


F-11





XSUNX,
INC.


(A
Development Stage Company)


Notes
to Financial Statements


September
30, 2010 and 2009





10.
            COMMITMENTS
      AND CONTINGENCES(continued)





Leased Facility
Transactions


The
Company renewed its lease for the facility located in Aliso Viejo. The term of
the lease is for a twelve month period effective May 1, 2010, at a monthly rate
of $1,000 per month.





Legal
Contingency


On
September 21, 2010, the Company received notice of a claim filed by Billco
Manufacturing Inc. requesting an additional payment of $340,568 for a piece of
equipment that had been cancelled by the Company. The Company never took
possession of the equipment, but did pay a restocking fee of $130,988. The
Company has retained counsel to aggressively defend the matter. The ultimate
outcome of this action cannot be readily determined at this time.





11.
            SUBSEQUENT
      EVENTS





Management
has evaluated subsequent events as of the financial statement date according to
the requirements of ASC TOPIC 855 and has reported the following:





On
October 18, 2010, the Company conditionally granted shares of stock options to
two employees to purchase 11,000,000 shares of common stock at a purchase price
of $0.10 per share over a five year period.





Pursuant
to an S-1 Registration Statement declared effective by the SEC on June 30, 2010,
the Company sold to Lincoln Park Capital Group, LLC (LPC) from October 1, 2010
through the date of this report, a total of approximately 1,963,940 shares for a
total investment of $175,000. These shares were sold at various pricing
between $0.08 and $0.09 per share.  An additional 48,609 of the
remaining pool of 1,250,000 commitment shares were issued on a pro rata basis to
LPC as LPC has purchased additional shares pursuant to the effective S-1
Registration Statement.




F-12